Supplement to Joint Plan of Reorganization

EX-2 3 ex2-4.htm EXHIBIT 2.4 Supplement to Joint Plan of Reorganization
EXHIBIT 2.4

Supplement to Joint Plan of Reorganization

1. Draft Settlement Agreement among the United States of America, Sun Healthcare Group, Inc. and its subsidiaries.

A. Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and Sun Healthcare Group, Inc.

2.* Annual Report on Form 10-K for the year ended December 31, 2000.

3.* Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

4.* Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

5. Proposed 2002 Management Equity Incentive Plan for Sun Healthcare Group, Inc.

6. Proposed Registration Rights Agreement to register common shares of Sun Healthcare Group, Inc.

7. Proposed Warrant Agreement to purchase common shares of Sun Healthcare Group, Inc.

8. Proposed Amended and Restated Certificate of Incorporation for Sun Healthcare Group, Inc.

9. Proposed Amended and Restated Bylaws for Sun Healthcare Group, Inc.

10. Proposed Certificate of Designation of Preferred Stock of Sun Healthcare Group, Inc.

11. Memorandum of Understanding with certain former employees of SunBridge Healthcare Corporation and SunDance Rehabilitation Corporation.

12. Proposed Employment Agreement between Sun Healthcare Group, Inc. and Richard K. Matros.

13. Biographies of the executive officers and Board of Directors of Sun Healthcare Group, Inc.

*As previously filed.

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SETTLEMENT AGREEMENT

I. PARTIES

This Settlement Agreement ("Settlement Agreement") is entered into among the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General ("OIG-HHS") and the Centers for Medicare and Medicaid Services ("CMS") of the United States Department of Health and Human Services ("HHS"), the TRICARE Management Activity Support Office ("TMA")(formerly the Office of Civilian Health and Medical Program of the Uniformed Services, or "CHAMPUS"), a field activity of the Office of the Secretary of Defense, the United States Department of Defense, through its General Counsel (collectively the "United States"); Sun Healthcare Group, Inc. and its subsidiaries who filed bankruptcy in the District of Delaware on October 14, 1999 (the "Petition Date") as defined in Exhibit A to the Joint Plan of Reorganization originally dated November 7, 2001 (final version dated December 18, 2001) (the "Plan"), under jointly administered case number 99-3657 (MFW)(collectively "Sun"); and Stephen Beaujon, Renee Lundgren, Thomas DeLay, David Junga, K. G. Simmons, Judith R. Barry, Saul Epstein, Vida M. Melton and Diane Lind (collectively the "Relators"), (all the foregoing

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hereinafter referred to as "the Parties"), through their authorized representatives.

II. PREAMBLE: FALSE CLAIMS

As a preamble to this Settlement Agreement, the Parties agree to the following:

A. Sun Healthcare Group, Inc., a Delaware corporation headquartered in Albuquerque, New Mexico, is a diversified holding company that, through its direct and indirect subsidiaries, operates long-term care facilities in the United States and formerly operated facilities abroad. At times pertinent to the allegations in the complaints referenced herein, Sun Healthcare Group, Inc.'s direct and indirect subsidiaries also provided rehabilitation, respiratory and physical therapy, pharmaceutical services, medical supplies and other ancillary services to the long-term care industry.

B. On October 14, 1999, Sun Healthcare Group, Inc., for itself and on behalf of approximately 185 direct and indirect subsidiaries, filed a petition with the United States Bankruptcy Court for the District of Delaware under chapter 11 of title 11 of the United States Code, thereby commencing a bankruptcy proceeding for those entities ("Bankruptcy Action").

C. Relator Stephen Beaujon is a resident of Florida. On March 18, 1999, Mr. Beaujon filed a qui tam action in the United States District Court for Northern District of Texas captioned United States ex rel. Stephen Beaujon v. Sun Healthcare Group,

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Inc., Sunquest Consulting Services, Inc., Sundance Rehabilitation Corp., and Sunrise, Inc., No. 3-99CV0511-H (N.D. Texas, Dallas

Division.)

D. Relator Renee Lundgren is a resident of Texas. On September 29, 1998, Ms. Lundgren filed a qui tam action in the United States District Court for Central District of California captioned United States ex rel. Renee Lundgren v. Sun Health Care Group; SunCare Respiratory Services, Inc.; Golden Care; SunRise Health Care Corporation, Inc.; and Does 1-100, No. 98-7875 (C.D. Cal.).

E. Relators Thomas DeLay and David Junga are residents of Florida and Connecticut, respectively. In March 1999, the Messrs. DeLay and Junga filed a qui tam action in the United States District Court for District of Connecticut captioned United States ex rel. Thomas DeLay and David Junga v. Sun Healthcare Group, Inc., Sun Care Respiratory Services, Inc., and Sunrise HealthCare Corporation, No. 399 CV 00403 (D. Conn.).

F. Relator K. G. Simmons is a resident of Florida. On June 28, 1999, Mr. Simmons filed a qui tam action in the United States District Court for Northern District of Florida captioned United States ex rel. K. G. Simmons v. Sun Healthcare Group, et al., No. 1:99cv 154 SPM (N.D. Fla.).

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G. Relator Judith R. Barry is a resident of Massachusetts. On March 30, 1999, Ms. Barry filed a qui tam action in the United States District Court for District of Massachusetts captioned United States ex rel. Judith R. Barry v. Sun Healthcare Group, Inc. and Suncare Respiratory Services Inc., No. 99-10694DPW (D. Mass.).

H. Relator Saul Epstein is a resident of Pennsylvania. On August 10, 1998, Mr. Epstein filed a qui tam action in the United States District Court for Eastern District of Pennsylvania captioned United States ex rel. Saul Epstein v. Sun Healthcare Group, Inc., et al., No. 98CV-4185 (E.D. Pa.).

I. Relator Vida Melton is a resident of Georgia. On April 6, 1998, Ms. Melton filed a qui tam action in the United States District Court for Northern District of Georgia captioned United States ex rel. Vida M. Melton v. Respiratory Care Services, Inc. et al., No. 1:98-CV-1006 (N.D. Ga.).

J. Relator Diane Lind is a resident of California. On October 27, 1998, Ms. Lind filed a qui tam action in the United States District Court for Central District of California captioned United States ex rel. Diane Lind v. Sun Health Care Group, Inc.; Regency Health Services; Care Home Health; and Does 1-100, No. 97-2109 JSL (SHx) (C.D. Cal.).

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K. Debbie DuMond is a resident of Arkansas. On October 22, 1996, Ms. DuMond filed a qui tam action in the United States District Court for Western District of Arkansas captioned United States ex rel. Debbie DuMond v. Sundance Rehabilitation Corporation, et al., No. 96-5162 (W.D. Ark.). This case was subsequently settled as to Ms. DuMond and her counsel, and neither is a party to this Settlement Agreement. The United States retains an interest in the case and disposes of its rights against Sun thereunder in this Settlement Agreement.

L. Marilou McKenzie and Ila Swan are residents of California. On January 22, 1997, Ms. McKenzie and Ms. Swan filed a qui tam action in the United States District Court for the Eastern District of California captioned United States of America, ex rel. Marilou McKenzie and Ila Swan v. Crestwood Hospitals, Inc., West Coast Cambridge, Inc., Integrated Health Services, Inc., Sun Healthcare Group, Inc., SunRise Healthcare Corporation, James M. Dobbins, Jr., No. Civ-S-97-0107 LKK/GGH (E.D. Cal.). This case was subsequently settled as to Ms. McKenzie, Ms. Swan, and their counsel, and none is a party to this Settlement Agreement. The United States retains an interest in the case and disposes of its rights against Sun thereunder in this Settlement Agreement.

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M. Shirley Gotzmer and Ila Swan are residents of California. On December 17, 1996, Ms. Gotzmer and Ms. Swan filed a qui tam action in the United States District Court for the Eastern District of California captioned United States of America, ex rel. Shirley Gotzmer and Ila Swan v. Regency Health Services, Inc. and Care Enterprises West, No. Civ-S-96-2173 WBS/JFM (E.D. Cal.). This case was subsequently settled as to Ms. Gotzmer, Ms. Swan, and their counsel, and none is a party to this Settlement Agreement. The United States retains an interest in the case and disposes of its rights against Sun thereunder in this Settlement Agreement.

N. The United States contends that Sun submitted or caused to be submitted false claims for payment to the Medicare Program (Medicare), Title XVIII of the Social Security Act, 42 U.S.C. Section Section 1395-1395ggg, and TMA, 10 U.S.C. Section Section 1071-1109.

O. The United States contends that it has certain civil claims, as specified below, against Sun for engaging in the following conduct ("Covered Conduct"):

1. Over-billing Medicare and TMA for management services provided by Sun at skilled nursing facilities during Medicare cost report years 1995 through the end of the Closed Cost Years ("Closed Cost Years" is defined at section IV.C.1 herein).

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2. Over-billing Medicare and TMA for improperly calculated, medically unnecessary, imprudent or unreasonable respiratory therapy care services, supplies and equipment, provided by Sun at skilled nursing facilities, including those that did not have a valid transfer agreement with a hospital, during the Medicare cost report years 1987 through the end of the Closed Cost Years.

3. Over-billing the Medicare program for cost report years 1990 through the end of the Closed Cost Years (i) for home health care services without obtaining necessary physician authorization; and (ii) for certified home health aide visits that were not properly supervised or were rendered to ineligible patients.

4. Submitting false Medicare cost reports, for cost report years 1995 through the end of the Closed Cost Years, that overstated the costs attributable to the facilities' Medicare certified units by allocating labor hours to the Medicare certified units that were not actually incurred in the treatment of Medicare beneficiaries.

5. Submitting false cost reports to the United States, including but not limited to Medicare and TMA, and to the Medicaid programs for the cost report periods from 1996 through the end of the Closed Cost Years by claiming reimbursement for

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evaluation and management (E&M) services purportedly provided by physical therapists, not physicians, and for issues related to arrangements with physicians for use of facilities and services at Sun's comprehensive outpatient rehabilitation facilities and other rehabilitation facilities.

6. Over-billing the Medicare, TMA and State of Wisconsin Medicaid programs as a result of inadequate care rendered to patients at Perennial Health Beloit, Inc., which Sun operated as long term care facility from July 1, 1999 until April 21, 2000.

7. Submitting false cost reports to the United States and to various States in cost years 1986 through the end of the Closed Cost Years by failing to provide adequate care and by failing to provide individualized care plans at Sycamore Care and Rehabilitation and other Sun-owned and Sun-operated skilled nursing facilities and hospitals.

8. Over-billing the United States in cost years 1993 through the end of the Closed Cost Years for certain supplies, devices, wheelchairs, products and nutrients, relating but not limited to enteral nutrition, parenteral nutrition, ostomy, tracheostomy, orthotics, surgery, wound care and urology, provided by or on behalf of the Company or its affiliates, including Retirement Care Associates, Inc. and its subsidiaries,

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Americare Health Services and SunChoice, including where there was a lack of medical necessity or a failure to obtain, maintain or submit adequate certifications of medical necessity or physicians' orders, or where the items were bundled or incorrectly billed.

9. Submitting false claims to the United States and Medicaid programs from cost years 1990 through the end of the Closed Cost Years by Pharmacy Factors for pharmaceuticals that were provided in connection with certain arrangements with durable medical equipment suppliers.

10. Submitting false Medicare cost reports for cost years 1994 through the end of the Closed Cost Years that overstated capital-related costs by failing to appropriately adjust the cost basis of depreciable assets under the principles of the Deficit Reduction Act of 1984 (Pub. L. No. 98-369) (DEFRA).

11. Submitting false Medicare cost reports for cost years 1998 through the end of the Closed Cost Years by improperly identifying and classifying routine products and supplies as ancillary products and supplies.

12. Submitting false Medicare cost reports for facilities operated by Retirement Care Associates, Inc. and its subsidiaries for cost years through the end of the Closed Cost

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Years by failing to report costs of contract therapy services as having been provided by a related party contractor, In-House Rehab Corporation and its affiliates.

13. Submitting false Medicare cost reports in cost years 1997 through the end of the Closed Cost Years by failing to report costs of therapy equipment as having been provided by a related party contractor, Accelerated Care Plus and its affiliates.

14.Submitting false Medicare cost reports in cost years 1995 through the end of the Closed Cost Years by overstating the allocation of home office costs to Company-operated skilled nursing facilities and hospitals.

15. Submitting false Medicare cost reports in cost years 1995 through the end of the Closed Cost Years by improperly overstating capital costs due to a failure to properly allocate space (square footage) used for barber and beauty shop to a non-reimbursable cost center.

16. Submitting false Medicare cost report in cost years 1990 through the end of the Closed Cost Years by improperly billing overtime to Medicare cost centers when services were not provided to Medicare patients by Capitol Care Management and its affiliates.

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17. Submitting false Medicare cost reports in cost years 1995 through the end of the Closed Cost Years by improperly billing for therapy services that were performed under contracts retained as the result of the payment of inducements to skilled nursing facilities.

18. Over-billing Medicare, Medicaid, CHAMPUS and other federal programs for the cost report years 1994 through the end of the Closed Cost Years by claiming reimbursement using CPT codes for one-on-one patient care rather than for group patient care services and by failing to document adequately time spent with patients.

P. The United States also contends that it has certain administrative claims against Sun for engaging in the Covered Conduct.

Q. Sun denies the contentions of the United States as set forth in Section II.O above and the allegations of the Relators and DuMond, Gotzmer, McKenzie and Swan in the qui tam actions and denies that it has any liability regarding these allegations. This Settlement Agreement is not a concession by the United States that its claims are not well founded.

R. To avoid the delay, uncertainty, inconvenience, and expense of protracted litigation of the above claims, the Parties

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reach a full and final settlement pursuant to the Terms and Conditions below.

III. PREAMBLE: CIVIL ADMINISTRATIVE CLAIMS

A. As a participant in the Medicare program, 42 U.S.C. Section 1395 et seq., Sun rendered services to Medicare beneficiaries and was paid for such services on an estimated basis, subject to routine, periodic audits. Sun also supplied goods and services under Part B of the Medicare program. As a result of such audits, CMS has determined that Sun was overpaid for certain cost periods and underpaid for other cost periods. Any underpayments relating to cost periods before the Petition Date which were determined after the Petition Date have been administratively frozen in accordance with the Stipulation between HHS and Sun approved on November 12, 1999.

B. Sun, HHS and CMS now wish to avoid the administrative and litigation expenses associated with resolving the amounts due between Sun and HHS arising from the routine administration of the Medicare program and thus agree to liquidate and settle such claims in accordance with the terms and conditions set forth below.

IV. TERMS AND CONDITIONS

A. Treatment of Providers and Suppliers Sun Has Divested or Intends to Divest

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1. Incorporation of Prior Stipulations. The Stipulation between HHS and Sun approved by the Bankruptcy Court on November 12, 1999 is hereby incorporated by reference. In addition, (a) the Stipulation to Facilitate Transfer or Closure of Certain Healthcare Facilities entered into between Sun and the United States, and approved by the Bankruptcy Court on August 21, 2000, including any amendments thereto, and (b) the Stipulation dated June 30, 2000, transferring facilities to Karell Capital and affiliates (the "Divestiture Stipulations"), are hereby incorporated by reference. In the event of any conflicts between this Settlement Agreement and the November 12, 1999 Stipulation and Divestiture Stipulations, this Settlement Agreement shall govern.

2. Providers Divested Prior to, but Not Included in, the Divestiture Stipulations. Sun divested certain providers (the "Prior Divestments") via transactions occurring within several months before and after the Petition Date. The Prior Divestments were not included in the Divestiture Stipulations. The provider agreements for the Prior Divestments shall be deemed rejected as of the time of confirmation of the Plan, or the date the case is converted to a chapter 7 case or dismissed, whichever occurs first, except to the extent that (a) such agreements terminated

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post-petition by operation of law or due to action by CMS, in which case they shall be deemed rejected as of the termination date; (b) Sun fully divested its interest in the Prior Divestment prior to the Petition Date, in which case the provider agreement is not an executory contract and shall be treated as terminated or transferred in accordance with applicable non-bankruptcy law; or (c) to the extent that Sun and CMS agree that the provider agreement may be transferred to a third party upon mutually acceptable terms. Any claim CMS has against Sun arising from or related to Sun’s operations under any provider agreement transferred prior to the effectiveness of the Divestiture Stipulations is resolved and released in accordance with this Settlement Agreement; such release of claims shall not be construed to release CMS's rights, if any, against transferees of such provider agreements.

3. Suppliers To Be Divested.

(a) Sun has apprised the United States of certain suppliers owned by Sun (and will continue to apprise the United States, as appropriate, of additional suppliers owned by Sun) to be divested, including, without limitation, pharmacies and respiratory therapy suppliers (collectively, the "Divested Suppliers"). If Sun chooses to divest a supplier, it shall notify the United States of such divestiture and notify the

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appropriate carrier and/or National Supplier Clearinghouse and the Office of Financial Management, Program Integrity Group, Division of Provider/Supplier Enrollment, to the attention of Robert Loyal, that its supplier number is thereby terminated, in accordance with applicable non-bankruptcy law. If Sun transfers or sells the assets of a Sun supplier to a third party (the "New Supplier"), such New Supplier shall apply for a new Medicare supplier number in accordance with applicable non-bankruptcy law, unless the New Supplier already has a Medicare supplier number and is permitted to use the acquired assets under such number in accordance with applicable non-bankruptcy law, or it does not wish to serve Medicare beneficiaries.

(b) The United States agrees that an order approving the transfer or closure of a supplier may contain the following terms:

(i) the United States will not contend that the Medicare Act, as interpreted in United States v. Vernon Home Health, Inc., 21 F.3d 693, 696 (5th Cir. 1994), renders the New Supplier liable for Medicare overpayments made to the Divested Supplier prior to the date of transfer.

(ii) Sun is authorized to terminate any Medicare supplier number for such closed or transferred Divested Suppliers;

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(iii) claims of CMS and Sun relating to all Sun suppliers, including but not limited to the Divested Suppliers, shall be resolved in accordance with this Settlement Agreement.

B. Implementation

1. Scope. Except as otherwise expressly stated therein, this Section B and the subsequent Section C shall apply to all Sun providers (the "Providers") or suppliers (the "Suppliers" and collectively with the Providers, the "Sun Entities") currently or previously owned by Sun, except for the Divested Providers.

2. Means of Implementation.

(a) The Parties shall cooperate to obtain court approval of this Settlement Agreement and of a Corporate Integrity Agreement ("CIA").

(b) Effectiveness of a confirmed Plan shall be a condition of this Settlement Agreement, and the Parties shall not be bound by the terms of this Settlement Agreement prior to the effective date of the Plan (the "Effective Date"), except to the extent that this Settlement Agreement expressly provides for performance by Sun or the United States prior to the Effective Date.

C. Consideration

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1. Mutual Release of Non-fraud Medicare Claims.

(a) Except as stated in Paragraph (e) of this section, Sun and CMS shall mutually release each other from any pre-petition or post-petition Medicare Claims (as defined in this paragraph) relating to the Sun Entities’ participation in the Medicare program through the end of the first cost reporting period for each Provider or Supplier, including partial periods, which ends after October 13, 1999 (the "Closed Cost Years"). For Sun Entities without cost report periods, the mutual release shall be with respect to Medicare Claims (as defined in this paragraph) for items or services furnished on or before October 13, 1999. CMS shall release Sun from any pre-petition Administrative CMP Claims (as defined in this paragraph) relating to the Sun Entities’ participation in the Medicare program on or before October 13, 1999. "Medicare Claims" means any administrative monetary claims, causes of action, liabilities, suits, proceedings or other administrative rights seeking payment of money arising from the Sun Entities’ participation in the Medicare program, including, without limitation, overpayments, underpayments, medical review determinations, routine cost limit exceptions, and administrative appeals. "Administrative CMP Claims" means civil monetary penalties ("CMP"s) imposed under

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CMS’s survey and certification authority pursuant to 42 U.S.C. Section 1395i-3(h)(2)(B)(ii) and 42 U.S.C. Section 1396r (h)(2)(A)(ii). Medicare Claims and Administrative CMP Claims do not include any claim relating to or liability for a violation of the False Claims Act, 31 U.S.C. Section Section 3729-3733; the Civil Monetary Penalties Law, 42 U.S.C. Section 1320a-7a (solely to the extent that such claims are included under the definition of Civil Fraud Claims in Paragraph C.5(a) or to the extent that Administrative CMP Claims accrue after the Petition Date)¹; the Program Fraud Civil Remedies Act, 31 U.S.C. Section 3801-3812; Permissive Exclusion, 42 U.S.C. Section 1320a-7(b); or the common law theories of payment by mistake, unjust enrichment, breach of contract and fraud. Sun makes no admission of wrongdoing or liability with respect to the Medicare Claims being released. Notwithstanding this or any other provision of this Settlement Agreement, the United States shall be entitled to reopen Sun’s cost reports for Closed Cost Years solely for the purpose of complying with any Act of Congress

^{1For the purposes of this agreement, an Administrative CMP Claim accrues on the
date that a per instance violation occurs or, in the case of a per diem penalty, on each
day that the facility is not in substantial compliance. Thus, for a per diem CMP that
spans the Petition Date, the per diem penalty multiplied by the number of days out of
compliance occurring before the Petition Date shall be treated as a pre-petition penalty,
and the per diem penalty multiplied by the number of days out of compliance occurring on
or after the Petition Date shall be treated as a post-petition penalty.

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requiring the United States to rely upon settled cost reports for such years as a basis
for adjusting federal payment rates to Sun Entities; provided however, that the United
States and the Sun Entities shall not use such adjustments to seek any further payments
from each other for Closed Cost Year periods, and the United States shall only use such
adjustments to adjust payment rates to the Sun Entities in cost report periods after the
Closed Cost Years as part of adjustments in federal payment rates applicable to all
similarly situated providers participating in Medicare; and provided further, that to the
extent that CMS must finally settle (as provided in 42 C.F.R. Section 413.60) such
cost reports for purposes of rebasing, Sun shall have the opportunity to examine and
dispute the final settlement for purposes of rebasing if Sun can show a significant,
measurable impact on future payments to Sun.

          (b) Within ten days of the
date that this Settlement Agreement is approved, Sun shall withdraw all appeals in any
fora, whether judicial or administrative, relating to Medicare Claims and Administrative
CMP Claims released herein, subject to reinstatement if the Plan is not confirmed within
three months of such approval. The dismissal of any appeal of a CMP renders final CMS's
imposition of any such CMP, so that CMS has the right to rely on findings related to such
CMPs for all purposes except

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to collect the Administrative CMP Claim associated with such findings and the dismissed
appeal (except to the extent that the appeal is reinstated pursuant to this paragraph).
Accordingly, the releases in this Settlement Agreement and the Plan and Sun's discharge in
bankruptcy do not affect the quality history of any Sun Entity. The State Operations
Manual Guidance to Surveyors is CMS's interpretation of its quality regulations, and Sun
is on notice of the interpretations contained therein without limiting Sun’s right to
challenge CMS’s interpretations.

          (c) CMS will instruct its
intermediaries and carriers not to issue any notices of overpayment or denial, and not to
attempt any offset or recoupment, for Medicare Claims in Closed Cost Years or pre-petition
Administrative CMP Claims. Any Medicare Claims relating to Medicare program items or
services furnished by the Sun Entities after the Closed Cost Years (for Sun Entities which
do not have cost report periods, Medicare Claims arising after the Petition Date) or for
Administrative CMP Claims that accrue after the Petition Date shall be handled in
accordance with applicable law, which shall include, but not be limited to, Sun’s
right to appeal. Without limiting the generality of the foregoing, Sun shall pay all
Medicare Claims relating to Medicare program items or services furnished by the

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Sun Entities after the Closed Cost Years (for Sun Entities which do not have cost
report periods, Medicare Claims arising after the Petition Date) and all Administrative
CMP Claims that accrue after the Petition Date, as administrative expense claims under the
Plan, to the extent that (i) such claims are due as of the date of confirmation of the
Plan; and (ii) CMS has not already recovered the claim via voluntary repayment,
recoupment or offset; or (iii) the amount to be paid reflects any reductions in the amount
of the overpayment due to appeals resolved after the Petition Date. All Medicare Claims
and Administrative CMP Claims which become due on or after the date of confirmation of the
Plan shall be payable and collectible in accordance with applicable non-bankruptcy law and
this Settlement Agreement. CMS expressly reserves the right to offset or recoup Medicare
Claims which arise after the Closed Cost Years and Administrative Medicare CMPs which
accrue after the Petition Date.

          (d) CMS shall continue to
make Medicare reimbursement payments relating to post-petition items and services
furnished by the Sun Entities in accordance with the standard practices of CMS and
applicable Medicare law. Such Medicare reimbursement payments shall not be suspended,
recouped, offset or reduced based upon nonpayment of a released Medicare Claim or released
Administrative CMP Claim.

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          (e) CMS does not release
its monetary or equitable claims against Sun in the pending appeal (No. 00-986, D. Del.)
of the bankruptcy court's October 26, 2000, order granting Sun's motion to compel CMS to
reinstate SunBridge Care and Rehabilitation -- University into the Medicare Program
without requiring the facility to pay its Medicare debts.

     2. Assumption of Medicare Provider Agreements.
As part of the Plan if not before, Sun shall assume the Medicare provider agreements for
the Providers, except as set forth in Paragraph A.2 herein. Within ten days of the
effective date of this Settlement Agreement, Sun shall provide to CMS a comprehensive list
of providers whose agreements will be assumed pursuant to this paragraph (by name and
provider number), so that CMS can instruct its fiscal intermediaries.

     3. Terminating Cost Reports and Release of Frozen
Funds.

          (a) Sun shall file cost
reports for each of the Providers (and those Suppliers which file cost reports) when due,
but there shall be no cost report audits of, or reviews of items or services furnished
during, the Closed Cost Years, and such cost periods will be administratively closed. All
Medicare Claims relating to items and services furnished by the Sun Entities in the Closed
Cost Years or, for Sun Entities without

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cost report periods, of items or services furnished on or before October 13, 1999; are
administratively final with respect to both CMS and the Sun Entities.

          (b) Unaudited amounts which
may be due to the Providers for the Closed Cost Years, held in administrative freeze
pending audit under the Stipulation between CMS and Sun, are released to CMS without
further review.

     4. Corporate Reorganization. CMS shall
process in accordance with applicable Medicare law and procedures any change of ownership
applications in connection with the transfer of any Provider or Supplier between Sun legal
entities under any Plan or any change of ownership as a result of a change of control of
Sun under any such Plan. Terminating and short cost reports shall not be required on
changes of ownership pursuant to this Paragraph which take place within twenty-four (24)
months of the Effective Date of the Plan.

     5. Consideration for False Claims Act Release.

          (a) Subject to receipt by
Sun of the full releases referred to in Section C of this Settlement Agreement, Sun agrees
to pay to the United States $11 million (the "Settlement Amount"). The United
States agrees to pay a portion of the Settlement Amount to the Relators, according to a
schedule to be agreed upon among the Relators and the United States. Sun

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further agrees to allow Relators' unsecured, pre-petition claims for attorney’s
fees and costs in amounts to be agreed upon among the Relators and Sun. The foregoing
payments shall be made as follows:

               (i)
Upon the Effective Date of the Plan, Sun shall pay the United States $1 million by
electronic funds transfer according to payment instructions provided by the Department of
Justice.

               (ii)
Upon the Effective Date of the Plan, Sun shall execute and deliver to the United States a
$10 million note payable to the DOJ with (1) interest at the rate specified in section
1961 of title 28 of the United States Code, (2) interest payable quarterly, and (3)
principal repaid on the following anniversaries of the Effective Date of the Plan: $1
million (first anniversary); $1 million (second anniversary); $2 million (third
anniversary); $3 million (fourth anniversary); and $3 million (fifth anniversary). Payment
shall be made by electronic funds transfer pursuant to instructions provided by DOJ.

               (iii)
Contingent upon the United States receiving from Sun payments of the Settlement Amount as
defined in the foregoing Paragraphs C.5(a)(i) and (ii), the United States agrees to pay a
share of said payment(s) to Relators, according to a schedule to be agreed upon among the
Relators and the United

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States, by electronic funds transfer as soon as feasible after receipt of
payments from Sun.

               (iv)
Sun agrees to allow the unsecured pre-petition claims for attorneys' fees and costs of
Relators who filed qui tams, as listed in Section II, in amounts to be agreed upon
among the Relators and Sun.

          b. Sun shall withdraw its
proofs of claim in In re Sensitive Care, Inc., Bankruptcy Case No. 399-31463-SAF-7
(Bankr. N.D. Texas) within two weeks of the approval of this Settlement Agreement.

          c. Any discharge in
bankruptcy Sun may receive in the Bankruptcy Action shall not discharge Sun’s
obligations under this Settlement Agreement.

     6. False Claims Act Release by the United States.
Subject to the exceptions in Paragraph C.8 below, in consideration of the obligations of
Sun in this Settlement Agreement, and conditioned upon Sun's full payment of the
Settlement Amount, the United States (on behalf of itself, its officers, agents, agencies,
and departments), agrees to release Sun (including Divested Providers and Divested
Suppliers under Section A hereof, and its successors and assigns) from, and further agrees
to refrain from instituting directing or maintaining any action against Sun for, any civil
or

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administrative monetary claim the United States has or may have under the False Claims
Act, 31 U.S.C. Section Section 3729-3733; the Civil Monetary Penalties Law, 42
U.S.C. Section 1320a-7a (excluding Administrative CMP Claims); the Program Fraud
Civil Remedies Act, 31 U.S.C. Section Section 3801-3812; any statutory
provision applicable to the federally-funded programs in this Settlement Agreement for
which the Civil Division, United States Department of Justice, has actual and present
authority to assert and compromise pursuant to 28 C.F.R. Part 0, Subpart I, Section
0.45(d)(1995); or the common law theories of payment by mistake, unjust enrichment,
breach of contract, disgorgement and fraud, for the Covered Conduct. No individuals
are released by this Settlement Agreement. The United States releases only the federal
portion of claims regarding Medicaid.

     7. Waiver of Permissive Exclusion.

          (a) HHS-OIG.
In consideration of the obligations of Sun in this Settlement Agreement, conditioned
upon Sun's full payment of the Settlement Amount, and except as otherwise provided in the
CIA, the OIG-HHS agrees to release and refrain from instituting, directing, or maintaining
any administrative claim or action seeking exclusion from the Medicare, Medicaid, or other
Federal health care programs (as defined in 42 U.S.C. Section 1320a-7b(f)) against
Sun (including Divested Providers and

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DRAFT - January 11, 2002

Divested Suppliers under Section A hereof) under 42 U.S.C. Section 1320a-7a
(Civil Monetary Penalties Law), or 42 U.S.C. Section 1320a-7(b)(7) (permissive
exclusion), for the Covered Conduct, except as reserved in Paragraph C.8 below, and as
reserved in this paragraph. The OIG-HHS expressly reserves all rights to comply with any
statutory obligations to exclude Sun from the Medicare, Medicaid, or other Federal health
care program under 42 U.S.C. Section 1320a-7(a)(mandatory exclusion) based upon the
Covered Conduct. Nothing in this paragraph precludes the OIG-HHS from taking action
against entities or persons, or for conduct and practices, for which civil claims have
been reserved in Paragraph C.8, below.

          (b) TMA. In
consideration of the obligations of Sun set forth in this Settlement Agreement,
conditioned upon Sun's full payment of the Settlement Amount, TMA agrees to release and
refrain from instituting, directing, or maintaining any administrative claim or action
seeking exclusion from the TRICARE Program against Sun (including Divested Providers and
Divested Suppliers under Section A hereof) under 32 C.F.R. Section 199.9 for the
Covered Conduct, except as reserved in Paragraph C.8, below, and as reserved in this
paragraph. TMA expressly reserves authority to exclude Sun from the TRICARE Program under
32 C.F.R. Section Section 199.9 (f)(1)(i)(A), (f)(1)(i)(B), (f)(1)(i)(D), and
(f)(1)(iii), based

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DRAFT - January 11, 2002

upon the Covered Conduct. Nothing in this paragraph precludes TMA or the TRICARE
Program from taking action against entities or persons, or for conduct and practices, for
which civil claims have been reserved in Paragraph C.8 below.

     8. Reserved Claims. Notwithstanding any
term of this Settlement Agreement, specifically reserved and excluded from the scope and
terms of this Settlement Agreement as to any entity or person (including Sun and
the Relators) are the following claims of the United States:

          (a) Any civil, criminal or
administrative liability arising under Title 26, U.S. Code (Internal Revenue Code);

          (b) Any criminal liability;

          (c) Except as explicitly
stated in this Settlement Agreement, the CIA, and the Divestiture Stipulations
incorporated herein, any administrative liability, including mandatory exclusion from
Federal health care programs;

          (d) Any liability to the
United States (or its agencies) for any conduct other than the Covered Conduct;

          (e) Any liability based
upon such obligations as are created by this Settlement Agreement or as arise under the
CIA;

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DRAFT - January 11, 2002

          (f) Any liability for
personal injury or property damage or for other consequential damages arising from
the Covered Conduct.

          (g) Any civil or
administrative liability of individuals (including current or former directors, officers,
employees, agents, or shareholders of Sun).

The United States recognizes that upon confirmation of the Plan, Sun shall be
discharged (including any Sun liability relating to Divested Providers, Prior Divestments
and Divested Suppliers under Section A of this Settlement Agreement) and that nothing in
Paragraph C.6 shall limit or enlarge (except to the extent that claims are expressly
released therein) the discharge provided Sun under section 1141 of the Bankruptcy Code.

     9. Release by Relators.

          (a) United States.
Conditioned upon receipt of the payment described in Paragraph C.5(a)(iii), the Relators,
for themselves and for their heirs, successors, attorneys, agents, and assigns, agree to
release the United States, its officers, agents, and employees, from any claims arising
from or relating to 31 U.S.C. Section 3730, or arising from the filing of the qui
tams referenced in Paragraphs II.B through II.G above ("qui tams"),
including 31 U.S.C. Section Section 3730(b), (c), (d), and (d)(1), and for a share
of the proceeds of the qui tams, i.e., a share of the

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DRAFT - January 11, 2002

Settlement Amount according to the agreement among the Relators and the United States,
and for a share of the proceeds of any proceeding involving an "alternate
remedy" as that term is used in 31 U.S.C. Section 3730(c)(5). The Relators
agree and confirm that this Settlement Agreement is fair, adequate, and reasonable under
all the circumstances, pursuant to 31 U.S.C. Section 3730(c)(2)(B), and that, except
as agreed upon among the Relators and the United States, they will not seek
a relator’s share of any portion of the above-described settlement between Sun and
any of its subsidiaries, divisions, or successors, and the United States, arising from any
amounts resolving other qui tam suits, other investigations, non-fraud
Medicare Claims and Administrative CMP Claims held by CMS and resolved through this
Settlement Agreement, and the Divestiture Stipulations. The Relators also agree and
confirm that they will not challenge the Agreement pursuant to 31 U.S.C. Section
3730(c)(2)(B), and expressly waive the opportunity for a hearing on any such
objection, pursuant to 31 U.S.C. Section 3730(c)(2)(B).

          (b) Sun.
Conditioned upon receipt of the payment described in Paragraph C.5(a)(iii), the Relators,
for themselves and for their heirs, successors, attorneys, agents, and assigns, agree to
release Sun, Divested Providers, Prior Divestments and Divested Suppliers under Section A
hereof, and all subsidiaries

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DRAFT - January 11, 2002

and affiliates, predecessors, successors and assigns, as well as its current and former
directors, officers, employees, agents and shareholders, from any liability to Relator
arising from the filing of the qui tams, or under 31 U.S.C. Section
3730(d) for expenses or attorney’s fees and costs, or under 31 U.S.C. Section
3730(h) for employment decisions by Sun, and covenants not to sue with respect to,
and releases, acquits, waives, and forever discharges Sun, Divested Providers, Prior
Divestments and Divested Suppliers under Section A hereof, and all subsidiaries and
affiliates, predecessors, successors and assigns, as well as its current and former
directors, officers, employees, agents and shareholders from any and all rights, claims,
expenses, debts, liabilities, demands, obligations, costs, damages, injuries, actions and
causes of action of every nature, whether known or unknown, suspected or unsuspected, in
law or in equity, including those for attorney's fees and costs, arising prior to the
Effective Date of the Plan.

     10. Corporate Integrity Agreement. Sun has
entered into a CIA with HHS, attached as Exhibit A, which is incorporated into this
Settlement Agreement by reference. Sun will implement its obligations under the CIA
upon the Effective Date of the Plan. A breach by Sun of the CIA does not constitute a
breach of this

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DRAFT - January 11, 2002

Settlement Agreement, and a breach by Sun of this Settlement Agreement does not
constitute a breach of the CIA.

     11. Waiver of Certain Defenses. Sun waives
and will not assert any defenses Sun may have to any criminal prosecution or
administrative action relating to the Covered Conduct, which defenses may be based in
whole or in part on a contention that, under the Double Jeopardy Clause in the Fifth
Amendment of the Constitution, or under the Excessive Fines Clause in the Eighth Amendment
of the Constitution, this Settlement Agreement bars a remedy sought in such criminal
prosecution or administrative actions listed in Paragraph IV.C.8. Sun agrees that this
Settlement Agreement is not punitive in purpose or effect. Nothing in this paragraph or
any other provision of this Settlement Agreement constitutes an agreement by the United
States concerning the characterization of the Settlement Amount for purposes of the
Internal Revenue laws, Title 26 of the United States Code.

     12. Release of United States by Sun. Sun
fully and finally releases the United States, its agencies, employees, servants, and
agents from any claims (including attorney’s fees, costs, and expenses of every kind
and however denominated) which Sun has asserted, could have asserted, or may assert in the
future against the United States, its agencies, employees, servants,

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DRAFT - January 11, 2002

and agents, related to the Covered Conduct and the United States' investigation
and prosecution thereof. Nothing in this Paragraph shall be construed to prevent Sun from
asserting defenses, except those separately waived elsewhere in this Settlement Agreement,
to any and all claims subsequently brought against Sun by the United States.

     13. No Offset or Recoupment.
Notwithstanding any provision in the Plan, Sun may not decrease the Settlement Amount as a
result of the denial of claims for payment now being withheld from payment by any Medicare
or TRICARE carrier or intermediary or any State payer, related to the Covered Conduct; and
Sun agrees not to resubmit to any Medicare carrier or intermediary or TRICARE or any State
payer any previously denied claims related to the Covered Conduct, and agrees not to
appeal any such denials of claims.

     14. Compliance with Federal Acquisition Regulation
("FAR"). [This section still subject to negotiation] Sun agrees
to the following:

          (a) Unallowable Costs
Defined: That all costs (as defined in the FAR Section 31.205-47 and in
Titles XVIII and XIX of the Social Security Act, 42 U.S.C. Section Section
1395-1395ggg and 1396-1396v, and the regulations promulgated thereunder) incurred
by or on

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DRAFT - January 11, 2002

behalf of Sun, its present or former officers, directors, employees, shareholders, and
agents in connection with:

               (i)
the matters covered by this Settlement Agreement,

               (ii)
the United States' audit(s) and civil investigation(s) of the matters covered by this
Settlement Agreement,

               (iii)
Sun's investigation, defense, and corrective actions undertaken in response to the United
States’ audit(s) and civil investigation(s) in connection with the matters covered by
this Settlement Agreement, the CIA, and the Stipulations and Divestiture Agreements
incorporated herein (including attorney's fees),

               (iv)
the negotiation and performance of this Settlement Agreement, the Stipulations and the
Divestiture Agreements,

               (v)
the payment Sun makes to the United States pursuant to this Settlement Agreement and any
payments that Sun may make to relators, and

               (vi)
negotiation of the CIA and the following obligations arising under the CIA, to:

                    (A)
retain and pay for an independent review organization to perform Review Procedures as
described in

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DRAFT - January 11, 2002

Section III.D of the CIA (except to the extent that such Review Procedures are
performed by Sun),

                    (B)
retain and pay for an independent monitor pursuant to Section III.D of the CIA, and

                    (C)
prepare and submit reports to the OIG-HHS,are unallowable costs on Government contracts
and under the Medicare Program, Medicaid Program, TRICARE Program, and Federal Employees
Health Benefits Program (FEHBP)(All costs described or set forth in this Paragraph 14(a)
are hereafter, "Unallowable Costs") and

          (b) Future Treatment
of Unallowable Costs: These Unallowable Costs will be separately estimated and
accounted for by Sun, and Sun will not charge such Unallowable Costs directly or
indirectly to any contracts with the United States or any State Medicaid Program, or seek
payment for such Unallowable Costs through any cost report, cost statement, information
statement, or payment request submitted by Sun or any of its subsidiaries to the
Medicare, Medicaid, TRICARE, or FEHBP Programs.

          (c) Treatment of
Unallowable Costs Previously Submitted for Payment: Sun further agrees that within
120 days of

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DRAFT - January 11, 2002

the approval of this Settlement Agreement it will identify to applicable Medicare and
TMA fiscal intermediaries, carriers, and/or contractors, and Medicaid, VA and FEHBP fiscal
agents, any Unallowable Costs (as defined in this paragraph) included in payments
previously sought from the United States, or any State Medicaid Program, including, but
not limited to, payments sought in any cost reports, cost statements, information reports,
or payment requests already submitted by Sun or any of its subsidiaries, and will request,
and agree, that such cost reports, cost statements, information reports, or payment
requests, even if already settled, be adjusted to account for the effect of the inclusion
of the Unallowable Costs, except that none of the obligations of this paragraph (c) shall
apply to any Closed Cost Year (for purposes of Medicare) or any periods which are the
subject of a settlement with a state (for purposes of the Federal participation in
Medicaid). Sun agrees that the United States will be entitled to recoup from Sun any
overpayment as a result of the inclusion of such Unallowable Costs on previously-submitted
cost reports, information reports, cost statements, or requests for payment, except to the
extent that such overpayment arises in a Closed Cost Year (for purposes of Medicare) or
arises in a period that is the subject of a settlement with a state (for purposes of the
Federal participation in Medicaid). If Sun fails

-36-

DRAFT - January 11, 2002

to identify such costs in past filed cost reports in conformity with this paragraph,
the United States may seek an appropriate penalty or other sanction in addition to the
recouped amount. Any payments due after the adjustments have been made shall be paid to
the United States pursuant to the direction of the Department of Justice, and/or the
affected agencies. The United States reserves the right to disagree with any calculations
submitted by Sun or any of its subsidiaries on the effect of inclusion of Unallowable
Costs (as defined in this paragraph) on Sun or any of its subsidiaries' cost reports, cost
statements, or information reports. Nothing in this Settlement Agreement shall constitute
a waiver of the rights of the United States to examine or reexamine, except for the Closed
Cost Years, the Unallowable Costs described in this paragraph.

     15. Sun's Right to Challenge Cost Adjustments.
Nothing in this Settlement Agreement shall preclude Sun from challenging any adjustment to
cost not related to the Covered Conduct, or other determination of allowable costs not
related to the Covered Conduct made by any Medicare fiscal intermediary in any non-Closed
Cost Year even if the determination relates to an audit adjustment made in a Closed Cost
Year. With respect to the Closed Cost Years, there shall be no final determination
concerning the allowability or amount of specific costs.

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DRAFT - January 11, 2002

     16. Cooperation. Sun agrees to cooperate
fully and truthfully with the United States' investigation of individuals and entities not
specifically released in this Settlement Agreement, for the Covered Conduct. Upon
reasonable notice, Sun will make reasonable efforts to facilitate access to, and encourage
the cooperation of, its directors, officers, and employees for interviews and testimony,
consistent with the rights and privileges of such individuals, and will furnish to the
United States, upon reasonable request, all non-privileged documents and records in its
possession, custody or control relating to the Covered Conduct which have not been
previously produced by Sun to the United States.

     17. No Third Party Beneficiaries. This
Settlement Agreement is intended to be for the benefit of the Parties only. The Parties do
not release any claims against any other person or entity, except to the extent provided
for in Paragraphs IV.C.6, IV.C.9 and IV.C.12. There are no third party beneficiaries,
express or implied.

     18. No Collection from Medicare Beneficiaries or
Their Authorized Representatives. Sun agrees that it will not seek payment for any
of the Medicare Claims covered by this Settlement Agreement from any health care
beneficiaries or their authorized representatives. Sun waives any claim against these

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DRAFT - January 11, 2002

beneficiaries or their authorized representatives based upon the claims for payment
covered by this Settlement Agreement.

     19. Costs. Except as expressly provided to
the contrary in this Settlement Agreement, each Party will bear its own legal and other
costs incurred in connection with this matter, including the preparation and
performance of this Settlement Agreement.

     20. Voluntary Transaction. Sun and the
Relators represent that this Settlement Agreement is freely and voluntarily entered into
without any degree of duress or compulsion whatsoever.

     21. Federal Law Controls. This Settlement
Agreement is governed by the laws of the United States. The Parties agree that the
exclusive jurisdiction and venue for any dispute arising between and among the Parties
under this Settlement Agreement will be the United States Bankruptcy Court for the
District of Delaware, including any dispute regarding Relators' attorneys' fees and costs
reserved in Paragraph IV.C.5.a, except that disputes arising under the CIA shall be
resolved exclusively under the breach and dispute resolution provisions in the CIA.

     22. Complete Agreement. This Settlement
Agreement, the CIA incorporated herein, and the Divestiture Stipulations incorporated
herein constitute the complete agreement between and

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DRAFT - January 11, 2002

among the Parties. This Settlement Agreement may not be amended except by written
consent of the Parties, except that only Sun and OIG-HHS must agree in writing to
modification of the Corporate Integrity Agreement.

     23. Dismissal of False Claims Act Claims.
Promptly after the Effective Date of the Plan, the United States shall (a) move to dismiss
with prejudice to the United States the Civil Fraud Claims alleged in the pending qui
tam suits set forth herein, and (b) move to dismiss with prejudice to Relators,
DuMond, McKenzie, Gotzmer and Swan those claims against Sun for the Covered Conduct and
which were filed by said Relators under 31 U.S.C. Section 3730(b) and (d). Promptly
after the Effective Date of the Plan, Relators shall dismiss with prejudice as to Sun (a)
those claims against Sun for the Covered Conduct that Relators have filed in any state
court, and, as necessary to seek approval of any state authorities to do so, and (b) any
and all claims under 31 U.S.C. Section 3730(h) for Sun's employment decisions.
Relators agree to cooperate in all the dismissals and releases discussed in this
paragraph.

     24. Authority to Execute. The individuals
signing this Settlement Agreement on behalf of Sun represent and warrant that they are
authorized by Sun to execute this Settlement Agreement. The individuals signing this
Settlement Agreement on behalf of

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DRAFT - January 11, 2002

the Relators represent and warrant that they are authorized by Relators to execute this
Settlement Agreement. The United States signatories represent that they are signing this
Settlement Agreement in their official capacities and that they are authorized to execute
this Settlement Agreement.

     25. Execution in Counterparts. This
Settlement Agreement may be executed in counterparts, each of which constitutes an
original and all of which constitute one and the same Settlement Agreement.

     26. Successors. This Settlement Agreement
is binding on all successors, transferees, heirs, and assigns of the Parties.

     27. Effective Date of Settlement. This
Settlement Agreement is effective on the date that it is approved by the Court, except
that performance in part hereunder shall not be due until the Effective Date of Sun's
Plan.

     28. Facsimile Signatures. Facsimiles of
signatures shall constitute acceptable, binding signatures for purposes of this Settlement
Agreement.

     29. Lock Up Agreement.

          (a) Sun agrees that the
Plan shall incorporate the terms of and will otherwise not be inconsistent with this
Settlement Agreement or the CIA.

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DRAFT - January 11, 2002

          (b) The United States
shall, consistent with the provisions of the Settlement Agreement and the CIA:

               (i)
Support and vote to accept the Plan on behalf of HHS and DOJ;

               (ii)
Not consent to or vote, on behalf of HHS and DOJ, for any competing plan of
reorganization;

               (iii)
Not object to or otherwise commence any proceeding to oppose or object, on behalf of HHS
and DOJ, to the Plan or disclosure statement based upon the treatment of any Medicare
Claim or Civil Fraud Claim settled or released herein; and

               (iv)
Support the inclusion of a statement in Sun’s disclosure statement that the United
States, on behalf of HHS and DOJ, intends to vote to accept the Plan.

          (c) Sun’s right to a
discharge under the Plan shall not be limited; provided, however, that such discharge
shall not discharge Sun’s obligations under the Settlement Agreement, as incorporated
into the Plan.

THE UNITED STATES OF AMERICA

-42-

DRAFT - January 11, 2002}


DATED:	BY: DANIEL R. ANDERSON Commercial Litigation Branch Civil Division United States Department of Justice


DATED:	BY: JEANNINE LESPERANCE Commercial Litigation Branch Civil Division United States Department of Justice


DATED:	BY: LEWIS MORRIS Assistant Inspector General Office of Counsel to the Inspector General Office of Inspector General United States Department of Health and Human Services


DATED:	BY: HOWARD L. ALTSCHWAGER Deputy General Counsel TRICARE Management Activity United States Department of Defense

-43-

DRAFT - January 11, 2002

Sun - DEFENDANT


DATED:	BY: Robert F. Murphy General Counsel and Secretary Sun Healthcare Group, Inc.


DATED:	BY: James C. Stansel Sidley Austin Brown & Wood Counsel for Sun


DATED:	BY: Donna K. Thiel Morgan Lewis & Bockius Counsel for Sun

-44-

DRAFT - January 11, 2002

RELATORS

JUDITH R. BARRY

DATED:	BY: Judith R. Barry

DATED:	BY: Counsel for Judith R. Barry

STEPHEN BEAUJON

DATED:	BY: Stephen Beaujon

DATED:	BY: Counsel for Stephen Beaujon

THOMAS DELAY

DATED:	BY: Thomas Delay

DATED:	BY: Counsel for Thomas Delay

SAUL EPSTEIN

DATED:	BY: Saul Epstein

DATED:	BY: Counsel for Saul Epstein

-45-

DRAFT - January 11, 2002


DAVID JUNGA

DATED:	BY: David Junga

DATED:	BY: Counsel for David Junga

DIANE LIND

DATED:	BY: Diane Lind

DATED:	BY: Counsel for Diane Lind

RENEE LUNDGREN

DATED:	BY: Renee Lundgren

DATED:	BY: Counsel for Renee Lundgren

VIDA M. MELTON

DATED:	BY: Vida M. Melton

DATED:	BY: Counsel for Vida M. Melton

DRAFT - January 11, 2002


K. G. SIMMONS

DATED:	BY: K. G. Simmons

DATED:	BY: Counsel for K. G. Simmons

-47-

July 12, 2001

CORPORATE INTEGRITY AGREEMENT

BETWEEN THE

OFFICE OF INSPECTOR GENERAL

OF THE

DEPARTMENT OF HEALTH AND HUMAN SERVICES

AND

SUN HEALTHCARE GROUP, INC.

TABLE OF CONTENTS

I.	PREAMBLE		1
		1. "Sun"	1
		2. "Covered Persons"	1
		3. "Covered Contractor"	2
		4. "Federal health care program requirements"	2

II.	TERM OF THE CIA		2

III.	CORPORATE INTEGRITY OBLIGATIONS		3
	A.	Program Infrastructure	3
		1. Compliance and Audit Committees of the Board of Directors	3
		2. Compliance Officer	4
		3. Corporate Compliance Committee	5
		4. Compliance Liaisons	5
		5. Administrators	6
		6. Internal Audit and Review Functions	7
	B.	Written Standards	8
		1. Code of Conduct	8
		a. Contents	8
		b. Distribution and Certification	9
		c. Covered Contractor Requirements	10
		2. Policies and Procedures	10
	C.	Training and Education	16
		1. General Training	17
		2. Specific Training for Relevant Covered Persons	17
		3. Attendance Log and Certification	20
		4. Submission of Training and Course Materials	20
		5. Prior Training	20
	D.	Review Procedures	21
		1. Independent Monitor (Quality Engagement)	21
		a. The Monitor's Function	21
		b. Access	23
		c. Sun's Obligations	25
		d. The Monitor's Obligations	27
		e. Miscellaneous Provisions	30
		2. Financial Reviews	31
		a. General Description	31
		b. Billing Engagement	33
		c. Compliance Engagement	47
		d. Validation Review	49
		e. Independence Certification	50
	E.	Confidential Disclosure Program	50
	F.	Ineligible Persons	51

		1. Definition	51
		2. Screening Requirements	52
		3. Review and Removal Requirement	52
		4. Pending Charges and Proposed Exclusion	53
	G.	Notification of Proceedings	53
	H.	Reporting	54
		1. Definition of "Overpayment"	54
		2. Definition of "Material Deficiency"	54
		3. Reporting of Overpayments	54
		2. Reporting of Material Deficiencies	55

IV.	NEW BUSINESS UNITS OR LOCATIONS		55

V.	IMPLEMENTATION AND ANNUAL REPORTS		56
	A.	Implementation Report	56
	B.	Annual Reports	58
	C.	Certifications	61

VI.	NOTIFICATION AND SUBMISSION OF REPORTS		62

VII.	OIG INSPECTION AND REVIEW RIGHTS		62

VIII.	DOCUMENT AND RECORD RETENTION		63

IX.	DISCLOSURES AND PRIVILEGES		64

X.	BREACH		65
	A.	Stipulated Penalties for Failure to Comply with Certain Obligations	65
	B.	Payment of Stipulated Penalties	68
		1. Demand Letter	68
		2. Timely Written Requests for Extensions	69
		3. Form of Payment	69
		4. Independence from Material Breach Determination	69
	C.	Exclusion for Material Breach of this CIA	69
		1. Material Breach	69
		2. Notice of Material Breach and Intent to Exclude	70
		3. Opportunity to cure	71
		4. Independence from Material Breach Determination	71
	D.	Dispute Resolution	71
		1. Review Rights	72
		2. Stipulated Penalties Review	72
		3. Exclusion Review	73
		4. Review by Other Agencies	74

iii

XI.	EFFECTIVE AND BINDING AGREEMENT		74

Appendix A			76

	Sun Monitor Task List		76
	I.	ANALYSIS OF THE QUALITY COMPLIANCE INFRASTRUCTURE	76
	II.	ANALYSIS OF THE POLICIES AND PROCEDURES AND TRAINING	79
	III.	ANALYSIS OF QUALITY RELATED DATA	80
	IV.	MECHANISMS TO ANALYZE THE EFFECTIVENESS AND THOROUGHNES OF SUN'S IMPLEMENTATION OF THE CIA	81
	V.	REPORTING TO GOVERNMENT AND SUN ON MONITORING ACTIVITIES	81

Appendix B			82

	Minimum Data Set Audit Guidelines		82
	A.	General	82
	B.	Stage 1 of the MDS Audit	83
	C.	Sate 2 of the MDS Audit	85
	D.	MDS Audit Report	87
	E.	Annual Report	89

Appendix C			90

	Overpayment Refund Form		90

I. PREAMBLE

Sun HealthCare Group, Inc. ("Sun") hereby enters into this Corporate Integrity Agreement ("CIA") with the Office of Inspector General ("OIG") of the United States Department of Health and Human Services ("HHS") to promote compliance by Sun (as this term is defined herein), and by all Covered Persons and Covered Contractors (as these terms are defined herein) with the requirements of Medicare, Medicaid, and all other Federal health care programs (as defined in 42 U.S.C. Section 1320a-7b(f)) (hereinafter collectively referred to as the "Federal health care programs"). Sun's compliance with the terms and conditions in this CIA shall constitute an element of Sun's present responsibility with regard to participation in the Federal health care programs. Contemporaneously with this CIA, Sun is entering into a settlement with the United States, as embodied in the Plan of Reorganization soon to be filed in Sun's Chapter 11 proceeding (In re: Sun HealthCare Group, Inc., et al., Case No. 99-3657 (MFW) Jointly Administered (the "Bankruptcy Court")) (hereafter referred to as "Settlement Agreement"). The scope of this CIA shall be governed by the following definitions:

1. "Sun": includes any corporation, subsidiary, affiliate, joint venture or other organization or entity in which Sun owns greater than 50% or has a controlling interest, operates, performs billing functions, or has a management contract or arrangement to provide management and administrative services or any arrangement in which Sun has control over the day-to-day operations over the organization or entity.

2. "Covered Persons": includes all officers, directors, and employees. This term also includes those contractors who participate in Sun's billing or related submissions to the Federal health care programs.

Page 1 of 90

3. "Covered Contractor: includes any entity or individual with whom Sun has entered into a contract or other arrangement and does not fall within the definition of "Covered Persons," but nevertheless provides patient or resident care to Federal health care program beneficiaries on a regular basis (i.e., more often than two weeks over a 52-week period) or otherwise carries out the duties and responsibilities of this CIA (excluding the Monitor and the Independent Review Organization ("IRO") functions described herein).

4. "Federal health care program requirements: includes statutes, regulations, guidelines, the Centers for Medicare & Medicaid Services (formerly known as the Health Care Financing Administration or HCFA) (hereinafter "CMS") manuals and written directives of the Federal health care programs.

II. TERM OF THE CIA

The period of the compliance obligations assumed by Sun under this CIA shall be the period of time that Sun remains obligated by the payment terms of the Settlement Agreement, but in any event for not less than 5 years from the Effective Date of this CIA. Thus, once the parties have signed this CIA, it shall become final and binding on the Effective Date of Sun's Plan of Reorganization (as the term Effective Date is defined by the Plan), as approved by the Bankruptcy Court (hereafter referred to as the "Effective Date" in this CIA).

Sections VII, VIII, IX, X and XI shall remain in effect until OIG has completed its review of the final Annual Report and any additional materials submitted by Sun pursuant to OIG's request.

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III. CORPORATE INTEGRITY OBLIGATIONS

Prior to the execution of this CIA, Sun established a Compliance Program and as a condition of this CIA agrees to maintain its Compliance Program for the duration of this CIA. In addition, to the extent not already implemented and for the duration of this CIA, Sun hereby agrees to supplement its Compliance Program by adhering to the obligations contained in this CIA including creating the following infrastructure:

A. Program Infrastructure.

Within 120 days of the Effective Date of this CIA, Sun shall review its current infrastructure and to the extent not already accomplished, create an internal structure whereby individuals are given responsibility at the facility, regional and corporate levels to address quality of care concerns. These individuals shall not be in the Chief Financial Officer's ("CFO's") chain of command. There shall be in place a mechanism and structure to provide the individuals who are charged with quality of care concerns with direct access to the Compliance Officer, appropriate clinical and/or medical staff and the Corporate Compliance Committee.

As part of this internal structure, Sun shall maintain or establish, as necessary, the following positions and committees. If Sun changes its Compliance Program infrastructure in a way that affects these positions and committees, Sun shall ensure that under the new structure Sun devotes resources of equal effectiveness to its Compliance Program as are devoted under the structure described herein and provide notice to the OIG within 15 days after any such change.

1. Compliance and Audit Committees of the Board of Directors. Sun currently has an Audit Committee of the Board of Directors (the "Audit Committee") and a Compliance Committee of the Board of Directors (the "Board Committee"). The Board Committee is comprised of not less than three outside directors of Sun. The Board Committee shall be

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responsible for the review of matters related to the Compliance Program, this CIA, and compliance with Federal health care program requirements. During the term of this CIA, the Audit Committee shall review the adequacy of Sun's internal financial controls, accounting practices and financial reporting policies. During the term of this CIA, the Board Committee shall: a) review the quality and integrity of Sun's claims submission controls, policies and practices; b) ensure that Sun adopts and implements policies and procedures designed to comply with all applicable Federal health care program requirements, and this CIA; c) ensure that Sun has a system in place to respond to Federal, state, internal, and external reports of quality of care issues and that such system functions adequately; and d) ensure that Sun adopts and implements policies and procedures that are designed to ensure that each individual that is cared for at a Sun facility receives the level of care required by law. The Board Committee shall meet at least quarterly.

The individuals who serve on the Board Committee shall be available to the Compliance Officer, the Monitor, and the Independent Review Organization (as these terms are described in Section III.D) required under this CIA, to respond to any issues or questions that might arise. The names of the Board Committee members and the charter for the Board Committee shall be provided to OIG within 120 days of the Effective Date of this CIA. When new members of the Board Committee are appointed, or the responsibilities or authorities of the Board Committee are substantially changed, Sun shall notify the OIG, in writing, within 15 days after such a change.

2. Compliance Officer. Sun has appointed a Compliance Officer, who is and shall be responsible for developing and implementing policies, procedures, and practices designed to promote compliance with the Federal health care program requirements and the obligations set forth in this CIA.

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The Compliance Officer is and shall be a member of senior management of Sun (i.e., not subordinate to Sun's General Counsel or CFO) with unrestricted access to the Board Committee, who shall make regular (at least quarterly for the first year and semi-annually each year thereafter) reports regarding compliance matters directly to the CEO and the Board Committee, and who shall be authorized to report to the Board Committee at any time. The Compliance Officer is and shall remain responsible for monitoring the day-to-day activities engaged in by Sun to further its compliance objectives as well as for any reporting obligations created under this CIA. The Compliance Officer or his or her designees shall also ensure that quality of care or claim submission issues are appropriately identified and addressed through corrective action plans. In the event a new Compliance Officer is appointed during the term of this CIA, Sun shall notify the OIG, in writing, within 15 days after such a change.

3. Corporate Compliance Committee. Sun has appointed a Corporate Compliance Committee ("Compliance Committee"). The Compliance Committee shall include the Compliance Officer and other appropriate officers or individuals who have the authority and responsibility to ensure appropriate quality of care at Sun's facilities, ensure proper billing to Federal health care programs, and to ensure the implementation of this CIA. The Compliance Officer shall chair the Compliance Committee and the Compliance Committee shall support the Compliance Officer in fulfilling his/her responsibilities.

4. Compliance Liaisons. Sun has designated the presidents of its subsidiary lines of business and certain other employees as Compliance Liaisons. Each Compliance Liaison is and shall continue to be responsible for monitoring and ensuring execution of the Compliance Program and the relevant requirements of this CIA at each operational level for which the Compliance Liaison is responsible. Compliance Liaisons are and shall remain responsible for:

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providing leadership and support regarding compliance issues at operational levels within their control; distributing written compliance-related materials; ensuring the provision of appropriate training and the proper documentation of such training; ensuring the appropriate distribution of internal and external compliance audit reports and monitoring of corrective action related to such reports or other identified compliance-related issues; ensuring proper reporting and responses to compliance-related issues; and monitoring staff in the execution of their compliance-related functions. If these functions or reporting processes change, Sun shall devote resources of similar effectiveness to the compliance functions. Compliance Liaisons shall certify quarterly to the Compliance Officer that all plans of correction related to identified problems for which they are responsible have been implemented, or are in the process of being implemented, and that all Compliance Program concerns have been reported. Such certifications shall be maintained by the Compliance Officer and shall be available to OIG upon request. False certifications by the Compliance Liaisons shall be grounds for immediate termination, and proper execution of Compliance Liaison duties shall be a component of their performance evaluations.

5. Administrators. Each Sun facility (nursing home or hospital) is managed by an Administrator or Chief Executive Officer ("Administrator"). The Administrators will continue to be responsible for compliance activities within their facilities. Execution of compliance duties shall be a component of the performance evaluations of Administrators. Should it become necessary to pursue employment of a new Administrator, the new Administrator shall be granted authority sufficient to carry out all required duties, including those with respect to Sun's Compliance Program and this CIA.

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6. Internal Audit and Review Functions. Within 120 days of the Effective Date of this CIA, Sun shall review the adequacy of its system of internal financial controls, accounting policies, financial reporting practices and its other internal audit and review functions, as they relate to the Federal health care programs, and shall continue to perform, or if necessary establish a program for performing, internal audits and reviews that shall:

a. make findings of whether the cost reports, claims and submissions to Federal health care programs that affect reimbursement are accurate and in accordance with applicable law;

b. make findings of whether the systems are in place and functioning effectively to ensure that patients and residents at Sun facilities are receiving the quality of care and quality of life consistent with basic care, treatment and protection from harm standards, as required by applicable law, including 42 C.F.R. Parts 482 and 483 and any other applicable law;

c. conduct an annual Minimum Data Set ("MDS") billing review of claims submitted by Sun's nursing facilities; and

d. perform such other internal audits and reviews as necessary to ensure that this CIA is being appropriately implemented and to ensure that Sun is meeting its obligations under applicable law.

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B. Written Standards.

1. Code of Conduct. Sun has a Code of Conduct. Within 90 days of the Effective Date of this CIA, the Code of Conduct shall be reviewed by the Compliance Officer to ensure it meets the requirements set forth herein.

a. Contents: The Code of Conduct shall, at a minimum, include:

i. Sun's commitment to full compliance with all Federal health care program requirements and other applicable laws, its commitment to prepare and submit accurate billings consistent with Federal health care program requirements;

ii. Sun's requirement that all of its Covered Persons shall be expected to comply with all Federal health care program requirements and with Sun's own policies and procedures (including the requirements of this CIA);

iii. the requirement that all Covered Persons shall be expected to report suspected violations of any Federal health care program requirements or of Sun's own policies and procedures and if there are credible allegations of patient harm, such report shall be made in accordance with applicable law;

iv. the possible consequences to both Sun and to any Covered Person for failing to comply with all Federal health care program requirements and with Sun's own policies and procedures or for failure to report such non-compliance; and

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v. the right of all individuals to use the Confidential Disclosure Program (as described in Section III.E. of this CIA), as well as Sun's commitment to confidentiality and non-retaliation with respect to disclosures.

b. distribution and Certification. Within 100 days of the Effective Date of this CIA, Sun shall distribute the Code of Conduct to all Covered Persons who have not already received a copy that reflects the required contents as set forth herein. Within 130 days of the Effective Date of this CIA, each Covered Person shall certify, in writing, that he or she has received, read, understood, and will abide by Sun's Code of Conduct. New Covered Persons shall receive the Code of Conduct during orientation or at the time of their appointment, employment or contract, or within 130 days of the Effective Date of the CIA, whichever is later. All New Covered Persons shall complete the required certification within 30 days after the commencement of their appointment, employment, or contract or within 130 days of the Effective Date of the CIA, whichever is later. Sun shall continue to make the promotion of, and adherence to, the Code of Conduct an element in evaluating the performance of its Covered Persons. Sun shall annually review the Code of Conduct and will revise or supplement it as necessary. Sun shall distribute revisions or supplements of the Code of Conduct to Covered Persons within 30 days of such changes being completed. Covered Persons shall certify on an annual

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basis that they have received, read, understood and will abide by the Code of Conduct that is currently in place.

c. Covered Contractor Requirements. For each of its Covered Contractors, Sun shall: i) require in its contract with the Covered Contractor that the Covered Contractor acknowledges Sun's Compliance Program and Code of Conduct; and ii) for any Covered Contractor with whom Sun has an existing contract, Sun shall in good faith seek to reform the contract to require the Covered Contractor to acknowledge the Compliance Program and Code of Conduct and Sun shall ensure that the Code of Conduct is provided (either by Sun or the Covered Contractor) to all of the Covered Contractors.

2. Policies and Procedures. Sun has established written policies and procedures governing billing and quality of care issues. To the extent that it has not already done so, Sun shall develop written policies and procedures regarding its Compliance Program and its compliance with applicable law including, but not limited to, the requirements of Federal health care programs. Sun shall continue to assess and update as necessary the policies and procedures at least annually and more frequently, as appropriate. The policies and procedures shall be sent to OIG within 120 days of the Effective Date of this CIA. To the extent not already accomplished, Sun shall ensure that the relevant portions of its policies and procedures are available to the appropriate Covered Persons within 100 days of the Effective Date of this CIA. Compliance staff or supervisors shall continue to be available to explain any and all policies and procedures. Within 90 days of the Effective Date of this CIA, Sun shall review and analyze its

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policies and procedures to ensure that, at a minimum, Sun has adequate policies and procedures that specifically address:

a. Measures designed to ensure that Sun complies with Titles XVIII and XIX of the Social Security Act, 42 U.S.C. Section Section 1395-1395ggg and 1396-1396v, and all regulations, written directives, and guidelines promulgated under these statutes, including, but not limited to, 42 C.F.R. Parts 424 and 483, and any other and any other applicable laws that address quality of care in nursing facilities;

b. Measures designed to ensure that Sun complies with all requirements applicable to Medicare's Prospective Payment System ("PPS") for nursing facilities, including, but not limited to: the collection of the clinical data required under the Minimum Data Set ("MDS") as specified by the Resident Assessment Instrument User's Manual; use of the current Resource Utilization Groups ("RUG") classification system; and billing and cost report preparation policies and procedures;

c. Measures designed to ensure compliance with state and Federal reporting requirements pertaining to incident, accident, abuse and neglect reporting requirements. Also, measures designed to ensure that Sun has an appropriate system to collect and analyze reports at the facility, regional, and corporate levels relating to incidents, accidents, abuse, and neglect. The reports required under this

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system shall be of a nature to provide the Corporate Compliance Committee with meaningful information to be able to determine: i) if there are quality of care problems; and ii) the scope and severity of the problems;

d. Measures designed to ensure that residents and patients are discharged only for the reasons authorized by and in accordance with the procedures established by applicable law and not discharged for financial reasons unless authorized by law;

e. Measures designed to ensure that staffing is in compliance with Federal health care program requirements and state laws, including, but not limited to, 42 C.F.R. Section Section 483.23(a) and (b) (hospitals) and Section 483.30 (nursing facilities);

f. Measures designed to inform Covered Persons and Covered Contractors (to the extent relevant to their duties) of the staffing requirements of Federal and state law;

g. Measures to inform Covered Persons during orientation and during other training required by this CIA that appropriate staffing levels are a critical aspect of patient care, and, if any person has a concern about the level of staffing that there are many avenues available to each individual to address such concerns, including, but not limited to, the facility administrator, the Confidential Disclosure Program (as described in Section III.E. of this CIA),

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individuals at the regional, or corporate level, or directly to the Compliance Officer;

h. Measures designed to disfavor the use of individuals at any Sun facility who are from a temporary agency or not employed by Sun (not including those individuals who are included in the definition of Covered Persons) and measures designed to create and maintain a standardized system to track the number of individuals at each facility who fall within this category so that the number/proportion of or changing trends in such staff can be adequately identified by Sun and/or the Monitor;

i. Measures designed to ensure compliance with the completion of accurate clinical assessments as required by applicable Federal law (see, e.g., 42 C.F.R. Section 483.20);

j. Measures designed to ensure that where cost reports affect the level of reimbursement, cost reports correctly reflect relations with related parties and that Sun only claims entitlement to exceptions to the extent that they are in accordance with the law;

k. Measures designed to ensure that Covered Contractors are appropriately supervised to ensure that they are acting within the parameters of Sun's policies and procedures and the Federal health care program requirements;

l. Measures designed to ensure that the internal audits performed in conjunction with the IRO are performed by appropriate and

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qualified individuals, as further set forth in Section III.D.2.b. of this CIA;

m. Non-retaliation policies and methods for employees to make disclosures or otherwise report on compliance issues through the Confidential Disclosure Program required by Section III.E.;

n. Disciplinary guidelines to reflect the Code of Conduct requirements as specified in Section III.B.1;

o. Measures designed to promote adherence to the compliance and quality of care standards set forth in applicable Federal healthcare program requirements, and this CIA, by developing compensation policies that: (i) promote quality of resident and patient care; (ii) do not inhibit the quality of resident or patient care; and (iii) promote adherence to this CIA. Such measures shall include financial incentives for improving the quality of care at the facilities for which a particular individual shares responsibility, and financial penalties (e.g., no bonus or increase in salary) for failure to prevent quality of care problems. Nothing in this provision precludes the company generally from establishing performance-based financial incentives;

p. Measures designed to ensure cooperation with the Monitor and the IRO both of which shall have access to facilities and documents as set forth in this CIA;

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q. Measures designed to ensure that compliance issues are identified internally (e.g., through reports of abuse or neglect, financial data, reports to supervisors, the Confidential Disclosure Program (described in Section III.E. of this CIA) or other complaints, internal audits or reviews, patient satisfaction surveys, CMS quality indicators, staff turnover data, or internal surveys) or externally (e.g. consultants, audits performed by the IRO or the Monitor's reports) and are promptly and appropriately investigated and, if the investigation substantiates compliance issues, Sun implements effective and timely corrective action plans and monitors compliance with such plans;

r. Measures designed to collect staffing data, including staff to patient/resident ratio and staff turnover data;

s. Measures designed to ensure that an appropriate pre-admission clinical assessment will be made of all potential respiratory therapy patients/residents;

t. Measures designed to ensure that respiratory therapy residents/patients will only be admitted or cared for if the facility can provide all treatments and care prescribed by the patient's/resident's admitting/attending physician and that for respiratory therapy patients/residents that Sun cannot clinically accommodate, Sun will refer them to more appropriate facilities;

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u. Measures designed to ensure that once admitted, respiratory therapy patients/residents will receive appropriate clinical services based on their assessed needs from appropriately trained clinicians and that care, treatment plans and progress will be reviewed by qualified supervisory staff to ensure appropriate care;

v. Measures designed to protect patient safety in the event of utility or weather related emergencies as required by regulations;

w. Measures designed to achieve compliance with nutrition and hydration (42 C.F.R. Section 483.25) and physical environmental regulations (42 C.F.R. Section 483.70); and

x. Measures which direct facilities (at least annually) to evaluate their physical plants to determine whether they are able to respond to heat, utility or other weather related emergencies.

C. Training and Education.

Prior to the execution of this CIA, Sun established a training program for all its Covered Persons and agrees that it shall continue to conduct training programs that meet the requirements of this CIA. Training may be provided through appropriate Internet or Intranet-based mechanisms, but at all times during which any training is conducted, Sun will make available to all training recipients, persons knowledgeable about the subject area covered in the training.

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1. General Training. Within 120 days after the Effective Date of this CIA, Sun shall provide at least 2 hours of general training to each Covered Person. This general training shall explain Sun's:

a. Corporate Integrity Agreement requirements;

b. Compliance Program (including the policies and procedures as they pertain to general compliance issues); and

c. Code of Conduct.

New Covered Persons shall receive the general training described above during orientation, but not later than 20 days after the beginning of their employment or within 120 days after the Effective Date of this CIA, whichever is later. During the term of this CIA, every Covered Person shall receive such general training on an annual basis.

2. Specific Training for Relevant Covered Persons. Within 120 days after the Effective Date of this CIA, Sun shall provide specific training of certain designated Covered Persons, as set forth in this Section. Each Covered Person who is involved in the delivery of patient or resident care (including individuals who are responsible for quality assurance, setting policies or procedures, or making staffing decisions), the preparation or submission of claims for reimbursement or cost reports (or equivalent reporting mechanisms), or the assignment of procedure codes or other diagnostic assessments that might affect reimbursement, for any Federal health care programs (hereinafter, "Relevant Covered Persons") shall receive at least 2 hours of specific training pertinent to his or her responsibilities (as described below) in addition to the general training required above. This training shall be conducted at least annually thereafter during the term of this CIA, and shall include a discussion of the policies and procedures set forth in Section III.B.2, including, but not limited to:

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a. the submission of accurate information (e.g., MDS, claims, bills, and cost reports (or equivalent reporting mechanisms) for services rendered to Medicare or Medicaid beneficiaries, including, but not limited to, the requirements for an accurate clinical assessment, if relevant to the person's duties;

b. policies, procedures and other requirements applicable to the documentation of services and completion of medical records, if relevant to the person's duties;

c. the personal obligation of each individual involved in the patient care, documentation, or reimbursement processes to ensure that such submissions are accurate;

d. applicable Federal health care program requirements, if relevant to the person's duties;

e. the legal sanctions for improper submissions to Federal health care programs;

f. examples of relevant reimbursement practices related to Federal health care programs found to have been improper, if relevant to the person's duties;

g. for Relevant Covered Persons who provide resident care: the coordinated interdisciplinary approach to providing care to residents, including, but not limited to, resident assessment and the requirements of 42 C.F.R. Section 483; and

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h. for Relevant Covered Persons who provide resident care: the policies and procedures for appropriate admission and appropriate care of respiratory therapy patients/residents.

New Relevant Covered Persons shall receive this specific training within 40 days of the beginning of their employment or contract, or within 120 days after the Effective Date of this CIA, whichever is later. Newly hired Relevant Covered Persons involved in the delivery of patient or resident care or in the preparation or submission of information (including, but not limited to, claims, bills, MDS, or cost reports) to any Federal health care program shall be adequately supervised by trained employees until they have completed the specific training relevant to their duties. Each Relevant Covered Person shall receive the appropriate specific training on an annual basis during the term of the CIA.

In addition, each facility shall conduct appropriate periodic training at least semi-annually, or more frequently, as needed, on quality of care issues, including those issues identified by Sun through its various compliance mechanisms. As part of this training, during the spring of each year on an annual basis, each facility shall provide training to each Relevant Covered Person who provides patient care, on identifying residents at risk of heat and weather related problems (or other problems associated with the loss of utility service), identifying heat illness symptoms, and on an appropriate response to heat, utility or other weather related emergencies (and shall provide a checklist of measures that should be followed). In determining what additional training should be performed, the Compliance Officer or his/her designees will review the complaints received, satisfaction surveys, staff turnover data, any state or Federal surveys, including those performed by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), any internal surveys, and the CMS

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quality indicators for nursing facilities. Such training will be for the length of time necessary to teach the subject matter. Such training will be provided to all Relevant Covered Persons at the facility who are responsible for patient or resident care. Sun shall implement mechanisms to evaluate that training participants comprehended and (where appropriate) implemented the content of the training.

3. Attendance Log and Certification. An attendance log shall document the attendance of each person who is required to attend the training. The person responsible for the training shall certify the accuracy of the attendance log. The attendance log shall specify the type of training received and the date received. The Compliance Officer or his/her designees shall retain the attendance logs and certifications, along with specific course materials, and make all of these logs, certifications, and materials available to OIG upon request. The certification shall specify the type of training received and the date received.

4. Submission of Training and Course Materials. The training and course materials for General and Specific Training (as defined herein) shall be submitted to OIG no later than 20 days after completion of any training described herein.

5. Prior Training. Training of any type provided to affected Covered Persons within six months prior to the Effective Date of this Agreement that meets the requirements of Section III.C shall be deemed to meet the time frame obligation imposed by this Section, but does not obviate the requirements for attendance certifications.

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D. Review Procedures.

1. Independent Monitor (Quality Engagement). Within 60 days of the Effective Date of this CIA, Sun shall engage an appropriately qualified monitoring team (collectively the "Monitor"), that meets the approval of OIG. The Monitor may retain additional personnel, including, but not limited to, independent consultants, if needed to help meet the Monitor's obligations under this CIA. It is the intent of the parties to this CIA that the Monitor and Sun shall work cooperatively to foster the provision of high quality care at Sun. Sun shall be responsible for all costs incurred by the Monitor in connection with its duties under this CIA, including, but not limited to, the costs of travel, consultants, administrative personnel, office space and equipment, or additional personnel ("Monitor's Costs"). Such costs shall not exceed $2,000,000 annually ("Annual Limit"). To assist in Sun's budgeting process, the Monitor shall provide Sun with an estimated, non-binding budget on an annual basis.

a. The Monitor's Function. The Monitor shall be responsible for assessing the effectiveness, reliability, and thoroughness of Sun's quality of care infrastructure and systems with respect to Sun's nursing facilities. Specifically, the Monitor, guided by the Quality Monitor Task List (copy attached as Appendix A hereto), shall assess, among other things the following:

i. Sun's internal quality of care infrastructure, including, but not limited to, whether Sun has established and is carrying out its functions to review, analyze, and address quality of care issues; whether systems are place to promote quality of care and to respond to quality of care issues and the systems are operating in a

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timely and effective manner; whether the communication systems are effective, providing for accurate quality-related data, information, decisions, and results of decisions are transmitted to the proper individuals in a timely fashion; and whether the training programs are effective and thorough.

ii. Sun's response to quality of care issues, which shall include an assessment of:

(A) Sun's ability to identify the problem;

(B) Sun's ability to determine the scope of the problem (e.g., is it isolated or systemic);

(D) Sun's ability to execute the corrective action plan;

(E) Sun's ability to evaluate whether the assessment, corrective action plan and execution of that plan was effective, reliable, and thorough and maintained over time.

iii. the accuracy of internal reports, data and assessments that relate to patient and resident care;

iv. Sun's proactive steps (including training) to ensure that each patient and resident receives care in accordance with applicable law and the policies and procedures adopted by Sun, including those required by this CIA;

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v. whether compliance with Sun's policies and procedures that promote quality of care is a positive factor in determining compensation to Sun's employees;

vi. whether Sun's facility site visits are occurring as necessary to identify and address quality of care issues;

vii. whether Sun has in place an effective system to track temporary agency personnel, staff to patient ratios and staff turnover rates;

viii. whether Sun has complied with its own policies and procedures, training requirements, the Federal health care program requirements, and the requirements of this CIA regarding the admission and care of respiratory therapy patients and residents; and

ix. whether Sun has complied with its own policies and procedures, training requirements, the Federal health care program requirements and the requirements of the CIA related to heat, utility and weather related emergencies and to determine whether Sun has adopted appropriate contingency plans to address such emergencies.

b. Access. The Monitor shall have access to:

i. Facilities, at any time and without prior notice;

ii. (A) the CMS quality indicators (for nursing facilities);

(B) internal or external surveys or reports; (C) Sun Quality Line or

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other allegations or complaints; (D) resident or patient satisfaction surveys; (E) staffing reports setting forth the staff to patient ratios, temporary staffing levels, and staff turnover data; (F) incident, accident, abuse, neglect or death reports; (G) reports of incidents involving a patient or resident that prompt a full internal investigation; (H) patient or resident records consistent with applicable laws; (I) financial data relating to the quality of care provided to residents of Sun facilities; (J) self-evaluative reports including, but not limited to, those from medical review committees, quality assurance committees, or peer review committees; and (K) any other pre-existing data, including the reconfiguring of existing data that the Monitor may determine relevant to fulfilling the duties required under this CIA in the format requested by the Monitor, to the extent practicable;

iii. Covered Persons under the conditions set forth in Section VII of this CIA governing the rights of OIG to interview Sun's employees, contractors and agents; and

iv. Current patients and residents, subject to: (A) their clinical condition; and (B) their consent (without interference from Sun or its counsel), to conduct interviews with them outside the presence of Sun supervisory staff or counsel provided that such interviews are conducted in accordance with all applicable laws and the rights of such individuals, including the right of a patient to decline to be

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interviewed. Nothing in this CIA shall be construed to limit the Monitor's access to family or guardians, or former Covered Persons, patients, or residents.

c. Sun's Obligations. Sun shall:

i. Not impede the Monitor's access to its facilities (pursuant to the provisions of this CIA) and shall provide any requested documentation within the time frame specified by the Monitor, subject to any extensions and modifications requested by Sun and granted by the Monitor (the Monitor shall balance the circumstances of the situation with the burden on Sun when making document requests);

ii. Assist in contacting and arranging interviews of Covered Persons (to be conducted in accordance with the provisions of Section VII), and not impede the cooperation by such individuals;

iii. Provide access to current residents or patients and contact information for their families and guardians, in a manner consistent with the rights of such individuals under State or Federal law, and not impede their cooperation;

iv. Provide the last known contact information for former employees, contractors, and agents, and not impede the cooperation from such individuals, including, but not limited to, refraining from placing confidentiality requirements in termination agreements that would limit such cooperation;

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v. Provide the last known contact information for former residents, patients, their families, or guardians consistent with the rights of such individuals under State or Federal law, and not impede their cooperation;

vi. Address any written recommendation made by the Monitor either by substantially implementing the Monitor's recommendations or by explaining why it has elected not to do so;

vii. Pay the Monitor's bills for Monitor's Costs within 30 days of receipt. While Sun must pay all the Monitor's bills within 30 days, Sun may bring any disputed Monitor's Costs or bills to OIG's attention; and

viii. Not sue or otherwise bring any action against the Monitor related to any findings made by the Monitor or related to any exclusion or other sanction of Sun under this Agreement; provided, however, that this clause shall not apply to any suit or other action based solely on the dishonest or illegal acts of the Monitor, whether acting alone or in collusion with others.

Nothing in this Subsection (c) shall limit the right of Sun to inform individuals of their rights under law.

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d. The Monitor's Obligations. The Monitor shall:

i. Respect the legal rights, privacy, and dignity of all Covered Persons, residents, and patients;

ii. Where independently required by applicable law or professional licensing standard to report any finding to an appropriate regulatory or law enforcement authority, simultaneously submit copies of such reports to OIG and to Sun;

iii. At all times act reasonably in connection with its duties under the CIA, including when requesting information from Sun. Acting reasonably shall mean, when appropriate, among other things, that the Monitor shall consider the burdens and costs to Sun;

iv. Subject to Subsection (e) below, communicate its assessments of Sun through its quarterly reports to Sun and OIG concerning the findings made to date;

v. Submit bills to Sun on a consolidated basis no more than once per month, and submit an annual summary representing an accounting of its costs throughout the year to Sun and to OIG. Sun shall have the opportunity to review such bills and bring any issue of disputed bills or costs to the attention of OIG;

vi. Not be bound by any other private or governmental agency's findings or conclusions, including, but not limited to, JCAHO, CMS, or the state survey agency. Likewise, such private and governmental agencies shall not be bound by the Monitor's

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findings or conclusions. The Monitor's reports shall not be the sole basis for determining deficiencies by the state survey agencies. The parties agree that HHS and its contractors shall not introduce any material generated by the Monitor, or any opinions, testimony, or conclusions from the Monitor as evidence into any proceeding involving a Medicare or Medicaid survey, certification, or other enforcement action against Sun, and Sun shall similarly be restricted from using material generated by the Monitor, or any opinions, testimony, or conclusions from the Monitor as evidence in any of these proceedings. Nothing in the previous sentence, however, shall preclude the OIG or Sun from using any material generated by the Monitor, or any opinions, testimony, or conclusions from the Monitor in any action under the CIA or pursuant to other OIG authorities;

vii. Abide by the legal requirements of Sun's facilities: (A) to maintain the confidentiality of each resident's personal and clinical records; and (B) to maintain confidential and not to disclose the records of Sun's Corporate Compliance Committee and self-evaluative reports including, but not limited to, those from medical review committees, quality assurance committees or peer review committees. (see 42 C.F.R. Section Section 483.10 and 483.75(o)(3)). Nothing in the prior sentence, however, shall limit or affect the Monitor's obligation to provide information, including information from

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patient and resident clinical records, to the OIG, and, when legally or professionally required, reporting to other agencies;

viii. Except to the extent required by law, maintain the confidentiality of any proprietary financial and operational information, processes, procedures and forms obtained in connection with its duties under this CIA and not comment publicly concerning its findings except to the extent authorized by the OIG;

ix. Where appropriate, communicate requests for access, documents or other information to the Compliance Officer; and

x. Where possible, identify the criteria under which it intends to assess Sun's activities as set forth herein and communicate those criteria to Sun in advance of its assessments.

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e.     Miscellaneous Provisions.

i.  The Monitor may confer and correspond with Sun and OIG on an ex parte basis at any time. If, after consulting with Sun, the Monitor has concerns about corrective action plans that are not being enforced or systemic or repeated problems that could impact Sun's ability to render quality care to its patients and residents, then the Monitor shall: (A) report such concerns in writing to the Consortium, in care of OIG at the address set forth in Section VI of this CIA (the Consortium consists of representatives of OIG, CMS, and the Department of Justice); and (B) provide notice and a copy of the report to the Compliance Officer and the Board Committee. Sun shall be provided an opportunity to respond to the Consortium concerning any such report;

ii.  The Consortium shall seek to resolve any such dispute between the Monitor and Sun prior to OIG seeking any remedies pursuant to the terms of this CIA;

iii.  The Monitor serves at the behest of OIG and may be removed from the Monitor position solely at the discretion of OIG. If the Monitor resigns or is removed for any reason prior to the termination of the CIA, OIG, at its sole discretion, shall appoint another Monitor with the same functions and authorities;

iv.  The Monitor shall not control, manage or operate Sun; and

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v.  Nothing in this Agreement changes the applicable requirements for standard of care from that imposed by the Federal health care program requirements and other laws.

2.      Financial Reviews.

(a)     a.     General Description

i.     Retention of Independent Review Organization. Prior to the Effective Date of this CIA, Sun will retain an entity, such as an accounting, auditing or consulting firm (hereinafter "Independent Review Organization" or "IRO"), to perform review engagements to assist Sun in assessing and evaluating its billing, coding and claim submission practices and its compliance obligations pursuant to this CIA and the Settlement Agreement. The IRO retained by Sun shall have expertise in the billing, coding, reporting and other requirements of the particular section of the health care industry pertaining to this CIA and in the general requirements of the Federal health care program(s) from which Sun seeks reimbursement. The Billing Engagement, described below shall be accomplished by a combination of reviews performed by the IRO and the Sun Internal Review Team pursuant to the schedule in Section III.D.2.b.vii. below. The IRO shall assess, along with Sun, whether it can perform the IRO engagements in a professionally

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independent fashion, taking into account any other business relationships or other engagements that may exist.

ii.     Types of Engagements. The IRO shall conduct two separate engagements. One engagement shall address Sun's billing, coding and claim submission practices to the Federal health care programs ("Billing Engagement"). The second engagement shall address Sun's compliance with the obligations assumed under this CIA and the Settlement Agreement ("Compliance Engagement").

iii.     Frequency of Billing and Compliance Engagements. The Billing Engagement shall be performed in accordance with the schedule in Section III.D.2.b.vii. beginning with the Effective Date of this CIA. The IRO and Sun's Internal Review Team shall perform the Minimum Data Set Audits (hereinafter, "MDS Audits") of the Billing Engagement and the IRO shall perform the Process Review component of the Billing Engagement. The Compliance Engagement shall be performed by the IRO for the first one-year period beginning with the Effective Date of this CIA.

iv.     Retention of Records. Sun shall retain and make available to the OIG, upon request, all work papers, supporting documentation, correspondence and draft reports, if any, (those exchanged between the IRO and Sun) related to the engagements for the duration of the CIA plus one year.

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b.     Billing Engagement. The Billing Engagement shall be comprised of two separate reviews - an MDS Audit and a Process Review. The MDS Audit and corresponding MDS Audit Report are discussed in detail in Appendix B to this CIA, which is incorporated by reference.

i.     Selection of Potential Candidates for Sun's Internal Review Team. Sun's Corporate Compliance Officer shall identify prospective team members based upon the candidate's MDS Audit experience (i.e. has performed similar MDS audits within the 6 months prior to becoming part of Sun's Internal Review Team), qualifications, and clinical background. The IRO and Corporate Compliance Officer shall independently assess each respective candidate's experience, qualifications, and clinical background. Both the IRO and Sun shall draft independent recommendations for each prospective Internal Review Team member regarding whether each member should serve on Sun's Internal Review Team. The IRO and Sun shall mutually agree on Sun's proposed Internal Review Team members for the purposes of Credentialing as set forth below.

ii.     Credentialing of Sun's Internal Review Team. To credential Sun's Internal Review Team, the following protocol will be used. Within 90 days of the Effective Date of this CIA and prior to the initiation of any MDS Audits, the IRO shall randomly select (using RAT-STATS) 25 sampling units from Sun's nursing

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facilities. The identities of the patients in the selected sampling units will be redacted to preserve patient confidentiality. These sampling units will be used to train and assess the candidates for Sun's Internal Review Team. Using the audit procedures set forth in Appendix B, the IRO will train the prospective Internal Review Team members using the first 10 randomly generated sampling units. Following the demonstration training, and using the remaining 15 randomly selected sampling units, each of the candidates will independently make coding and overpayment determinations on these units based on defined audit procedures agreed to by Sun and the IRO as set forth below. Each prospective Internal Review Team member will be evaluated on how they scored each test sampling unit. Each reviewer's percentage score will be calculated based on pre-selected objective audit elements. These pre-selected objective audit elements and the credentialing standard shall be mutually agreed upon by Sun and the IRO and shall be submitted to the OIG for review. At any time during the term of the CIA, the OIG may provide Sun with comments, recommendations, or may reject any or all of the pre-selected objective audit elements or credentialing standard and may create its own audit elements and credentialing standard and apply it to select Sun's Internal Review Team. Any comments provided, recommendations made or the lack thereof or the lack of rejection of any or all of the pre-selected objective

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audit elements or credentialing standard shall not constitute acceptance of the pre-selected objective audit elements or the credentialing standard. Those Internal Review Team Candidates with credentialing scores at or above the credentialing standard will be selected as members of Sun's Internal Review Team.

iii.     Reporting the Selection of Sun's Internal Review Team. As part of Sun's Implementation Report, Sun's Corporate Compliance Officer shall provide the OIG with his justification and the IRO's recommendations for each proposed Internal Review Team member. Both Sun's justification and the IRO's recommendation shall include a narrative evaluation of each prospective team member's audit test performance for each selected Internal Review Team member. Sun shall also include each candidate's resume, audit test results, and credentialing score which support each candidate's selection as an Internal Review Team member as part of its justification.

iv.     Replacement of Internal Review Team Members. If at any time during the term of this CIA, an Internal Review Team member needs to be replaced, the protocol described in Section III.D.2.b.i-iii. herein shall be implemented to select a new Internal Review Team member. However, Sun's justification and the IRO's recommendation, as described in Section III.D.2.b.ii herein, shall

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be submitted to the OIG prior to engaging the new Internal Review Team member.

v.     Annual IRO Verification Review. At the end of each Review Year (as defined in Section III.D.2.b.vi below) of the CIA, the IRO will verify a sample of each Sun Internal Review Team member's MDS Audit determinations to ensure the reviewer is making accurate judgements. To conduct the verification review, the IRO will review either 10% or 15 sampling units from each Internal Review Team member's previous year's MDS Audits, whichever is greater, and the accuracy of the reviewer's determinations shall be recorded. The IRO shall randomly select each reviewer's sample using RAT-STATS. Any incorrect MDS Audit determinations made by a Team member will constitute an error. If 5% or more of a team member's determinations are incorrect, the Internal Review Team member will be removed from the Team unless retention of the Internal Review Team member is otherwise recommended by the IRO and accepted by the OIG. The audit test results for each Internal Review Team member and any recommendation or supporting rationale will be included in each Annual Report to the OIG. The OIG, will have discretion to remove any person from the Internal Review Team at any time.

vi.     Pooling Methodology. For the purpose of the MDS Audits that the IRO and Sun will conduct, the IRO will aggregate total

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nursing facility data and allocate each of Sun's nursing facilities into four pools based upon their respective distribution of total claims paid by Medicare Part A.

(A)     Based upon the paid claims information, the IRO will sort all of the Sun nursing facilities into four pools. The facilities shall be resorted annually on the anniversary of the Effective Date of this CIA and each such annual period shall constitute a review year (the "Review Year"). The four pools are as follows:

(1)  Facilities that have received no Medicare Part A payments during the Review Year (hereinafter referred to as the "Medicare Zero Claim Pool"). The IRO will remove the Medicare Zero Claim Pool from the population of nursing facilities that it will randomly select from for the annual MDS Audits;

(2)  Facilities that have received payment from Medicare Part A for 1 to 250 claims during the Review Year (hereinafter referred to as the "Medicare Small Claim Pool");

(3)  Facilities that have received payment from Medicare Part A for 251-750 claims during the Review Year (hereinafter referred to as the "Medicare Medium Claim Pool"); and

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(4)  Facilities that have received payment from Medicare Part A for more than 751 claims during the Review Year covered by the billing review (hereinafter referred to as the "Medicare Large Claim Pool").

vii.     Annual Facility Selection Methodology. Consistent with Appendix B, the Audit Period for year 1 reviews will begin with the Effective Date of the CIA and will end with the date the MDS Audit begins for each respective Claim Pool. For the first year reviews, no MDS Audit will contain less than 3 months worth of data and no more than 9 months worth of data. For each Claim Pool's subsequent yearly review, the Audit Period for the MDS Audit shall consist of 12 months of data. These subsequent yearly reviews shall begin at the end of the preceding Audit Period for each Claim Pool and shall end 12 months later.

The MDS Audit will be prioritized in the following manner: During each Review Year, the IRO will review facilities in the Medicare Large Claim Pool prior to reviewing the facilities in the Medicare Medium Claim Pool. Sun will review facilities in the Medicare Medium Claim Pool prior to reviewing the facilities in the Medicare Small Claim Pool. The IRO and Sun may deviate from this prioritization schedule only after receiving prior written approval from the OIG.

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2.     Audit Period 1 Reviews:

-       IRO will randomly select, using RAT-STATS, 5 facilities from the Medicare Small Claim Pool - Sun will perform an MDS Audit on these facilities.

-       IRO will randomly select, using RAT-STATS, 15 facilities from the Medicare Medium Claim Pool - IRO will perform an MDS Audit on the first five randomly generated facilities and Sun will perform an MDS Audit on the remaining 10 facilities.

-       IRO will randomly select, using RAT-STATS, 6 facilities from the Medicare Large Claim Pool - IRO will perform an MDS Audit on these facilities.

-       In accordance with Section III.D.2.b.v. above, at the end of Review Year 1, the IRO will review 10% or 15 sampling units for each member of Sun's Internal Review Team, whichever is greater. The IRO will randomly select, using RAT-STATS, each member's sampling units.

3.     Audit Period 2 Reviews:

-       IRO will randomly select, using RAT-STATS, 5 facilities from the Medicare Small Claim Pool, excluding those Medicare Small Claim Pool facilities that were selected in Audit Period 1, - Sun will perform an MDS Audit on these facilities.

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-       IRO will randomly select, using RAT-STATS, 15 facilities from the Medicare Medium Claim Pool, excluding those Medicare Medium Claim Pool facilities that were selected in Audit Period 1 - IRO will perform an MDS Audit on the first five randomly generated facilities and Sun will perform an MDS Audit on the remaining 10 facilities.

-       IRO will randomly select, using RAT-STATS, 6 facilities from the Medicare Large Claim Pool - IRO will perform an MDS Audit on these facilities.

-       IRO will randomly select, using RAT-STATS, 1 of the 20 Medium and Small Claim Pool facilities reviewed in Audit Period 1 and will perform an MDS Audit on this facility.

-       In accordance with Section III.D.2.b.v. above, at the end of Review Year 2, the IRO will review 10% or 15 sampling units for each member of Sun's Internal Review Team, whichever is greater. The IRO will randomly select, using RAT-STATS, each member's sampling units.

4.     Audit Period 3 Reviews:

-       IRO will randomly select, using RAT-STATS, 5 facilities from the Medicare Small Claim Pool, excluding those Medicare Small Claim Pool facilities that were selected in Audit Periods 1 or 2 - Sun will perform an MDS Audit on these facilities.

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-       IRO will randomly select, using RAT-STATS, 15 facilities from the Medicare Medium Claim Pool, excluding those Medicare Medium Claim Pool facilities that were selected in Audit Periods 1 or 2 - IRO will perform an MDS Audit on the first five randomly generated facilities and Sun will perform an MDS Audit on the remaining 10 facilities.

-       IRO will randomly select, using RAT-STATS, 6 facilities from the Medicare Large Claim Pool - IRO will perform an MDS Audit on these facilities.

-       IRO will randomly select, using RAT-STATS, 1 of the 40 Medium and Small Claim Pool facilities reviewed in Audit Periods 1 or 2 and will perform an MDS Audit on these facilities.

-       In accordance with Section III.D.2.b.v. above, at the end of Review Year 3, the IRO will review 10% or 15 sampling units for each member of Sun's Internal Review Team, whichever is greater. The IRO will randomly select, using RAT-STATS, each member's sampling units.

5.     Audit Period 4 Reviews:

-       IRO will randomly select, using RAT-STATS, 5 facilities from the Medicare Small Claim Pool, excluding those Medicare Small Claim Pool facilities that were selected in Audit Periods 1, 2, or 3 - Sun will perform an MDS Audit on these facilities.

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-       IRO will randomly select, using RAT-STATS, 15 facilities from the Medicare Medium Claim Pool, excluding those Medicare Medium Claim Pool facilities that were selected in Audit Periods 1, 2, or 3 - IRO will perform an MDS Audit on the first five randomly generated facilities and Sun will perform an MDS Audit on the remaining 10 facilities.

-       IRO will randomly select, using RAT-STATS, 6 facilities from the Medicare Large Claim Pool - IRO will perform an MDS Audit on these facilities.

-       IRO will randomly select, using RAT-STATS, 2 of the 60 Medium and Small Claim Pool facilities reviewed in Audit Periods 1, 2, or 3 and will perform an MDS Audit on these facilities.

-       In accordance with Section III.D.2.b.v. above, at the end of Review Year 4, the IRO will review 10% or 15 sampling units for each member of Sun's Internal Review Team, whichever is greater. The IRO will randomly select, using RAT-STATS, each member's sampling units.

6.     Audit Period 5 Reviews: All facilities, even if previously selected, will be included in the universe for Audit Period 5.

-       IRO will randomly select, using RAT-STATS, 5 facilities from the Medicare Small Claim Pool - Sun will perform an MDS Audit on these facilities.

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-       IRO will randomly select, using RAT-STATS, 15 facilities from the Medicare Medium Claim Pool - IRO will perform an MDS Audit on the first five randomly generated facilities and Sun will perform an MDS Audit on the remaining 10 facilities.

-       IRO will randomly select, using RAT-STATS, 6 facilities from the Medicare Large Claim Pool - IRO will perform an MDS Audit on these facilities.

-       In accordance with Section III.D.2.b.v. above, at the end of Review Year 5, the IRO will review 10% or 15 sampling units for each member of Sun's Internal Review Team, whichever is greater. The IRO will randomly select, using RAT-STATS, each member's sampling units.

viii.     MDS Audit. The IRO and Sun's Internal Review Team shall perform an MDS Audit to identify any overpayments through a variable appraisal of paid claims submitted by Sun to the Medicare program. The MDS Audit shall be performed in accordance with the procedures set forth in Appendix B to this CIA.

ix.     MDS Audit Report. The IRO shall prepare a report based upon each MDS Audit performed for each facility the IRO reviewed ("MDS Audit Report"). Sun shall prepare an MDS Audit Report for each facility it reviewed. The MDS Audit Report shall be created in accordance with the procedures set forth in Appendix

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B to this CIA and shall be submitted to OIG by Sun as part of Sun's Annual Reports.

x.     Process Reviews. The IRO shall perform Process Reviews at Sun's nursing facilities which are selected for MDS Audits as described above. The Process Reviews shall include a review of Sun's claims, coding, billing and submission process and other compliance related activities ("Process Review"). The Process Review may be performed concurrently with the other elements of the Billing Engagement and shall include testing or verification of Sun's Systems, processes and/or operations only when necessary as described below in Section III.D.2.b.x.(B). The Process Review shall consist of a thorough review and inquiry of the following:

(A)     Sun's documentation, coding, billing and reporting operations relating to claims submitted to all Federal health care programs. As part of this review, the IRO is expected to evaluate the presence, application and adequacy of:

(1)  Sun's billing and medical record documentation and coding process;

(2)  Sun's billing policies and procedures to ensure proper coding and billing;

(3)  Sun's internal controls to ensure accurate coding and claims submission;

(4)  Sun's reporting operations or mechanisms that

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ensure appropriate communication between Sun and its fiscal intermediaries; and

(5) corrective action plans to correct any inaccurate coding or billing processes or individual claim forms.

(B)     In the event Sun or the IRO identify deficiencies in Sun's medical record documentation, coding process, policies and procedures, internal controls, reporting mechanisms or corrective action plans, (either through the Billing Engagement, Process Review, internal or external audits, or fiscal intermediary review) which result, or could result, in inappropriate billing to the federal health care programs, the IRO shall, attempt to quantify any actual or potential underpayment or overpayments and shall make a report to Sun (and to the OIG as described below) that shall include the IRO's recommendations to correct the identified deficiency. In addition, the IRO shall test the applicable Sun system(s) to ensure the potential deficiency is not a systemic problem. Sun will correct any identified deficiency within 3 months of the discovery of the deficiency or provide the OIG with a reason why it cannot correct the deficiency within that time frame. Sun will report its findings regarding any potential deficiencies and

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corrective actions in its Process Review Report.

xi.     Process Review Report. The IRO shall prepare a report based upon each Process Review performed ("Process Review Report") which shall be submitted to the OIG as part of Sun's Annual Reports. The Process Review Report shall include the IRO's findings and supporting rationale regarding:

(A)     any identified deficiencies in Sun's medical record documentation, coding process, policies and procedures, internal controls, reporting mechanisms or corrective action plans;

(B)     any weakness or potential weaknesses in Sun's medical record documentation, coding process, policies and procedures, internal controls, reporting mechanisms or corrective action plans; and

(C)     any recommendations the IRO may have to improve any of these systems, operations, or processes.

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c.     Compliance Engagement.

i.     Compliance Review. The IRO shall conduct a review of Sun's compliance activities ("Compliance Review"). The Compliance Review shall consist of a review of Sun's adherence to the obligations set forth in this CIA, and a review of Sun's compliance with certain provisions of the Settlement Agreement:

(A)     CIA Obligations Review. The IRO shall assess and evaluate Sun's compliance with the obligations set forth in each section of this CIA.

(B)     Unallowable Costs Review. The IRO shall determine whether Sun has complied with its obligation not to charge to, or otherwise seek payment from, Federal or State payors for unallowable costs (as defined in the Settlement Agreement) and its obligation to identify to applicable Federal or State payors any unallowable costs included in payments previously sought from the United States, or any State Medicaid program. This unallowable cost analysis shall include, but not be limited to, payments sought in any cost reports, cost statements, information reports or payment requests for post-petition periods. In making this determination, the IRO may need to review cost reports and/or financial statements from the year in which of the Settlement Agreement was executed, as well

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as from previous years but shall not include any Closed Cost Years as defined in the Settlement Agreement, or post-petition periods which are the subject of a settlement with a state.

ii.     Compliance Review Report. The IRO shall prepare a report based upon the Compliance Review performed (the "Compliance Review Report"). The Compliance Review Report shall include:

(A)     the IRO's findings, and supporting rationale (or narrative explanation), if any, and a summary of such findings and rationale regarding Sun's compliance with the terms of each section of the CIA, as applicable; and

(B)     the IRO's findings and supporting rationale (or narrative explanation) regarding whether Sun has complied with its obligation not to charge to, or otherwise seek payment from, Federal or State payors for unallowable costs (as defined in the Settlement Agreement) and its obligation to identify to applicable Federal or State payors any unallowable costs included in payments previously sought from such payor.

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d.     Validation Review. In the event the OIG has reason to believe that: Sun's Billing or Compliance Engagement fails to conform to the requirements of this CIA; or the findings or MDS Audit results are believed to be inaccurate, the OIG may, at its sole discretion, conduct its own review to determine whether the Billing and Compliance Engagements comply with the requirements of the CIA and/or to determine if the findings or MDS Audit results are inaccurate. Sun agrees to pay for the reasonable cost of any such review performed by the OIG or any of its designated agents so long as it is initiated before one year after Sun's final submission is received by the OIG.

Prior to initiating a validation review, the OIG shall notify Sun of its intent to do so with an explanation stating why the OIG believes such a review is necessary. In order to resolve any concerns raised by the OIG, Sun may request a meeting with the OIG to discuss the results of any Engagement submissions; present any additional or relevant information to clarify the results of the Engagements or to correct the inaccuracy of the MDS Audit; and/or propose alternatives to the proposed validation review.

The OIG will attempt in good faith, to resolve any Billing or Compliance Engagement and/or MDS Audit issues with Sun prior to conducting a validation review. However, the final determination as to whether or not to proceed with a validation review shall be made at the sole discretion of the OIG.

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e.     Independence Certification. The IRO shall include in its report(s) to Sun a certification or sworn affidavit that it has evaluated its professional independence and/or professional objectivity, as applicable, with regard to the Billing and Compliance Engagements and that it has concluded that it was, in fact, independent and/or objective, as applicable.

     E.     Confidential Disclosure Program.

          Sun has established a Confidential Disclosure Program, which includes two toll-free telephone lines, known as the "Sun Quality Line" and "Customer First Line" (collectively the "Confidential Disclosure Program"). The Sun Quality Line has been designed and implemented for employees, contractors, and vendors, while the Customer First Line has been designed for patients and families. Within 90 days of the Effective Date of this CIA, Sun shall review its Confidential Disclosure Program and ensure that it is in compliance with the requirements of this Section. The Confidential Disclosure Program shall enable any individual to disclose, to the Compliance Officer or some other person who is not in the disclosing individual's chain of command, any identified issues or questions associated with Sun's policies, practices, or procedures with respect to quality of care or a Federal health care program, believed by the individual to be inappropriate. Sun shall publicize the existence of the Confidential Disclosure Program, and, at a minimum shall post notice of it prominently in common gathering areas (e.g., lobbies, dining rooms, activity rooms, waiting rooms, employee break rooms and other locations where notices are typically posted) in each of its facilities and locations and shall publicize it in training and newsletters to employees.

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The Confidential Disclosure Program shall emphasize a non-retribution, non-retaliation policy, and shall include a reporting mechanism for anonymous, confidential communication. Upon receipt of a disclosure, the Compliance Officer, or his/her designee, shall gather the information in such a way as to elicit all relevant information from the disclosing individual. The Compliance Officer, or his/her designee, shall make an inquiry into the allegations set forth in every disclosure to ensure that he or she has obtained all of the information necessary to determine whether further review should be conducted. For any disclosure that is sufficiently specific so that the Compliance Officer, or his/her designee, determines further review is warranted, the Compliance Officer, or his/her designee, shall conduct such further review of the allegations and ensure that follow-up is conducted and that any inappropriate or improper practice is addressed.

The Compliance Officer shall maintain a written record, which shall include the date of receipt of the allegation or complaint, a summary of each allegation or complaint received, the status of the respective investigations, and any corrective action taken in response to the investigation. The written record shall be made available to OIG upon request.

     F.     Ineligible Persons.

     1.     Definition. For purposes of this CIA, an "Ineligible Person" shall be any individual or entity who: (a) is currently excluded, suspended, debarred or otherwise ineligible to participate in the Federal health care programs; or (b) has been convicted of a criminal offense and is subject to exclusion under 42 U.S.C. Section 1320a-7(a), but has not yet been excluded.

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     2.     Screening Requirements. Sun currently has policies and procedures regarding the screening of prospective Covered Persons, contractors, and physicians who receive staff privileges to prevent the hiring of, or contracting with, any Ineligible Person. Sun shall screen all prospective Covered Persons and contractors prior to engaging their services, and screen physicians prior to granting staff privileges by: (a) requiring applicants to disclose whether they are Ineligible Persons; and (b) reviewing the General Services Administration's List of Parties Excluded from Federal Programs (available through the Internet at http://www.arnet.gov/epls) and the HHS/OIG List of Excluded Individuals/Entities (available through the Internet at http://www.hhs.gov/oig) (these lists and reports will hereinafter be referred to as the "Exclusion Lists").

     3.     Review and Removal Requirement. Within 120 days of the Effective Date of this CIA, Sun will review its list of current Covered Persons, contractors, and physicians with staff privileges against the Exclusion Lists. Thereafter, Sun will review the list semi-annually. If Sun has notice that a Covered Person, contractor, or physician has become an Ineligible Person, Sun will remove such person from responsibility for, or involvement with, Sun's business operations related to the Federal health care programs and shall remove such person from any position for which the person's salary or the items or services rendered, ordered, or prescribed by the person are paid in whole or part, directly or indirectly, by Federal health care programs or otherwise with Federal funds at least until such time as the person is reinstated into participation in the Federal health care programs. Semi-annual reviews performed on Sun's Covered Persons, contractors, and physicians with

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staff privileges within six months prior to the Effective Date that satisfy the requirements of Section III.F.2 shall be deemed to have met the time frame obligation imposed by this Section, but do not obviate the semi-annual review requirements of this Section.

     4.     Pending Charges and Proposed Exclusions. If Sun has notice that a Covered Person, contractor, or physician with staff privileges is formally charged with a criminal offense related to any Federal health care program, or is proposed for exclusion during his or her employment or contract, Sun shall take all appropriate actions to ensure that the responsibilities of that Covered Person, contractor, or physician do not adversely affect the quality of care rendered to any patient or resident or the accuracy of any claims submitted to any Federal health care program.

     G.     Notification of Proceedings.

Within 30 days of discovery, Sun shall notify OIG, in writing, of any ongoing investigation or legal proceeding conducted or brought by a governmental entity or its agents involving an allegation that Sun has committed a crime or has engaged in fraudulent activities. This notification shall include a description of the allegation, the identity of the investigating or prosecuting agency, and the status of such investigation or legal proceeding. Sun shall also provide written notice to OIG within 30 days of the resolution of the matter, and shall provide OIG with a description of the findings and/or results of the proceedings, if any.

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H.     Reporting.

          1.     Definition of "Overpayment. For purposes of this CIA, an "Overpayment" shall mean the amount of money Sun has received in excess of the amount due and payable under the Federal health care program requirements, but shall not include periodic interim payments subject to reconciliation upon submission of a final cost report or reconciliation of other interim payments. Sun may not subtract any underpayments for purposes of determining the amount of relevant "Overpayments."

          2.     Definition of "Material Deficiency." For purposes of this CIA, a "Material Deficiency" means anything that involves: (i) a substantial Overpayment relating to any Federal health care program; or (ii) a matter that a reasonable person would consider a potential violation of 42 U.S.C. Section Section 1320a-7, 1320a-7a, or 1320a-7b, or other criminal or civil law related to any Federal health care program for which penalties or exclusion may be authorized under the law. A Material Deficiency may be the result of an isolated event or a series of occurrences.

          3.     Reporting of Overpayments. If, at any time, Sun identifies or learns of any billing, reporting, or other policies, procedures and/or practices that has resulted in an Overpayment (as herein defined), Sun shall notify the payor (e.g., Medicare fiscal intermediary or carrier) within 30 days of discovering the Overpayment and take remedial steps within 60 days of discovery (or such additional time as may be agreed to by the payor) to repay the Overpayment and correct the problem, including preventing the underlying problem and the Overpayments from recurring. Notification and repayment to the contractor should be done in accordance with the contractor policies, and, for Medicare contractors, must include the information contained on the

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Overpayment Refund Form, provided as Appendix C to this CIA.

          4.     Reporting of Material Deficiencies. If Sun determines that there is a Material Deficiency (as defined herein), Sun shall notify OIG within 40 days of discovering the Material Deficiency. The report to OIG shall include:

a. A complete description of the Material Deficiency, including the relevant facts, persons involved, and legal and program authorities;

b. Sun's actions (and future plans of action) to correct the Material Deficiency; and to prevent such Material Deficiency from recurring;

c. If applicable, the information on the Overpayment Refund Form and the payor's name, address, and contact person where the Overpayment (if any) was sent; and

d. If applicable, the date of the check and identification number (or electronic transaction number) on which the Overpayment (if any was repaid).

IV.     NEW BUSINESS UNITS OR LOCATIONS

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In the event that Sun purchases or establishes new business units that participate in any Federal health care program after the Effective Date of this CIA, Sun shall notify OIG of this fact within 30 days of the date of purchase or establishment. This notification shall include the type of facility, location of the new operation(s), phone number, fax number, Federal health care program provider number(s) (if any), and the corresponding payor(s) (contractor specific) that has issued each provider number. All Covered Persons and Covered Contractors at such locations shall be subject to the requirements in this CIA that apply to new Covered Persons and Covered Contractors (e.g., completing certifications and undergoing training). In the case of new business units and locations, the obligations of this CIA shall apply only to services or activities occurring after the Effective Date of the acquisition or establishment of the new business unit or location. Sun shall use its best efforts to implement the requirements of this CIA in new business units or locations that participate in any Federal health care programs as soon as practicable. Notwithstanding any other provisions to the contrary, the terms of this CIA shall not become effective for new business units or locations until six months after the purchase or establishment of such new business units or locations.

VI.     IMPLEMENTATION AND ANNUAL REPORTS

          A.     Implementation Report. Within 120 days after the Effective Date of this CIA, Sun shall submit a written report to OIG summarizing the status of its implementation of the requirements of this CIA. This Implementation Report shall include:

1.  the name, address, phone number and position description of all

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individuals in positions described in Section III.A;

2.  the charter for the Board Committee as required in Section III.A.1;

3. the program for internal audits and reviews and a description of the quality of care infrastructure as required in Section III.A.;

4.  a copy of Sun's Code of Conduct required by Section III.B.l;

5.  a copy of the policies and procedures required by Section III.B.2;

6.  a description of the training programs required by Section III.C., including a description of the targeted audiences and a schedule of when the training sessions were held and are to be held;

7.  a certification by the Compliance Officer that to the best of his or her knowledge:

a.  the policies and procedures required by Section III.B.2 have been developed, are being implemented, and have been made available to all appropriate Covered Persons;

b.  all Covered Persons and Covered Contractors have completed the Code of Conduct certification as required by Section III.B.1;

c.  all Covered Persons have completed the training and executed the certification required by Section III.C; and

d.  such certification may also include, if necessary, an explanation of noncompliance.

8.  a description of the Confidential Disclosure Program required by Section III.E.;

9.  the identity of the Independent Review Organization(s) and the

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proposed start and completion date of the engagements for the first year as well as the identification of the individual members comprising Sun's Internal Review Team and the respective credentialing information required in Section III.D.2.b;

10. a summary of personnel actions taken pursuant to Section III.F.; and

11. a list of all of Sun's business units participating in a Federal health care program (including mailing addresses), the corresponding name under which each location is doing business, the corresponding telephone numbers and facsimile numbers, each location's Federal health care program provider identification numbers(s), and the name, address, and telephone number of the payor (specific contractor) that issued each provider identification number.

                         B  Annual Reports. Sun shall submit to OIG an Annual Report with respect to the status and findings of Sun's Compliance activities over the one-year period covered by the Annual Report. Each Annual Report shall include:

                              1.  any change in the identity or position description of individuals in positions described in Section III.A., a change in any of the committees' structure or charter, any change in the internal audit and review program, or any change in the quality of care infrastructure;

                              2.  a certification by the Compliance Officer that to the best of his or her knowledge:

a.  all Covered Persons and Covered Contractors have completed the annual Code of Conduct certification required by Section III.B.1;

b.  all Covered Persons have completed the training and executed

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the certification required by Section III.C;

c.  Sun has complied with its obligations under the Settlement Agreement (i) not to resubmit to any Federal health care program payors any previously denied claims related to conduct addressed in the Settlement Agreement, and its obligation not to appeal any such denials of claims; and (ii) not to charge to or otherwise seek payment from Federal or state payors for unallowable costs (as defined in the Settlement Agreement) and its obligation to identify and adjust any past charges of unallowable costs;

d.  Sun has effectively implemented, or is in the process of implementing, all plans of correction related to problems identified under this CIA, Sun's Compliance Program, or internal audits or reviews; and

e.  Such certification may also include, if necessary, an explanation of noncompliance.

                              3.  notification of any material changes or amendments to the policies and procedures required by Section III.B.2 and the reasons for such changes (e.g., change in contractor policy);

                              4.  a summary of the facilities audited or reviewed pursuant to Sun's internal audit and review program, a summary of the findings of such audit or review, and a summary of the corrective actions taken under the program for internal audits and reviews;

                              5.  a complete copy of the reports prepared pursuant to the IRO's Submissions and compliance engagements, including all the information required in Section III.D;

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                              6.  Sun's response/corrective action plan to any findings by the IRO;

                              7.  Sun's response/corrective action plan to any issues raised by the Monitor;

                              8.  a summary of Material Deficiencies and reported throughout the course of the previous 12 months pursuant to Section III.H, and the corresponding corrective action plans;

                              9.  a report of the aggregate Overpayments that have been returned to the Federal health care programs that were discovered as a direct or indirect result of implementing this CIA. Overpayment amounts shall be broken down into the following categories: Medicare, Medicaid (report each applicable state separately) and other Federal health care programs;

                              10.  a summary of the Sun Quality Line written records required by Section III.E (excluding any calls that relate solely to human resources issues);

                              11.  a description of any personnel actions (other than hiring) taken by Sun as a result of the obligations in Section III.F, and the name, title, and responsibilities of any person who falls within the ambit of Section III.F.3 and 4, and the actions taken in response to the obligations set forth in that Section;

                              12.  a summary describing any ongoing investigation or legal proceeding conducted or brought by a governmental entity involving an allegation that Sun has committed a crime or has engaged in fraudulent activities, which has been reported pursuant to Section III.G. The statement shall include a description of the allegation, the identity of the investigating or prosecuting agency, and the status of such investigation or legal proceeding; and

                              13.  a description of all changes to the most recently provided list (as updated)

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of Sun's locations that participate in any Federal health care program (including mailing addresses), the corresponding name under which each location is doing business, the corresponding telephone numbers and facsimile numbers, each location's Federal health care program provider identification numbers(s), and the name, address, and telephone number of the payor (specific contractor) that issued each provider identification number.

          The first Annual Report shall be received by OIG no later than 1 year and 120 days after the Effective Date of this CIA. Subsequent Annual Reports shall be submitted no later than the anniversary date of the due date of the first Annual Report.

          C.     Certifications. The Implementation Report and Annual Reports shall include a certification by the Compliance Officer, under penalty of perjury, that: (1) Sun is in compliance with all of the requirements of this CIA (unless the noncompliance is clearly and explicitly described in the Implementation Report or Annual Report), to the best of his or her knowledge; and (2) the Compliance Officer has reviewed the Report and has made reasonable inquiry regarding its content and believes that, upon such inquiry, the information is accurate and truthful.

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VI.          NOTIFICATION AND SUBMISSION OF REPORTS

          Unless otherwise stated in writing subsequent to the Effective Date of this CIA, all notifications and reports required under this CIA shall be submitted to the entities listed below:

OIG: Civil Recoveries Branch - Compliance Unit

Office of Counsel to the Inspector General

Office of Inspector General

U.S. Department of Health and Human Services

Cohen Building, Room 5527

330 Independence Avenue, SW

Washington, DC 20201

Phone:  202.619.2078

Fax:  202.205.0604

Sun:

Mr. Chauncey Hunker, Ph.D.

Corporate Compliance Officer

Sun HealthCare Group, Inc.

101 Sun Lane, N.E.

Albuquerque, N.M. 87109

Phone:  866.468.2125 (ext.6853)

         505.468.6853

Fax:  505.821.9532

Chauncey.hunker@sunh.com

          Unless otherwise specified, all notifications and reports required by this CIA may be made by certified mail, overnight mail, hand delivery or other means, provided that there is proof that such notification was received. For purposes of this requirement, internal facsimile confirmation sheets do not constitute proof of receipt.

VII.     OIG INSPECTION AND REVIEW RIGHTS

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          In addition to any other rights OIG may have by statute, regulation, or contract, OIG or its duly authorized representative(s), may examine and photocopy Sun's books, records, and other documents and supporting materials and/or conduct an on-site review of any of Sun's facilities, locations, or operations for the purpose of verifying and evaluating: (a) Sun's compliance with the terms of this CIA, and (b) Sun's compliance with the requirements of the Federal health care programs in which it participates. The documentation described above shall be made available by Sun to OIG or its duly authorized representative(s) at all reasonable times for inspection, audit, or reproduction. Furthermore, for purposes of this provision, OIG or its duly authorized representative(s) may interview any of Sun's employees, contractors or agents who consent to be interviewed at the individuals' place of business during normal business hours or at such other place and time as may be mutually agreed upon between the individual and OIG. If an employee, consistent with his or her rights and privileges, refuses to be interviewed based upon an individual decision, Sun will not be in breach of this CIA if the interview does not occur but Sun shall not do anything to impede the cooperation of such employee. Sun agrees to assist OIG in contacting and arranging interviews with such individuals upon OIG's request. Sun's employees, contractors and agents may elect to be interviewed with or without a representative of Sun present.

VIII.     DOCUMENT AND RECORD RETENTION

          Sun shall maintain for inspection all documents and records relating to reimbursement from the Federal health care programs, or to compliance with this CIA, one year longer than the term of this CIA (or longer if otherwise required by law).

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IX.     DISCLOSURES AND PRIVILEGES

          The OIG will follow all applicable Federal laws concerning privacy and confidentiality, including the Federal Privacy Act, 5 U.S.C. Section 552a, to the greatest extent allowed by law.

          Consistent with HHS's Freedom of Information Act ("FOIA") procedures, set forth in 45 C.F.R. Part 5, OIG shall make a reasonable effort to notify Sun prior to any release by OIG of information submitted by Sun pursuant to its obligations under this CIA and identified upon submission by Sun as trade secrets, commercial or financial information and privileged and confidential under the FOIA rules. Sun shall refrain from identifying any information as trade secrets, commercial, or financial information and privileged and confidential that does not meet the criteria for exemption from disclosure under FOIA. With respect to the disclosure of information, Sun shall have the rights set forth in 45 C.F.R. Section 5.65(d). OIG shall protect confidential information under the FOIA rules to the greatest extent allowed by law. When required, the OIG shall provide the pre-disclosure notice required pursuant to 45 C.F.R. Section 5.65(d) to the Compliance Officer at the address provided in Section VI.

          Nothing in this CIA, or any communication or report made pursuant to this CIA, shall constitute or be construed as a waiver by Sun of Sun's attorney-client, work product, peer review, or other applicable privileges, including, without limitation, the protections contained in 42 C.F.R. Section 483.75(o). Notwithstanding that fact, the existence of any such privilege does not affect Sun's obligation to comply with the provisions of this CIA.

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X.     BREACH AND DEFAULT PROVISIONS

          Sun is expected to fully and timely comply with all of the obligations herein throughout the term of this CIA or other time frames herein agreed to (subject to Sun's right to request extensions of time in accordance with Section X.B.2).

     A.     Stipulated Penalties for Failure to Comply with Certain Obligations.

          As a contractual remedy, Sun and OIG hereby agree that failure to comply with certain obligations set forth in this CIA may lead to the imposition of the following monetary penalties (hereinafter referred to as "Stipulated Penalties") in accordance with the following provisions.

          1.     A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due or after any extension granted by OIG has expired) for each day Sun fails to have in place any of the following:

                                         a.  Compliance Officer;

                                         b.  Corporate Compliance Committee;

                                         c.  Board Committee;

                                         d.  Audit Committee;

                                         e.  Compliance Liaisons;

f.  a program for performing internal audits and reviews;

                                         g.  a written Code of Conduct;

                                         h.  written policies and procedures;

                                         i.  a Training Program; and

                                         j.  a Confidential Disclosure Program.

2.     A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the

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date the obligation became due) for each day Sun fails meet any of the deadlines (or any extension granted by OIG) to submit the Implementation Report or the Annual Reports to OIG.

     3.     A Stipulated Penalty of $2,000 (which shall begin to accrue on the date the failure to comply began) for each day Sun:

a.  hires, enters into a contract with, or grants staff privileges to an Ineligible Person after that person has been listed by a federal agency as excluded, debarred, suspended or otherwise ineligible for participation in the Medicare, Medicaid or any other Federal health care program (as defined in 42 U.S.C. Section 1320a-7b(f)) (this Stipulated Penalty shall not be demanded for any time period during which Sun can demonstrate that it did not discover the person's exclusion or other ineligibility after fulfilling the obligations described in Section III.F as to the status of the person); or

b.  employs, contracts with, or grants staff privileges to an Ineligible Person and that person: (i) has responsibility for, or involvement with, Sun's business operations related to the Federal health care programs; or (ii) is in a position for which the person's salary or the items or services rendered, ordered, or prescribed by the person are paid in whole

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or part, directly or indirectly, by Federal health care programs or otherwise with Federal funds (this Stipulated Penalty shall not be demanded for any time period during which Sun can demonstrate that it did not discover the person's exclusion or other ineligibility after fulfilling the obligations described in Section III.F as to the status of the person).

               4.     A Stipulated Penalty of $1,500 (which shall begin to accrue on the date the Sun fails to grant access) for each day Sun fails to grant access to the information or documentation as required in Section VII of this CIA.

               5.     A Stipulated Penalty of $1,000 (which shall begin to accrue 10 days after the date that OIG provides notice by certified mail to Sun of the failure to comply or any extensions granted by OIG) for each day Sun fails to comply fully and adequately with any obligation of this CIA, including those that are under the purview of the Monitor. In its notice to Sun, OIG shall state the specific grounds for its determination that Sun has failed to comply fully and adequately with the CIA obligation(s) at issue and a basis for Sun to cure noncompliance that will be deemed acceptable to OIG before accrual of any penalty hereunder. With respect to the Stipulated Penalty provision described in this Section X.A.5 only, OIG shall not seek a Stipulated Penalty if Sun cures or demonstrates to OIG' s satisfaction that the alleged failure to comply could not be cured with the 10 day period, but that: (i) Sun has begun to take action to cure the failure to comply; (ii) Sun is pursuing such action with due diligence, and (iii) Sun has provided to OIG a reasonable timetable for curing the failure to comply.

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     B.     Payment of Stipulated Penalties.

               1.     Demand Letter. Upon a finding that Sun has failed to comply with any of the obligations described in Section X.A and determining that Stipulated Penalties are appropriate, OIG shall notify Sun by personal service or certified mail of: (a) Sun's failure to comply; and (b) OIG's exercise of its contractual right to demand payment of the Stipulated Penalties (this notification is hereinafter referred to as the "Demand Letter").

               Within 15 days of the date of the Demand Letter, Sun shall either: (a) cure the breach to OIG's satisfaction and pay the applicable Stipulated Penalties; or (b) request a hearing before an HHS administrative law judge ("ALJ") to dispute OIG' s determination of noncompliance, pursuant to the agreed upon provisions set forth below in Section X.D. In the event Sun elects to request an ALJ hearing, the Stipulated Penalties shall continue to accrue until Sun cures, to OIG' s satisfaction, the alleged breach in dispute; however, the payment of such accrued Stipulated Penalties shall remain pending until the ALJ determination. Failure to respond to the Demand Letter in one of these two manners within the allowed time period shall be considered a material breach of this CIA and shall be grounds for exclusion under Section X.C.

               2.     Timely Written Requests for Extensions. OIG will reasonably consider any timely written request by Sun for an extension of time to perform any act or file any notification or report required by this CIA. Notwithstanding any other provision in this Section, if OIG grants the timely written request with respect to an act, notification, or report, Stipulated Penalties for failure to perform the act or file the notification or report shall not begin to accrue until 1 day after Sun fails to meet the revised deadline as agreed to by OIG-approved extension.

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Notwithstanding any other provision in this Section, if OIG denies such a timely written request, Stipulated Penalties for failure to perform the act or file the notification or report shall not begin to accrue until 2 business days after Sun receives OIG's written denial of such request or when the original obligation becomes due, whichever is later. A "timely written request" is defined as a request in writing received by OIG at least 5 business days prior to the date by which any act is due to be performed or any notification or report is due to be filed.

               3.     Form of Payment. Payment of the Stipulated Penalties shall be made by certified or cashier's check, payable to "Secretary of the Department of Health and Human Services," and submitted to OIG at the address set forth in Section VI.

               4.     Independence from Material Breach Determination. Except as otherwise noted, these provisions for payment of Stipulated Penalties shall not affect or otherwise set a standard for OIG's determination that Sun has materially breached this CIA, which decision shall be made at OIG's discretion and governed by the provisions in Section X.C, below.

C. Exclusion for Material Breach of this CIA.

     1.     Material Breach.        A material breach of this CIA means:

a.  a failure to address concerns raised by the Monitor regarding the quality of care provided to patients or residents, as set forth in Section III.D. of this CIA;

b.  a failure by Sun to report a material deficiency, take and enforce corrective action and pay the appropriate refunds, as provided in Section III.D and Section III.H;

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c.  repeated, systemic, or flagrant violations of the obligations under this CIA, including, but not limited to, the obligations addressed in Section X.A of this CIA;

d.  a failure to respond to a Demand letter concerning the payment of Stipulated Penalties in accordance with Section X.B above; or

e.  a failure to retain and use an IRO for review purposes or to fund the Monitor in accordance with Section III.D.

               2.     Notice of Material Breach and Intent to Exclude. The parties agree that a material breach of this CIA by Sun constitutes an independent basis for Sun's exclusion from participation in the Federal health care programs (as defined in 42 U.S.C. Section 1320a-7b(f)). Upon a determination by OIG that Sun has materially breached this CIA and that exclusion should be imposed, OIG shall notify Sun by certified mail of: (a) Sun's material breach and the specific nature of the breach; and (b) OIG's intent to exercise its contractual right to impose exclusion (this notification is hereinafter referred to as the "Notice of Material Breach and Intent to Exclude"). The exclusion may be directed at the corporation, or one or more individual facilities or subsidiaries, depending upon the facts of the breach.

               3.     Opportunity to cure. Sun shall have 35 days from the date of the Notice of Material Breach and Intent to Exclude Letter to demonstrate to OIG's satisfaction that:

a.  Sun is not in Material Breach of this CIA;

b.  the alleged material breach has been cured; or

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c.  the alleged material breach cannot be cured within the 35 day period, but that: (i) Sun has begun to take action to cure the material breach; (ii) Sun is pursuing such action with due diligence; and (iii) Sun has provided to OIG a reasonable timetable for curing the material breach.

               4.     Exclusion Letter. If at the conclusion of the 35 day period, Sun fails to satisfy the requirements of Section X.C.2, OIG may exclude the entity, entities or individual facilities identified in the Notice of Material Breach and Intent to Exclude from participation in the Federal health care programs. OIG will notify Sun in writing of its determination to exclude Sun or one or more of its individual facilities or subsidiaries (this letter shall be referred to hereinafter as the "Exclusion Letter"). Unless Sun requests a hearing pursuant to the Dispute Resolution provisions in Section X.D, below, the exclusion shall go into effect 30 days after the date of the Exclusion Letter. The exclusion shall have national effect with respect to the entities or individual facilities identified in the Notice of Material Breach and Intent to Exclude and shall preclude such entities or individual facilities from participating in the Federal health care programs and all other federal procurement and non-procurement programs. If Sun or one or more of its individual facilities or subsidiaries is excluded under the provisions of this CIA, Sun or the individual facility or subsidiary may seek reinstatement pursuant to the provisions at 42 C.F.R. Sections 1001.3001-.3004.

     D.     Dispute Resolution

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               1.     Review Rights. Upon OIG's delivery to Sun of its Demand Letter or its Exclusion Letter, and as an agreed-upon contractual remedy for the resolution of disputes arising under the obligation of this CIA, Sun shall be afforded certain review rights comparable to the ones that are provided in 42 U.S.C. Section 1320a-7(f) and 42 C.F.R. Part 1005 as if they applied to the Stipulated Penalties, or exclusion sought pursuant to this CIA. Specifically, OIG's determination to demand payment of Stipulated Penalties or to seek exclusion shall be subject to review by an ALJ and, in the event of an appeal, the Departmental Appeals Board ("DAB"), in a manner consistent with the provisions in 42 C.F.R. Section 1005.2-1005.21. Notwithstanding the language in 42 C.F.R. Section 1005.2(c), a request for a hearing involving Stipulated Penalties shall be made within 15 days of the date of the Demand Letter, and the request for a hearing involving exclusion shall be made within 30 days of the date of the Exclusion Letter.

               2.     Stipulated Penalties Review. Notwithstanding any provision of Title 42 of the United States Code or Chapter 42 of the Code of Federal Regulations, the only issues in a proceeding for Stipulated Penalties under this CIA shall be: (a) whether Sun was in full and timely compliance with the obligations of this CIA for which OIG demands payment; (b) the period of noncompliance; and (c) with respect to a Stipulated Penalty authorized under Section X.A.5 only, whether the failure to comply could not be cured within the 10 day period, but that by the end of that period: (i) Sun had begun to take action to cure the failure to comply, (ii) Sun was and is pursuing such action with due diligence; and (iii) Sun had provided to OIG a reasonable timetable for curing the breach which is being followed. Sun shall have the burden of

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proving its full and timely compliance and the steps taken to cure the noncompliance, if any. If the ALJ finds for OIG with regard to a finding of a breach of this CIA and orders Sun to pay Stipulated Penalties, such Stipulated Penalties shall become due and payable 20 days after the ALJ issues such a decision notwithstanding that Sun may request review of the ALJ decision by the DAB.

3.     Exclusion Review. Notwithstanding any provision of Title 42 of the United States Code or Chapter 42 of the Code of Federal Regulations, the only issues in a proceeding for exclusion based on a material breach of this CIA shall be: (a) whether Sun was in material breach of this CIA; (b) whether such breach was continuing on the date of the Exclusion Letter; and (c) whether the alleged material breach could not be cured within the 35 day period, but that (i) Sun has begun to take action to cure the material breach, (ii) Sun is pursuing such action with due diligence, and (iii) Sun has provided to OIG a reasonable timetable for curing the material breach.

For purposes of the exclusion herein, exclusion shall take effect only after an ALJ decision that is favorable to OIG. Sun's election of its contractual right to appeal to the DAB shall not abrogate OIG's authority to exclude Sun upon the issuance of the ALJ's decision. If the ALJ sustains the determination of OIG and determines that exclusion is authorized, such exclusion shall take effect 20 days after the ALJ issues such a decision, notwithstanding that Sun may request review of the ALJ decision by the DAB.

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               4.     Review by Other Agencies. Nothing in this CIA shall affect the right of CMS or any other Federal or state agency to enforce any statutory or regulatory authorities with respect to Sun's compliance with applicable Federal and state health care program requirements.

XI.     EFFECTIVE AND BINDING AGREEMENT

          Consistent with the provisions in the Settlement Agreement pursuant to which this CIA is entered, and into which this CIA is incorporated, Sun and OIG agree as follows:

     A.     This CIA shall be binding on the successors, assigns, and transferees of Sun except that divested facilities and entities shall be excused from the obligations under this CIA upon the assignment of a provider agreement or upon the disposition of assets to an unrelated entity;

     B.     This CIA shall become final and binding upon execution on the date the final signature is obtained on the CIA and effective upon confirmation by the Bankruptcy Court;

     C.     Any modifications to this CIA shall be made only with the prior written consent of the parties to this CIA;

     D.     Nothing in this CIA precludes Sun from lawfully contesting the legality, enforceability or applicability of any Federal health care program requirement; and

     E.     The undersigned Sun signatory represents and warrants that he is signing this CIA in his official capacity and that he is authorized to execute this CIA. The undersigned OIG signatory represents that he is signing this CIA in his official capacity and that he is authorized to execute this CIA.

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ON BEHALF OF SUN HEALTHCARE GROUP, INC.



Mark Wimer           Date

Chief Executive Officer

Sun Healthcare Group, Inc.



Chauncey Hunker           Date

Corporate Compliance Officer

Sun Healthcare Group, Inc.

ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL

OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES



Lewis Morris           Date

Assistant Inspector General for Legal Affairs

Office of Inspector General

U.S. Department of Health & Human Services

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Appendix A

Sun Monitor Task List

THIS DOCUMENT IS DESIGNED TO PROVIDE GUIDANCE TO THE MONITOR; IT MAY BE AMENDED AT ANY TIME CONSISTENT WITH THE TERMS OF THE CORPORATE INTEGRITY AGREEMENT ("CIA"). NOTHING IN THIS TASK LIST SHOULD BE INTERPRETED TO LIMIT THE TERMS AND CONDITIONS OF THE CIA.

     1.     ANALYSIS OF THE QUALITY COMPLIANCE INFRASTRUCTURE

          A.     Board of Directors: Existence of the Board level Compliance Committee (the "Board Committee") with a quality improvement function.

               1.     Existence of a Charter.

               2.     Analysis of whether the Charter reflects the duties and responsibilities set forth in the CIA.

               3.     Review of Board Report(s) related to quality of care.

               4.     Review of minutes with an analysis of whether the Board Committee is:

a.  carrying out the duties and responsibilities set forth in the CIA;

b.  receiving the information necessary to ensure that Sun has a system in place to respond to Federal, state, internal, and external reports of quality of care issues and that such system functions effectively; and

c.  providing the direction and support necessary to respond to these problems in a timely and effective manner.

          B.     Corporate Compliance Committee: Existence of and Analysis

               1.     Review of individuals appointed to the Compliance Committee to ensure that those individuals have the authority to carry out the duties and responsibilities set forth in the CIA.

               2.     Review of the Committee Report(s) related to quality of care.

               3.     Review of minutes and analysis of Compliance Committees' effectiveness.

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a.  are the meetings being conducted on a regular basis?

b.  is the Compliance Committee receiving and analyzing quality data reports?

c.  is the Compliance Committee ensuring that investigations are being conducted where necessary to determine the scope and severity of the problem and corrective action plans are initiated where appropriate?

d.  is the Compliance Committee monitoring development and implementation of corrective action plans, ensuring that follow up occurs, making necessary adjustments to corrective action plans, and ensuring that such correction is effectively maintained over time? And

e.  is the Compliance Committee recommending and implementing changes to policies and procedures and training where appropriate and necessary?

     C.     Internal Review Functions

               1.     Verify whether there exists sufficient resources to conduct internal reviews in order to obtain data concerning the quality of care provided to patients and residents at Sun facilities (as defined in the CIA).

               2.     Analysis of whether the individuals conducting the internal review functions have the appropriate qualifications, have been sufficiently trained, and are appropriately supervised.

               3.     Analysis of the effectiveness of internal review functions.

a.  ability to identify the problem;

b.  ability to determine the scope of the problem (e.g., is it isolated or systemic);

c.  ability to create corrective action plans;

d.  ability to execute the corrective action plans; and

e.  ability to evaluate whether the assessment, corrective action plan, and execution of the plan were effective, reliable, thorough, and maintained over time.

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     D.     Other Quality Compliance Infrastructure

               1.     Analysis of whether there is an infrastructure that allows information concerning quality of care at the facilities to be communicated to the personnel with the authority to make decisions about that information (e.g., are data reports being reviewed to identify potential quality problems at the facility, regional and corporate levels).

               2.     Analysis of whether there is an infrastructure that allows the decisions that are made concerning quality of care at the facilities to be communicated to the personnel with the authority to carry out those decisions and that follow up occurs to ensure that any corrective action or other decisions are implemented and maintained over time.

               3.     Analysis of whether there is an infrastructure that allows the personnel that are carrying out decisions to communicate the outcomes and effectiveness of any decisions to the personnel directing such action.

               4.     Analysis of whether there are staff compensation and reward policies that:

(a) promote quality of resident and patient care; and (b) do not inhibit the quality of resident or patient care, and that there is an infrastructure to effectively carry out such appropriate staff compensation and reward policies.

               5.     Assessment of whether facility site visits are occurring to determine whether potential quality problems are being appropriately identified and acted upon.

     E.     Effectiveness and Accessibility of the Compliance Officer, the Compliance Staff and Senior Medical and/or Clinical Advisors.

               1.     Analysis of whether the Compliance Officer, Compliance Staff and Senior Medical and/or Clinical Advisors are accessible when necessary to assist in making decisions that impact the quality of care of the patients and residents at Sun facilities.

               2.     Analysis of the involvement of the Compliance Officer, the Compliance Staff and Senior Medical and/or Clinical Advisors in the Compliance Committee's activities.

               3.     Analysis of whether the Compliance Officer is providing accurate and complete reports to the Board Committee and Compliance Committee.

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               4.     Analysis of the effectiveness of the Compliance Officer and the Compliance Staff and/or the Senior Medical and/or Clinical Advisors to:

a.  ability to identify the problem;

b.  ability to determine the scope of the problem (e.g. is it isolated or systemic);

c.  ability to create corrective action plans;

d.  ability to execute the corrective action plans; and

e.  ability to evaluate whether the assessment, corrective action plan, and execution of the plan were effective, reliable, thorough, and maintained over time.

2.     ANALYSIS OF THE POLICIES AND PROCEDURES AND TRAINING

     A.     Analysis of the substance of the policies and procedures relating to quality of care to determine if they assist the employees in providing appropriate quality of care to the patients and residents at Sun and are in accordance with professionally recognized standards of care.

               1.     Assessment of the clarity of policies and procedures.

               2.     Assessment of the distribution and availability of policies and procedures.

               3.     Assessment of the enforcement of policies and procedures.

     B.     Training related to Quality of Care.

               1.     Review of training materials.

               2.     Assessment of whether the clinical issues are being appropriately identified and effectively communicated.

               3.     Assessment of impact over time of Sun's training program concerning quality of care issues.

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3.     ANALYSIS OF QUALITY RELATED DATA

     A.     Existence of a system or systems to collect, report, analyze, and disseminate data on quality of care, including, but not limited to, deficiency data, MDS data, Confidential Disclosure Program or other complaints, incident, accident, neglect, and abuse reports, CMS quality indicators, resident and patient satisfaction surveys, JCAHO reports, and any other appropriate key indicator variables.

               1.     Analysis of the integrity of this system or systems.

a.  accuracy of the data being supplied;

b.  system controls that maintain the accuracy of the data;

c.  availability of the data to the appropriate personnel; and

d.  timeliness of the data.

               2.     Existence of appropriate and adequate red flag thresholds for use in quality improvement process.

               3.     Existence of adequate consistent reporting mechanism for determining staffing ratios and levels.

               4.     Existence of a system to determine the level of temporary staff usage.

               5.     Existence of a system to ensure that the incident, accident, abuse, and neglect reports are being created and centrally maintained, and are of a nature to allow the Quality and Ethics Committee meaningful information to be able to determine: 1) if there is a quality of care problem; and 2) the full scope and severity of the problem.

                       B.  Access to incident, accident, neglect, and abuse reports to determine the accuracy of the reports.

                       C.  Analysis of whether Sun accurately determines whether the incidents, accidents, neglect or abuse reports are related to quality of care issues, and if so, whether they are appropriately investigated to determine the scope and severity of the problem, and, if warranted, that corrective action was taken.

                       D.  Analysis of whether complaints related to quality of care (including, but not limited to, those received through the Confidential Disclosure Program) are appropriately investigated to determine the scope and severity of the problem, and, if warranted, that corrective action was taken and monitored to ensure permanent correction over time.

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IV.     MECHANISMS TO ANALYZE THE EFFECTIVENESS AND THOROUGHNESS OF SUN'S IMPLEMENTATION OF THE CIA.

     A.     Access to data, employees, residents, patients as specified in the CIA, subject to the confidentiality provisions of the CIA and applicable law.

     B.     Facility visits, ability to copy data, including, but not limited to, patient/resident records and other appropriate documents, subject to the confidentiality provisions of the CIA and applicable law.

     C.     Attendance at Board Meetings.

     D.     Attendance at committee meetings at the corporate, regional, and facility level.

     E.     Attendance at training sessions.

V.     REPORTING TO GOVERNMENT AND SUN ON MONITORING ACTIVITIES

     A.     Quarterly reports to Sun and OIG.

     B.     Annual reports to OIG on costs incurred.

     C.     Reports on immediate jeopardy issues as specified in the CIA.

     D.     Reports on systemic or repeated problems to the Consortium and to Sun as specified in the CIA.

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Appendix B

Minimum Data Set Audit Guidelines

A.     General

     1.     The IRO and Sun's Internal Review Team shall conduct Minimum Data Set ("MDS") Audits pursuant to the schedule set forth in Section III.D.2.b.vii of the CIA. The IRO and Sun's internal reviewers shall review paid Medicare Part A claims from Sun's nursing facilities and shall focus on the MDS.

     2.     The MDS Audit shall consist of a variable appraisal sample (dollar amount in error). For purposes of determining dollar amounts associated with errors, the final sampling unit shall be a single UB-92 bill and all associated MDS information on the UB-92 bill shall be reviewed.

     3.     The audit period for the first year MDS Audits shall be begin on the Effective Date of the CIA and will end with the date the MDS Audit begins for each respective Claim Pool (as identified in the annual facility selection methodology of Section III.D.2.b.vii of the CIA) (the "Audit Period"). The Audit Period for each subsequent MDS Audit shall begin at the end of the preceding year's Audit Period for each Claim Pool and shall end 12 months later. For the first MDS Audit, the universe from which the IRO and Sun will randomly select the UB-92 bills to review will include those UB-92s that were paid and have a date of service during the relevant Audit Period. For the remaining MDS Audits, the universe from which the IRO and Sun will randomly select the UB-92 bills to review will include those UB-92s that were paid during the relevant Audit Period.

     4.     If, in any Review Year, Sun's Internal Review Team cannot perform the number of MDS Audits required in any given year, the IRO shall perform the remainder of the MDS Audits in that year.

     5.     Sun shall retain copies of all work papers, supporting documentation, correspondence and draft reports, if any, (those exchanged between the IRO and Sun) used or created in connection with the MDS Audits and shall make such information available to OIG upon request. The IRO shall retain and make available to the OIG, upon request, all supporting rationale for its findings.

     6.     If Sun becomes aware that any facility (including those not selected to be included as part of an annual MDS Audit) is potentially experiencing non-compliance with the Federal health care program requirements for claims submissions, Sun shall, after reasonably determining whether further review is warranted, in addition to its other CIA obligations, conduct a review of

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the potential area of non-compliance. If warranted, Sun shall develop a corrective action plan and conduct appropriate follow-up to ensure that any inappropriate or improper practice(s) related to claims submission is appropriately addressed. All such instances of inappropriate or improper claims submission, regardless of whether the facility was selected in the MDS Audit, shall be reported to OIG, pursuant to Section III.H. of this CIA.

     7.     Consistent with the definition of Overpayment as articulated in Section III.H.1. of the CIA, an Overpayment is the amount of money Sun has received in excess of the amount due and payable under any Federal health care program requirements. For the purposes of the MDS Audit and all reporting to the OIG under this CIA, Sun shall not subtract or "net out" underpayments when determining the amount of relevant Overpayments.

B.     Stage 1 of the MDS Audit

     1.     Conducting the probe sample audit.

a.  A statistically valid random sample of a minimum of 30 UB-92s shall be selected, using RAT-STATS, from each facility selected for review. If the reviewer chooses to stratify the probe sample, the strata shall be determined prior to selecting the random sample of UB-92s and an explanation of how the strata was determined shall be included in the MDS Audit Report.

b.  For both the probe and full sample MDS Audits, the IRO and Sun's Internal Review Team shall perform the following steps:

i.  For the first year reviews, the IRO and Sun's Internal Review Team shall obtain a computer download (in either an ASCII, Lotus 1-2-3 or Microsoft Excel format), of the total Medicare Part A paid claims that had dates of service during the Audit Period for each of Sun's randomly selected nursing facilities (if a computer download is not available, then a computer-generated printout can be used). For subsequent year reviews, the IRO and Sun's Internal Review Team shall obtain a computer download of the total Medicare Part A paid claims for each randomly selected facility;

ii.  The IRO and Sun's Internal Review Team shall identify the universe of paid UB-92s for each nursing facility in the audit year in accordance with Section A.3 of this Appendix. Based on the results of the probe sample, the IRO and Sun's internal reviewers shall select a sufficient number of sampling units to meet the

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parameters of Section C.1.b. of this Appendix from each nursing facility's total Medicare Part A claims population for the full sample; and

iii.  The IRO and Sun's Internal Review Team shall notify each nursing facility of the paid UB-92s that were selected for review. The IRO and Sun's Internal Review Team shall obtain all appropriate medical records, billing and related supporting documentation. If Sun cannot produce the medical records or any other supporting documentation necessary to make an accurate claim determination, the IRO or Sun's Internal Review Team shall consider the relevant portion of the UB-92 which lacks proper documentation to be billed in error.

c.  The probe sample, as a whole, shall not be used as part of the full sample during Stage 2 of the MDS Audit. The UB-92s reviewed in the probe sample shall be included in the universe from which the full sample is selected so that all UB-92s have an equal chance of selection in the full sample.

d.  The dollar difference (i.e. the amount that was paid versus the amount that should have been paid) will be determined for each UB-92. Any underpayment identified in the probe sample shall be treated as a "zero" Overpayment. This dollar difference amount shall be the variable input into RAT-STATS to determine the full sample size.

e.  The results of the probe sample (dollar difference) shall be used to identify nursing facilities that have exceeded a designated financial error rate and to determine the appropriate sample sizes for the full sample MDS Audits, when applicable. The reviewer shall input the dollar difference results of the probe sample into RAT-STATS in order to determine the full sample size.

f.  If the financial error rate (i.e. total dollars identified as overpaid in the probe sample divided by total dollars paid to the facility based on the UB-92s selected in the probe sample) does not exceed the 5% threshold, the facility shall refund all identified Overpayments to the appropriate payor. If the financial error rate exceeds the 5% threshold, a full sample will be evaluated for that facility.

2.     Selection of facilities for Stage 2 of the MDS Audit.

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a.  The IRO and Sun's Internal Review Team shall conduct Stage 2 of the MDS Audit for each individual nursing facility selected as part of the probe sample for which the financial error rate in Stage 1 was greater than 5%.

b.  The 5% financial error threshold only applies to criteria for sample expansion, not for extrapolation of an error rate. If the financial error rate exceeds 5%, the universe shall be comprised of all sampling units for that facility, including those sampling units that were selected as part of the probe.

C.     Stage 2 of the MDS Audit

     1.     Selecting the full sample.

a.  Stage 2 shall consist of reviewing a full sample of UB-92s that have been randomly selected from the applicable Audit Period using RAT-STATS.

b.  The full sample shall contain a sufficient number of sampling units to generate results that provide, at a minimum, a 90% confidence interval and a maximum precision (relative precision i.e., semi-width of the confidence interval) of plus or minus 25% of the point estimate (i.e., the upper and lower bounds of the 90% confidence interval shall not exceed 125% and shall not fall below 75% of the midpoint of the confidence interval, respectively).

     2.     Conducting the claims review.

a.  The IRO shall assist Sun's Internal Review Team with the development of the necessary MDS Audit tools and with executing the appropriate sampling methodology.

b.  For each UB-92 selected in Stage 1 and Stage 2, the IRO and Sun's Internal Review Team shall review the MDS and the medical record documentation supporting the MDS. The review process shall entail an evaluation of the MDS and verification that each entry that affects the RUG code outcome for the MDS is supported by the medical record for the corresponding period of time consistent with the assessment reference date ("ARD") specified on the MDS.

c.  The IRO and Sun's Internal Review Team shall perform the steps identified in Section B.1.b of this Appendix.

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d.  The IRO and Sun's Internal Review Team shall perform an evaluation of the data on the UB-92 and determine whether the variables that affect the RUG assignment outcome for the MDS are supported by the medical record for the corresponding time period consistent with the assessment reference date specified in the MDS. This shall include the following issues:

i.  The accuracy of the MDS coding and the resulting RUG category selection based on the documentation within the medical record. The review of the MDS and related documentation shall include the following:

-  assessment reference date for accuracy;
-  activities of daily living and the look-back period used;
-  special treatments and procedures along with the look-back periods;
-  nursing restorative with look-back periods;
-  supplement for PPS with look-back periods used (e.g., estimated therapies and minutes for the 5-Day MDS); and
-  resulting RUG category.

ii.  The demonstration of medical necessity in the medical record by verifying the presence of physician orders for the services reflected as necessary in the MDS;

iii.  The accuracy of the associated UB-92s. At a minimum these claims shall be reviewed for the following:

-  coverage period;
-  revenue codes;
-  HIPPS codes (RUG categories and the modifiers for assessment type); and
-  Units of service.

e.  In those cases where an incorrect MDS has been identified, the IRO and Sun's Internal Review Team shall re-enter data from that MDS into Sun's or the IRO's grouper software to verify that the correct RUG code assignment was properly assigned on the UB-92. If an incorrect RUG code was assigned, this shall be considered an error.

f.  If there is insufficient support for an MDS data point(s) that results in a downward change in RUG assignment, the IRO and Sun's Internal Review Team should consider the dollar difference to be an Overpayment.

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g.  If an incorrect RUG was used, but it did not result in an Overpayment, it will be noted in the Audit Report.

D.     MDS Audit Report. The following information shall be included for each MDS Audit in the MDS Audit Report:

     1.     MDS Audit Methodology

a.  MDS Audit Objective: A clear statement of the objective intended to be achieved by the MDS Audit.

b.  Sampling Unit: A description of the Item, as that term is utilized for the MDS Audit. In accordance with Section A.2 of this Appendix, the sampling unit for the first year shall be paid UB92s with a date of service during the relevant Audit Period. For the remaining years, the sampling unit shall be paid UB-92s during the relevant Audit Period.

c.  MDS Audit Population: A description of the Population subject to the MDS Audit.

d.  Sampling Frame: A description of the sampling frame, which is the totality of Items from which the probe and full sample have been selected and an explanation of the methodology used to identify the sampling frame. In most circumstances, the sampling frame will be identical to the Population.

e.  Sources of Data: A description of the documentation relied upon by the IRO and Sun's Internal Review Team when performing the MDS Audit (e.g., medical records, physician orders, certificates of medical necessity, requisition forms, local medical review policies, CMS program memoranda, Medicare carrier or intermediary manual or bulletins, other policies, regulations, or directives).

f.  Review Protocol: A narrative description of how the MDS Audit was conducted and what was evaluated.

     2.     Statistical Sampling Documentation

a.  The number of sampling units appraised in each probe sample and in each full sample.

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b.  A copy of all RAT-STATS printouts of the random numbers generated by the "Random Numbers" function.

c.  A copy of all RAT-STATS printouts of the "Sample Size Estimators" results used to calculate the minimum number of Items for inclusion in the full samples.

d.  A copy of all RAT-STATS printouts of the "Variable Appraisals," "Difference Values Only" function results for each Probe Sample, including a copy of the data files.

e.  The Sampling Frame used in the probe sample(s) and full samples will be available to the OIG upon request.

     3.     MDS Audit Results

a.  For each MDS Audit, the total number and percentage of instances in which the IRO and Sun's Internal Review Team determined that the paid UB-92s submitted by Sun and reimbursed by the fiscal intermediary differed from what should have been submitted by Sun and reimbursed by the fiscal intermediary (the "Correct UB-92"), regardless of the effect on the payment.

b.  For each MDS Audit, the total number and percentage of instances in which the UB-92 submitted differed from the Correct UB-92 and in which such difference resulted in an Overpayment to Sun.

c.  For each MDS Audit, the total dollar amount of all paid claims in the MDS Audit Sample and the total dollar amount of Overpayments associated with the paid claims identified by the MDS Audit. (This is the total dollar amount of the Overpayments identified in Section B.3.b above.) The IRO and Sun's Internal Review Team may identify underpayments, but any underpayments identified during the MDS Audit shall not be offset or "netted out" of the total dollar amount of paid claims or of the Overpayments when reporting these amounts in the MDS Audit Report to the OIG.

d.  The level of precision achieved by the MDS Audit at a 90% confidence level.

e.  A spreadsheet of the MDS Audit results (for both the probe and full samples) that includes the following information for each paid claim appraised: Federal health care program billed, beneficiary health insurance claim number, date of service, MDS procedure code submitted, procedure code reimbursed, allowed amount reimbursed by

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payor, correct procedure code (as determined by the IRO and Sun's Internal Review Team), correct allowed amount (as determined by the IRO and Sun's Internal Review Team), dollar difference between allowed amount reimbursed by payor and the correct allowed amount.

     4.     Credentials. The names and credentials of the individuals who: (1) designed the statistical sampling procedures and the review methodology utilized for the MDS Audit; and (2) performed the MDS Audit.

E.     Annual Report

Sun shall report the findings from all of the MDS Audits (the "MDS Audit Report") described above as part of its Annual Report. The OIG may obtain documentation from the IRO and Sun regarding the work that has been performed on these audits, to assist the OIG in determining the appropriateness of the findings.

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Appendix C

Overpayment Refund Form

TO BE COMPLETED BY MEDICARE CONTRACTOR

Date:

Contractor Deposit Control #                          Date of Deposit:
Contractor Contact Name:                                          Phone #

Contractor Address:

Contractor Fax:

TO BE COMPLETED BY PROVIDER/PHYSICIAN/SUPPLIER

Please complete and forward to Medicare Contractor. This form, or a similar document containing the following information, should accompany every voluntary refund so that receipt of check is properly recorded and applied.

PROVIDER/PHYSICIAN/SUPPLIERNAME

ADDRESS

PROVIDER/PHYSICIAN/SUPPLIER #                           CHECK NUMBER#

CONTACT PERSON:                                                      PHONE #
AMOUNT OF CHECK $                                      CHECK DATE

REFUND INFORMATION

For each Claim, provide the following:

Patient Name                                                HIC #

Medicare Claim Number                               Claim Amount Refunded $

Reason Code for Claim Adjustment:                   (Select reason code from list below. Use one reason per claim)

(Please list all claim numbers involved. Attach separate sheet, if necessary)

Note:   If Specific Patient/HIC/Claim #/Claim Amount data not available for all claims due to Statistical Sampling, please indicate methodology and formula used to determine amount and reason for overpayment:

For Institutional Facilities Only:

Cost Report Year(s)

(If multiple cost report years are involved, provide a breakdown by amount and corresponding cost report year.)

For OIG Reporting Requirements:

Do you have a Corporate Integrity Agreement with OIG?                       Yes                   No

Reason Codes:

Billing/Clerical Error MSP/Other Payer Involvement Miscellaneous

01 - Corrected Date of Service 08 - MSP Group Health Plan
     Insurance 13 - Insufficient Documentation

02 - Duplicate 09 - MSP No Fault Insurance 14 - Patient Enrolled in an HMO

03 - Corrected CPT Code 10 - MSP Liability Insurance 15 - Services Not Rendered

04 - Not Our Patient(s) 11 - MSP, Workers Comp.(Including 16 - Medical Necessity

05 - Modifier Added/Removed      Black Lung) 17 - Other (Please Specify)

06 - Billed in Error 12 - Veterans Administration _________________________

07 - Corrected CPT Code

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Sun Healthcare Group, Inc.

2002 Management Equity Incentive Plan

Effective as of _________, 2002

SUN HEALTHCARE GROUP, INC.

2002 MANAGEMENT EQUITY INCENTIVE PLAN

          1.     Purpose. The Sun Healthcare Group, Inc. 2002 Management Equity Incentive Plan (the "Plan") is intended to provide incentives which will attract, retain and motivate highly competent persons as officers and key employees of, and consultants to, Sun Healthcare Group, Inc. (the "Company") and its subsidiaries and affiliates, by providing them opportunities to acquire shares of the Company's common stock, par value $.01 per share (the "Common Stock") or to receive monetary payments based on the value of such shares pursuant to the Benefits (as defined in Section 4 below) described herein. Capitalized terms are defined when first used, as described in the Index of Defined Terms at the end of this document.

          2.     Administration.

               (a)     Committee. The Plan will be administered by a committee (the "Committee") appointed by the Board of Directors of the Company from among its members (which may be the Compensation Committee) and shall be comprised, unless otherwise determined by the Company's Board of Directors, solely of not less than two (2) members who shall be (i) "Non-Employee Directors" within the meaning of Rule 16b-3(b)(3) (or any successor rule) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (ii) "outside directors" within the meaning of Treasury Regulation Section 1.162-27(e)(3) under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").

               (b)     Authority. The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it deems necessary for the proper administration of the Plan and to make such determinations and interpretations and to take such action in connection with the Plan and any Benefits granted hereunder as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be binding and conclusive on all participants and their legal representatives.

               (c)     Indemnification. No member of the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, except in circumstances involving his or her bad faith, gross negligence or willful misconduct, or for any act or failure to act hereunder by any other member or employee or by any agent to whom duties in connection with the administration of this Plan have been delegated. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company, a subsidiary or an affiliate against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's bad faith, gross negligence or willful misconduct.

               (d)     Delegation and Advisers. The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem

2

advisable, and the Committee, or any person to whom it has delegated duties as aforesaid, may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company, or the subsidiary or affiliate whose employees have benefited from the Plan, as determined by the Committee.

          3.     Participants. Participants will consist of such officers and key employees of, and such consultants to, the Company and its subsidiaries and affiliates as the Committee in its sole discretion determines to be significantly responsible for the success and future growth and profitability of the Company and whom the Committee may designate from time to time to receive Benefits under the Plan. Designation of a participant in any year shall not require the Committee to designate such person to receive a Benefit in any other year or, once designated, to receive the same type or amount of Benefit as granted to the participant in any other year. The Committee shall consider such factors as it deems pertinent in selecting participants and in determining the type and amount of their respective Benefits, including, without limitation, the effectiveness of an individual in limiting quality of healthcare issues at Company facilities for which a participant has or shares responsibility.

          4.     Type of Benefits. Benefits under the Plan may be granted in any one or a combination of (a) Stock Options, (b) Stock Appreciation Rights, (c) Stock Awards, and (d) Stock Units (each as described below, and collectively, the "Benefits"). Stock Awards and Stock Units may, as determined by the Committee in its discretion, constitute Performance-Based Awards, as described in Section 10 hereof. Benefits shall be evidenced by agreements (which need not be identical) in such forms as the Committee may from time to time approve; provided, however, that in the event of any conflict between the provisions of the Plan and any such agreements, the provisions of the Plan shall prevail.

          5.     Common Stock Available Under the Plan.

               (a)     Basic Limitations. The aggregate number of shares of Common Stock that may be subject to Benefits, including Stock Options, granted under this Plan shall be 900,000 shares of Common Stock, which may be authorized and unissued or treasury shares, subject to any adjustments made in accordance with Section 12 hereof. The maximum number of shares of Common Stock with respect to which Benefits (including Stock Options and Stock Appreciation Rights) may be granted or measured to any individual participant under the Plan during the term of the Plan shall not exceed 600,000 (in each case, subject to adjustments made in accordance with Section 12 hereof).

3

               (b)     Additional Shares. Any shares of Common Stock subject to a Stock Option or Stock Appreciation Right which for any reason is cancelled or terminated without having been exercised, or any shares subject to Stock Awards or Stock Units which are forfeited, or any shares delivered to the Company as part or full payment for the exercise of a Stock Option, Stock Appreciation Right or Stock Award shall again be available for award as Benefits under the Plan. The preceding sentence shall apply only for purposes of determining the aggregate number of shares of Common Stock subject to Benefits but shall not apply for purposes of determining the maximum number of shares of Common Stock with respect to which Benefits (including the maximum number of shares of Common Stock subject to Stock Options and Stock Appreciation Rights) may be granted to any individual participant under the Plan.

               (c)     Acquisitions. In connection with the acquisition of any business by the Company or any of its subsidiaries or affiliates, any outstanding grants, awards or sales of options or other similar rights pertaining to such business may be assumed or replaced by Benefits under the Plan upon such terms and conditions as the Committee determines. The date of any such grant or award shall relate back to the date of the initial grant or award being assumed or replaced, and service with the acquired business shall constitute service with the Company or its subsidiaries or affiliates for purposes of such grant or award. Any shares of Common Stock underlying any grant or award or sale pursuant to any such acquisition shall be disregarded for purposes of applying the limitations under and shall not reduce the number of shares of Common Stock available under Section 5(a) above.

          6.     Stock Options.

               (a)     Generally. Stock Options will consist of awards from the Company that will enable the holder to purchase a number of shares of Common Stock, at set terms. Stock Options may be "incentive stock options" ("Incentive Stock Options"), within the meaning of Section 422 of the Code, or Stock Options which do not constitute Incentive Stock Options ("Nonqualified Stock Options"). The Committee will have the authority to grant to any participant one or more Incentive Stock Options, Nonqualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). Each Stock Option shall be subject to such terms and conditions consistent with the Plan as the Committee may impose from time to time, subject to the following limitations:

               (b)     Exercise Price. Each Stock Option granted hereunder shall have such per-share exercise price as the Committee may determine at the date of grant.

               (c)     Payment of Exercise Price. The option exercise price may be paid in cash or, in the discretion of the Committee, by the delivery of shares of Common Stock of the Company then owned by the participant, by the withholding of shares of Common Stock for which a Stock Option is exercisable or by a combination of these methods. In the discretion of the Committee, payment may also be made by delivering a properly executed exercise notice to the Company together with a copy of irrevocable instructions

4

to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the exercise price. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. The Committee may prescribe any other method of paying the exercise price that it determines to be consistent with applicable law and the purpose of the Plan, including, without limitation, in lieu of the exercise of a Stock Option by delivery of shares of Common Stock of the Company then owned by a participant, providing the Company with a notarized statement attesting to the number of shares owned, where upon verification by the Company, the Company would issue to the participant only the number of incremental shares to which the participant is entitled upon exercise of the Stock Option.

               (d)     Exercise Period. Stock Options granted under the Plan shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee; provided, however, that no Stock Option shall be exercisable later than ten (10) years after the date it is granted except in the event of a participant's death, in which case, the exercise period of such participant's Stock Options may be extended beyond such period but no later than one (1) year after the participant's death. All Stock Options shall terminate at such earlier times and upon such conditions or circumstances as the Committee shall in its discretion set forth in such option agreement at the date of grant.

               (e)     Restoration of Stock Options. The Committee may, at the time of grant, provide for the grant of a subsequent Restoration Stock Option if the exercise price is paid for by delivering previously owned shares of Common Stock of the Company. Restoration Stock Options (i) may be granted in respect of no more than the number of shares of Common Stock tendered in exercising the predecessor Stock Option, (ii) shall have an exercise price equal to the Fair Market Value (as defined in Section 15 below) on the date the Restoration Stock Option is granted, and (iii) may have an exercise period that does not extend beyond the remaining term of the predecessor Stock Option. In determining which methods a participant may utilize to pay the exercise price, the Committee may consider such factors as it determines are appropriate.

               (f)     Limitations on Incentive Stock Options. Incentive Stock Options may be granted only to participants who are employees of the Company or of a "Parent Corporation" or "Subsidiary Corporation" (as defined in Sections 424(e) and (f) of the Code, respectively) at the date of grant. The aggregate Fair Market Value (determined as of the time the Stock Option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under all option plans of the Company and of any Parent Corporation or Subsidiary Corporation ) shall not exceed one hundred thousand dollars ($100,000). For purposes of the preceding sentence, Incentive Stock Options will be taken into account in the order in which they are granted. The per-share exercise price of an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock on the date of grant, and no Incentive Stock Option may be exercised

5

later than ten (10) years after the date it is granted. In addition, no Incentive Stock Option may be issued to a participant in tandem with a Nonqualified Stock Option.

               (g)     Additional Limitations on Incentive Stock Options for Ten Percent Shareholders. Incentive Stock Options may not be granted to any participant who, at the time of grant, owns stock possessing (after the application of the attribution rules of Section 424(d) of the Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary Corporation, unless the exercise price of the option is fixed at not less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant and the exercise of such option is prohibited by its terms after the expiration of five (5) years from the date of grant of such option.

          7.     Stock Appreciation Rights.

               (a)     Generally. The Committee may, in its discretion, grant Stock Appreciation Rights, including a concurrent grant of Stock Appreciation Rights in tandem with any Stock Option grant. A Stock Appreciation Right means a right to receive a payment in cash, Common Stock or a combination thereof, in an amount equal to the excess of (i) the Fair Market Value, or other specified valuation, of a specified number of shares of Common Stock on the date the right is exercised over (ii) the Fair Market Value, of such shares of Common Stock on the date the right is granted, or other specified amount, all as determined by the Committee; provided, however, that if a Stock Appreciation Right is granted in tandem with or in substitution for a Stock Option, the designated Fair Market Value in the award agreement may be the Fair Market Value on the date such Stock Option was granted. Each Stock Appreciation Right shall be subject to such terms and conditions as the Committee shall impose from time to time.

               (b)     Exercise Period. Stock Appreciation Rights granted under the Plan shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee; provided, however, that no Stock Appreciation Rights shall be exercisable later than ten (10) years after the date it is granted except in the event of a participant's death, in which case, the exercise period of such participant's Stock Appreciation Rights may be extended beyond such period but no later than one (1) year after the participant's death. All Stock Appreciation Rights shall terminate at such earlier times and upon such conditions or circumstances as the Committee shall in its discretion set forth in such right at the date of grant.

          8.     Stock Awards.

               (a)     Generally. The Committee may, in its discretion, grant Stock Awards (which may include mandatory payment of any bonus in stock) consisting of Common Stock issued or transferred to participants with or without other payments therefor. A Stock Award shall be construed as an offer by the Company to the participant to purchase the number of shares of Common Stock subject to the Stock Award at the purchase price, if any, established therefor. Any right to acquire the shares under the Stock Award that is

6

not exercised by the participant within thirty (30) days after the grant is communicated shall automatically expire.

               (b)     Payment of the Purchase Price. If the Stock Award requires payment therefor, the purchase price of any shares of Common Stock subject to a Stock Award may be paid in any manner authorized by the Committee, which may include any manner authorized under the Plan for the payment of the exercise price of a Stock Option. Stock Awards may also be made in consideration of services rendered to the Company or its subsidiaries or affiliates.

               (c)     Additional Terms. Stock Awards may be subject to such terms and conditions as the Committee determines appropriate, including, without limitation, restrictions on the sale or other disposition of such shares, the right of the Company to reacquire such shares for no consideration upon termination of the participant's employment within specified periods, and may constitute Performance-Based Awards, as described in Section 10 hereof. The Committee may require the participant to deliver a duly signed stock power, endorsed in blank, relating to the Common Stock covered by such an Award. The Committee may also require that the stock certificates evidencing such shares be held in custody or bear restrictive legends until the restrictions thereon shall have lapsed.

               (d)     Rights as a Shareholder. The Stock Award shall specify whether the participant shall have, with respect to the shares of Common Stock subject to a Stock Award, all of the rights of a holder of shares of Common Stock of the Company, including the right to receive dividends and to vote the shares.

          9.     Stock Units.

               (a)     Generally. The Committee may, in its discretion, grant Stock Units (as defined in subsection (d) below) to participants hereunder. The Committee shall determine the criteria for the vesting of Stock Units. Stock Units may constitute Performance-Based Awards, as described in Section 10 hereof. A Stock Unit granted by the Committee shall provide payment in shares of Common Stock at such time as the award agreement shall specify. Shares of Common Stock issued pursuant to this Section 9 may be issued with or without other payments therefor as may be required by applicable law or such other consideration as may be determined by the Committee. The Committee shall determine whether a participant granted a Stock Unit shall be entitled to a Dividend Equivalent Right (as defined in subsection (d) below).

               (b)     Settlement of Stock Units. Upon vesting of a Stock Unit, unless the Committee has determined to defer payment with respect to such unit or a participant has elected to defer payment under subsection (c) below, shares of Common Stock representing the Stock Units shall be distributed to the participant unless the Committee provides for the payment of the Stock Units in cash equal to the value of the shares of Common Stock which would otherwise be distributed to the participant or partly in cash and partly in shares of Common Stock.

7

               (c)     Deferral of Stock Units. Prior to the year with respect to which a Stock Unit may vest, the participant may elect, in accordance with rules prescribed by the Committee, not to receive a distribution upon the vesting of such Stock Unit and instead have the Company continue to maintain the Stock Unit on its books of account. In such event, the value of a Stock Unit shall be payable in shares of Common Stock pursuant to the agreement of deferral.

               (d)     Definitions. A "Stock Unit" means a notional account representing one (1) share of Common Stock. A "Dividend Equivalent Right" means the right to receive the amount of any dividend paid on the share of Common Stock underlying a Stock Unit, which shall be payable in cash or in the form of additional Stock Units.

          10.    Performance-Based Awards.

               (a)     Generally. Any Benefits granted under the Plan may be granted in a manner such that the Benefits qualify for the performance-based compensation exemption of Section 162(m) of the Code ("Performance-Based Awards"). As determined by the Committee in its sole discretion, either the granting or vesting of such Performance-Based Awards shall be based on achievement of hurdle rates and/or growth rates in one or more business criteria that apply to the individual participant, one or more business units or the Company as a whole.

               (b     Business Criteria. The business criteria shall be as follows, individually or in combination: (i) net earnings; (ii) earnings per share; (iii) net sales growth; (iv) market share; (v) net operating profit; (vi) expense targets; (vii) working capital targets relating to inventory and/or accounts receivable; (viii) operating margin; (ix) return on equity; (x) return on assets; (xi) planning accuracy (as measured by comparing planned results to actual results); (xii) market price per share; (xiii) total return to stockholders, and (xiv) limiting quality of health care issues at Company facilities. In addition, Performance-Based Awards may include comparisons to the performance of other companies, such performance to be measured by one or more of the foregoing business criteria.

               (c)     Establishment of Performance Goals. With respect to Performance-Based Awards, the Committee shall establish in writing (i) the performance goals applicable to a given period, and such performance goals shall state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the participant if such performance goals are obtained and (ii) the individual employees or class of employees to which such performance goals apply no later than ninety (90) days after the commencement of such period (but in no event after twenty-five percent (25%) of such period has elapsed).

               (d)     Certification of Performance. No Performance-Based Awards shall be payable to or vest with respect to, as the case may be, any participant for a given period

8

until the Committee certifies in writing that the objective performance goals (and any other material terms) applicable to such period have been satisfied.

               (e)     Modification of Performance-Based Awards. With respect to any Benefits intended to qualify as Performance-Based Awards, after establishment of a performance goal, the Committee shall not revise such performance goal or increase the amount of compensation payable thereunder (as determined in accordance with Section 162(m) of the Code) upon the attainment of such performance goal. Notwithstanding the preceding sentence, the Committee may reduce or eliminate the number of shares of Common Stock or cash granted or the number of shares of Common Stock vested upon the attainment of such performance goal.

          11.    Foreign Laws. The Committee may grant Benefits to individual participants who are subject to the tax laws of nations other than the United States, which Benefits may have terms and conditions as determined by the Committee as necessary to comply with applicable foreign laws. The Committee may take any action which it deems advisable to obtain approval of such Benefits by the appropriate foreign governmental entity; provided, however, that no such Benefits may be granted pursuant to this Section 11 and no action may be taken which would result in a violation of the Exchange Act, the Code or any other applicable law.

          12.    Adjustment Provisions; Change in Control.

               (a)     Adjustment Generally. If there shall be any change in the Common Stock of the Company, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or distribution (other than normal cash dividends) to stockholders of the Company, an adjustment shall be made to each outstanding Stock Option and Stock Appreciation Right such that each such Stock Option and Stock Appreciation Right shall thereafter be exercisable for such securities, cash and/or other property as would have been received in respect of the Common Stock subject to such Stock Option or Stock Appreciation Right had such Stock Option or Stock Appreciation Right been exercised in full immediately prior to such change or distribution, and such an adjustment shall be made successively each time any such change shall occur.

               (b)     Modification of Benefits. In the event of any change or distribution described in subsection (a) above, in order to prevent dilution or enlargement of participants' rights under the Plan, the Committee will have authority to adjust, in an equitable manner, the number and kind of shares that may be issued under the Plan, the number and kind of shares subject to outstanding Benefits, the exercise price applicable to outstanding Benefits, and the Fair Market Value of the Common Stock and other value determinations applicable to outstanding Benefits; provided, however, that any such arithmetic adjustment to a Performance-Based Award shall not cause the amount of compensation payable thereunder to be increased from what otherwise would have been due upon attainment of the unadjusted award. Appropriate adjustments may also be

9

made by the Committee in the terms of any Benefits under the Plan to reflect such changes or distributions and to modify any other terms of outstanding Benefits on an equitable basis, including modifications of performance targets and changes in the length of performance periods; provided, however, that any such arithmetic adjustment to a Performance-Based Award shall not cause the amount of compensation payable thereunder to be increased from what otherwise would have been due upon attainment of the unadjusted award. In addition, other than with respect to Stock Options, Stock Appreciation Rights, and other awards intended to constitute Performance-Based Awards, the Committee is authorized to make adjustments to the terms and conditions of, and the criteria included in, Benefits in recognition of unusual or nonrecurring events affecting the Company or the financial statements of the Company, or in response to changes in applicable laws, regulations, or accounting principles. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Stock Option shall comply with the rules of Section 424(a) of the Code, and (ii) in no event shall any adjustment be made which would render any Incentive Stock Option granted hereunder other than an incentive stock option for purposes of Section 422 of the Code.

               (c)     Effect of a Change in Control. Notwithstanding any other provision of this Plan, if there is a Change in Control (as defined in subsection (d) below) of the Company, all then outstanding Stock Options, Stock Appreciation Rights and Stock Units shall immediately vest and become exercisable and any restrictions on Stock Awards or Stock Units shall immediately lapse. Thereafter, all Benefits shall be subject to the terms of any agreement effecting the Change in Control, which agreement, may provide, without limitation, that each Stock Option and Stock Appreciation Right outstanding hereunder shall terminate within a specified number of days after notice to the holder, and that such holder shall receive, with respect to each share of Common Stock subject to such Stock Option or Stock Appreciation Right, an amount equal to the excess of the Fair Market Value of such shares of Common Stock immediately prior to the occurrence of such Change in Control over the exercise price per share underlying such Stock Option or Stock Appreciation Right with such amount payable in cash, in one or more kinds of property (including the property, if any, payable in the transaction) or in a combination thereof, as the Committee, in its discretion, shall determine. A provision like the one contained in the preceding sentence shall be inapplicable to a Stock Option or Stock Appreciation Right granted within six (6) months before the occurrence of a Change in Control if the holder of such Stock Option or Stock Appreciation Right is subject to the reporting requirements of Section 16(a) of the Exchange Act and no exception from liability under Section 16(b) of the Exchange Act is otherwise available to such holder.

               (d)     Definitions. For purposes of this Section 12, a "Change in Control" of the Company shall be deemed to have occurred if any of the following events occurs:

     (i)     Any "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange 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

10

the Exchange Act), directly or indirectly, of more than 33 1/3% of the then outstanding voting stock of the Company;

     (ii)     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;

     (iii)     A sale or other disposition by the Company of all or substantially all of the Company's assets;

     (iv)     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 of the Company and any new director (other than a director who is a representative or nominee of an Acquiring Person) whose election by the Company's 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 Company's Board of Directors;

provided, however, in no event shall any acquisition of securities, a change in the composition of the Company's 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 12(d)(1), 12(d)(2), 12(d)(3) and 12(d)(4) hereof, 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.

          13.    Nontransferability. Each Benefit granted under the Plan to a participant shall not be transferable otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the participant's lifetime, only by the participant. In the event of the death of a participant, each Stock Option or Stock Appreciation Right theretofore granted to him or her shall be exercisable during such period after his or her death as the Committee shall in its discretion set forth in such option or right at the date of grant and then only by the executor or administrator of the estate of the deceased participant or the person or persons to whom the deceased participant's rights under the Stock Option or Stock Appreciation Right shall pass by will or the laws of descent and distribution. Notwithstanding the foregoing, at the discretion of the Committee, an award of a Benefit other than an Incentive Stock Option may permit the transferability of a

11

Benefit by a participant solely to the participant's spouse, siblings, parents, children and grandchildren or trusts for the benefit of such persons or partnerships, corporations, limited liability companies or other entities owned solely by such persons, including trusts for such persons, subject to any restriction included in the award of the Benefit.

          14.    Other Provisions. The award of any Benefit under the Plan may also be subject to such other provisions (whether or not applicable to the Benefit awarded to any other participant) as the Committee determines appropriate, including, without limitation, for the installment purchase of Common Stock under Stock Options, for the installment exercise of Stock Appreciation Rights, to assist the participant in financing the acquisition of Common Stock, for the forfeiture of, or restrictions on resale or other disposition of, Common Stock acquired under any form of Benefit, for the acceleration of exercisability or vesting of Benefits in the event of a change in control of the Company, for the payment of the value of Benefits to participants in the event of a change in control of the Company, or to comply with federal and state securities laws, or understandings or conditions as to the participant's employment in addition to those specifically provided for under the Plan.

          15.    Fair Market Value. For purposes of this Plan and any Benefits awarded hereunder, Fair Market Value shall be the closing price of the Company's Common Stock on the date of calculation (or on the last preceding trading date if Common Stock was not traded on such date) if the Company's Common Stock is readily tradable on a national securities exchange or other market system, and if the Company's Common Stock is not readily tradable, Fair Market Value shall mean the amount determined in good faith by the Committee as the fair market value of the Common Stock of the Company.

          16.    Withholding. All payments or distributions of Benefits made pursuant to the Plan shall be net of any amounts required to be withheld pursuant to applicable federal, state and local tax withholding requirements. If the Company proposes or is required to distribute Common Stock pursuant to the Plan, it may require the recipient to remit to it or to the corporation that employs such recipient an amount sufficient to satisfy such tax withholding requirements prior to the delivery of any certificates for such Common Stock. In lieu thereof, the Company or the employing corporation shall have the right to withhold the amount of such taxes from any other sums due or to become due from such corporation to the recipient as the Committee shall prescribe. The Committee may, in its discretion and subject to such rules as it may adopt (including any as may be required to satisfy applicable tax and/or non-tax regulatory requirements), permit an optionee or award or right holder to pay all or a portion of the federal, state and local withholding taxes arising in connection with any Benefit consisting of shares of Common Stock by electing to have the Company withhold shares of Common Stock having a Fair Market Value equal to the amount of tax to be withheld, such tax calculated at rates required by statute or regulation.

12

          17.    Tenure. A participant's right, if any, to continue to serve the Company or any of its subsidiaries or affiliates as an officer, employee, or otherwise, shall not be enlarged or otherwise affected by his or her designation as a participant under the Plan.

          18.    Unfunded Plan. Participants shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any participant, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974, as amended.

          19.    No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan or any Benefit. The Committee shall determine whether cash, or Benefits, or other property shall be issued or paid in lieu of fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.

          20.    Duration, Amendment and Termination. No Benefit shall be granted more than ten (10) years after the Effective Date. The Committee may amend the Plan from time to time or suspend or terminate the Plan at any time. No amendment of the Plan may be made without approval of the majority of the stockholders of the Company if the amendment will: (i) disqualify any Incentive Stock Options granted under the Plan; (ii) increase the aggregate number of shares of Common Stock that may be delivered through Stock Options under the Plan; (iii) increase either of the maximum amounts which can be paid to an individual participant under the Plan as set forth in Section 5 hereof; (iv) change the types of business criteria on which Performance-Based Awards are to be based under the Plan; or (v) modify the requirements as to eligibility for participation in the Plan.

          21.    Governing Law. This Plan, Benefits granted hereunder and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws).

          22.    Effective Date. The Plan shall be effective as of [ ], the date the date the Company emerges from the bankruptcy it filed under title 11, chapter 11 of the United States Code (the "Effective Date"), provided that the Plan is approved by a majority of the stockholders of the Company within twelve (12) months of the Effective Date, and such approval of stockholders shall be a condition to the right of each

13

participant to receive any Benefits hereunder. Any Benefits granted under the Plan prior to such approval of stockholders shall be effective as of the date of grant (unless, with respect to any Benefit, the Committee specifies otherwise at the time of grant), but no such Benefit may be exercised or settled and no restrictions relating to any Benefit may lapse prior to such stockholder approval, and if stockholders fail to approve the Plan as specified hereunder, any such Benefit shall be cancelled.

14

Index of Defined Terms

Term Section Where Defined or First Used

Acquiring Person 12(d)(i)

Beneficial Owner 12(d)(i)

Benefits 4

Change in Control 12(d)

Chapter 11 Plan 12(d)

Code 2(a)

Committee 2(a)

Common Stock 1

Company 1

Dividend Equivalent Right 10(d)

Effective Date 22

Exchange Act 2(a)

Fair Market Value 15

Incentive Stock Option 6(a)

Non-Employee Director 2(a)

Nonqualified Stock Option 6(a)

Parent Corporation 6(f)

Performance-Based Awards 10(a)

Plan 1

Restoration Stock Options 6(e)

Stock Appreciation Rights 7

Stock Award 8

Stock Options 6

Stock Unit 9(d)

Subsidiary Corporation 6(f)

15

REGISTRATION RIGHTS AGREEMENT

          REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of _____________ ___, 2002, between Sun Healthcare Group, Inc., a Delaware corporation (the "Company"), and the Persons identified on Schedule I hereto¹ (the "Initial Holders").

W I T N E S S E T H:

          WHEREAS, pursuant to the Plan of Reorganization of Sun Healthcare Group, Inc. and its affiliated debtors and debtors in possession (the "Plan"), dated November 7, 2001, the Company has agreed, among other things, to issue 10,000,000 million shares of convertible common stock, par value $0.01 per share of the Company (the "Convertible Common Stock"); and

          WHEREAS, the Company has agreed to grant to Initial Holders the registration rights set forth herein; and

          WHEREAS, under certain circumstances, the Convertible Common Stock is convertible into shares of the Company's common stock, $0.01 (the "Common Stock"); and

          WHEREAS, this Agreement shall become effective upon the issuance of securities pursuant to the Plan;

          NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:

ARTICLE 1 -

DEFINITIONS

          As used herein, unless the context otherwise requires, the following terms have the following respective meanings:

          "Adverse Disclosure" means public disclosure of material non-public information, which disclosure in the good faith judgment of the chief executive officer or chief financial officer of the Company (i) would be required to be made in any registration statement filed with the Commission by the Company so that such registration statement would not be materially misleading; (ii) would not be required to be made at such time but for the filing of such


^{1Bank of America, Foothill, GSCP, Highland Capital, Morgens Waterfall, Woodstead,
Goldman Sachs

1

registration statement; and (iii) the Company has a bona fide business purpose for
avoiding.

          "Agreement"
has the meaning set forth in the recitals hereto.

          "Blackout Period"
has the meaning set forth in Section 2.1(g).

          "Commission"
means the Securities and Exchange Commission or any other Federal agency at the time
administering the Securities Act.

          "Common Stock"
has the meaning set forth in the recitals hereto.

          "Company"
has the meaning set forth in the recitals hereto.

          "Convertible Common
Stock" has the meaning set forth in the recitals hereto.

          "Exchange Act"
means the Securities Exchange Act of 1934, or any similar Federal statute, and the rules
and regulations of the Commission thereunder, all as the same shall be in effect at the
time. Reference to a particular section of the Securities Exchange Act of 1934 shall
include a reference to the comparable section, if any, of any such similar Federal
statute.

          "Holder"
means an Initial Holder or a successor, assignee or transferee of an Initial Holder as
contemplated by Section 5.3 hereof, in each case for so long as such Initial Holder,
successor, assignee or transferee holds Registrable Securities.

          "Initial Holder"
has the meaning set forth in the recitals hereto.

          "Managing
Underwriters" means any investment banker or investment bankers and manager or
managers that administer the offering of Registrable Securities covered by any
registration statement.

          "Participating
Holders" means Holders of Registrable Securities who demand or participate in a
registration of their Registrable Securities pursuant to Sections 2.1 or 2.2.

          "Person"
means a corporation, an association, a partnership, an organization, business, an
individual, a governmental or political subdivision thereof or a governmental agency.

          "Plan" has
the meaning set forth in the recitals hereto.

          "Registrable
Securities" means any shares of Common Stock issued to an Initial Holder pursuant
to the Plan and any Common Stock issuable to the Initial Holder upon conversion of the
Convertible Common Stock issued to Initial Holder pursuant to the Plan. As to any
particular Registrable Securities, once issued such securities shall cease to be
Registrable Securities when

2

(a) a registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been disposed of
in accordance with such registration statement, (b) they shall have been disposed of (1)
pursuant to Rule 144 (or any successor provision) under the Securities Act, or (2)
pursuant to another exemption from the registration requirements of the Securities Act
pursuant to which the securities are freely tradable without restrictions under the
Securities Act, (c) such Securities may be disposed of pursuant to Rule 144 (or any
successive provision) within the volume limitations thereunder within a 90-day period and
pursuant to Rule 144(E) (or any successive provision of the Securities Act), (d) they
shall have been otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and subsequent
disposition of them shall not require registration or qualification of them under the
Securities Act or any similar state law then in force, (e) they shall be sold by the
applicable Holder to the public pursuant to Section 1145 of title 11 of the United States
Code, as amended, or (f) they shall have ceased to be outstanding. Notwithstanding
anything herein to the contrary, the registration rights granted hereunder shall terminate
as to each Holder and with respect to such Securities upon the date that such Common Stock
is no longer Registrable Securities.

          "Registration
Expenses" means all expenses incident to the Company's performance of or
compliance with Section 2, including, without limitation, (i) all registration, filing and
NASD fees, all stock exchange listing fees, (ii) all fees and expenses of complying with
securities or blue sky laws, (iii) all word processing, duplicating and printing expenses,
messenger and delivery expenses, the fees and disbursements of counsel for the Company and
of its independent public accountants, including the expenses of any special audits or
"cold comfort" letters required by or incident to such performance and
compliance, (iv) the fees and disbursements of one counsel retained by all the
Participating Holders (selected by the Holders of a majority of the Registrable Securities
included in a registration) in an amount not to exceed $10,000 per registration statement,
(v) premiums and other costs of policies of insurance against liabilities arising out of
the public offering of the Registrable Securities being registered and (vi) any fees and
disbursements of underwriters customarily paid by issuers or sellers of securities, but
excluding underwriting discounts and commissions and transfer taxes, if any, provided
that, in any case where Registration Expenses are not to be borne by the Company, such
expenses shall not include salaries of Company personnel or general overhead expenses of
the Company, auditing fees, premiums or other expenses relating to liability insurance
required by underwriters of the Company or other expenses for the preparation of financial
statements or other data normally prepared by the Company in the ordinary course of its
business or which the Company would have incurred in any event.

          "Securities Act"
means the Securities Act of 1933, or any similar Federal statute, and the rules and
regulations of the Commission thereunder, all as of the same shall be in effect at the

3

time. References to a particular section of the Securities Act of 1933 shall include a
reference to the comparable section, if any, of any such similar Federal statute.

          "Underwritten
Offering" means an offering registered under the Securities Act in which
securities of the Company are sold to an underwriter on a firm commitment basis for
reoffering to the public.

ARTICLE II -

REGISTRATION UNDER SECURITIES ACT, ETC.

     2.1     Registration on Request

               (a)     Following
a period of 180 days following the Effective Date of the Plan, a Holder (or group of
Holders) holding at least 500,000 shares of Common Stock which constitute Registrable
Securities, subject to Section 2.1(c) hereof, may request, in writing, registration under
the Securities Act, of all or part of their Registrable Securities. Within 10 days after
receipt of any such request, the Company will give notice of such request to the other
Holders. Thereafter, the Company will use all commercially reasonable efforts to effect
the registration on an appropriate form under the Securities Act and will include in such
registration, subject to Section 2.1(c) hereof, all Registrable Securities held by any
Participating Holder with respect to which the Company has received a written request for
inclusion therein within 10 days after the receipt of the Company's notice. All
registrations initiated by a Participating Holder pursuant to this Section 2.1(a) are
referred to herein as "Demand Registrations."

               (b)     If
the Participating Holders holding not less than a majority of the Registrable Securities
included in any offering pursuant to a Demand Registration so elect by written request to
the Company, such offering shall be in the form of an Underwritten Offering. Participating
Holders holding a majority of the Registrable Securities included in such Underwritten
Offering shall, after consulting with the Company, have the right to select the managing
underwriter or underwriters for the offering, subject to the right of the Company to
approve such managing underwriter or underwriters (which approval shall not be
unreasonably withheld) and to select one co-managing underwriter reasonably acceptable to
such Participating Holders.

               (c)     If
the managing underwriter or underwriters of a proposed offering of Registrable Securities
included in a Demand Registration inform the Participating Holders of such Registrable
Securities and the Company in writing that, in its or their opinion, the number of
securities requested to be included in such Demand Registration (including securities of
the Company for its own account or for the account of other Persons which are not Holders)
exceeds the number which can be sold in such offering without being likely to have an
adverse effect on the price, timing or distribution of the securities offered or the
market for the securities offered, the Company will include in such registration all of
the Registrable Securities sought to be

4

registered therein by the Participating Holders and only such lesser number of other
securities requested to be included for the account of the Company or for the account of
other Persons which are not Holders as shall not, in the opinion of the managing
underwriter or underwriters, be likely to have such an effect. In the event that, despite
the reduction of the number of securities to be offered for the account of the Company or
for the account of Persons which are not Holders in such registration pursuant to the
immediately preceding sentence, the number of Registrable Securities to be included in
such registration exceeds the number which, in the opinion of the managing underwriter or
underwriters, can be sold without having the adverse effect referred to above, the number
of Registrable Securities that can be included without having such an adverse effect shall
be allocated pro rata among the Participating Holders which have requested participation
in the Demand Registration (based, for each such Participating Holder, on the percentage
(such Participating Holder's "Allocation Percentage") derived by dividing (i)
the number of Registrable Securities which such Participating Holder has requested to
include in such Demand Registration by (ii) the aggregate number of Registrable Securities
which all such Participating Holders have requested to include).

               (d)     Registration
Statement Form. Registrations under this Section 2.1 shall be on such appropriate
registration form of the Commission (i) as shall be selected by the Company and as
shall be reasonably acceptable to the Participating Holders holding a majority of
Registrable Securities requesting participation in the Demand Registration and, as shall
be reasonably acceptable to each Participating Holder and (ii) as shall permit the
disposition of such Registrable Securities in accordance with the intended method or
methods of disposition specified in their request for such registration.

               (e)     Expenses.
The Company will pay all Registration Expenses in connection with any registration
requested pursuant to this Section 2.1 prior to the time at which two such registrations
shall have been effected in which all of the Registrable Securities requested to be
included in such registration shall have been registered pursuant to this Section 2.1. The
Registration Expenses (and underwriting discounts and commissions and transfer taxes, if
any) in connection with each other registration requested under this Section 2.1 shall be
paid pro rata by the Participating Holders.

               (f)     Effective
Registration Statement. A Demand Registration requested pursuant to this Section 2.1
shall not be deemed to have been effected (i) unless a registration statement with
respect thereto has been declared effective by the Commission, provided that a
registration which does not become effective after the Company has filed a registration
statement with respect thereto solely by reason of the refusal to proceed of a
Participating Holder (other than a refusal to proceed based upon the advice of counsel
relating to a matter with respect to the Company) shall be deemed to have been effected by
the Company at the request of a Participating Holder unless such Participating Holder
shall have elected to pay all Registration Expenses in connection with such registration,
(ii) if, after it has become effective, such registration becomes subject to any
stop order, injunction or other order or requirement of the Commission or other
governmental agency or court for any reason, or (iii) the conditions to closing
specified in the purchase

5

agreement or underwriting agreement entered into in connection with such registration
are not satisfied, other than by reason of some act or omission by the Participating
Holders.

               (g)     Exceptions
to Registration on Request. Notwithstanding anything in Section 2.1(a) above to the
contrary, the Company shall not be obligated to take any action to effect any such
registration pursuant to Section 2.1(a) above:

                    (i)     In
any particular jurisdiction in which the Company would be required to execute a general
consent to service of process in effecting such registration, unless the Company is
already subject to service in such jurisdiction and except as may be required by the
Securities Act;

                    (ii)     During
the period starting with the date sixty (60) days prior to the Company's estimated date of
filing of, and ending on the one hundred and twentieth (120^th) day immediately
following the effective date of, any registration statement pertaining to securities of
the Company;

                    (iii)     During
the period commencing on the seventh day prior to the effective date of any offering by
the Company that is registered under the Securities Act and ending on the 90th day after
the offering is complete;

                    (iv)     After
the Company has effected two (2) such registrations pursuant to Section 2.1(a), and such
registrations have been declared or ordered effective and at least 75% of the Registrable
Securities requested to be included in such registrations have been registered pursuant to
Section 2.1;

                    (v)     If
the Company shall have previously effected a Demand Registration at any time during the
immediately preceding 180 day period;

                    (vi)     If
(A) the number of Registrable Securities identified in the Demand Registration shall be
less than five percent (5%) of the then outstanding shares of Common Stock (assuming
conversion of all Convertible Common Stock into Common Stock) or (B) the Registrable
Securities identified in the Demand Registration shall have a current market value as of
the date of the demand of less than $17,500,000;

                    (vii)     If
the filing, initial effectiveness or use of a registration statement in respect of a
Demand Registration would require the Company to make an Adverse Disclosure, and, in such
event, the Company shall promptly give Participating Holders written notice of such
determination, then the Company shall be entitled to (x) postpone the filing of the
registration statement otherwise required to be prepared and filed by the Company pursuant
to Section 2.1(a) hereof, or (y) elect that the effective registration statement not be
used, in either case for a reasonable period of time, but not to exceed one hundred eighty
(180) days after the date that the demand was made (a "Blackout Period");
provided that the Company may not exercise this deferral right more than once per twelve
(12) month period. Any such written notice shall contain a general statement of the
reasons for such postponement or restriction on use and an

6

estimate of the anticipated delay. The Company shall promptly notify each Participating
Holder of the expiration or earlier termination of such Blackout Period.

     2.2     Incidental Registration

               (a)     Right
to Include Registrable Securities. If the Company at any time proposes to register
securities comprising shares of common stock of the Company for its own account or for the
account of any holders of its securities under the Securities Act on Forms S-1, S-2 or S-3
(other than (A) a registration under Section 2.1 hereof, (B) a registration solely for
registration of securities in connection with an employee benefit plan or dividend
reinvestment plan or a merger or consolidation or incidental to an issuance of securities
under Rule 144A under the Securities Act or (C) a registration on any registration form
which does not permit secondary sales or does not include substantially the same
information as would be required to be included in a registration statement covering the
sale of Registrable Securities (other than information as to the selling stockholders and
their intended method or methods of disposition)), it will each such time give prompt
written notice to each Holder of its intention to do so and of such Holder's rights under
this Section 2.2. Upon the written request of any Holder made within 30 days after the
receipt of any such notice (which request shall specify the Registrable Securities
intended to be disposed of by such Holder and the intended method of disposition thereof),
the Company will, subject to Sections 2.2(b) hereof, effect the registration under the
Securities Act of all Registrable Securities which the Company has been so requested to
register by such Holder, to the extent requisite to permit the disposition (in accordance
with the intended methods thereof as aforesaid) of the Registrable Securities so to be
registered, by inclusion of such Registrable Securities in the registration statement
which covers the securities which the Company proposes to register, provided that
if, at any time after giving written notice of its intention to register any securities
and prior to the effective date of the registration statement filed in connection with
such registration, the Company shall determine for any reason either not to register or to
delay registration of such securities, the Company may, at its election, give written
notice of such determination to each Holder and, thereupon, (i) in the case of a
determination not to register, shall be relieved of its obligation to register any
Registrable Securities in connection with such registration (but not from its obligation
to pay the Registration Expenses in connection therewith), without prejudice, however, to
the rights of any Holder to request that such registration be effected as a registration
under Section 2.1, and (ii) in the case of a determination to delay registering,
shall be permitted to delay registering any Registrable Securities, for the same period as
the delay in registering such other securities. No registration effected under this
Section 2.2 shall relieve the Company of its obligation to effect any registration upon
request under Section 2.1, nor shall any such registration hereunder be deemed to have
been effected pursuant to Section 2.1. The Company will pay all Registration Expenses in
connection with each registration of Registrable Securities requested pursuant to this
Section 2.2. All registrations pursuant to Section 2.2(a) are referred to herein as "Piggyback
Registrations."

7

               (b)     Underwritten
Offering. If the offering pursuant to a Piggyback Registration is to be an
Underwritten Offering, then each Participating Holder making a request for its Registrable
Securities to be included therein must, and the Company shall use its reasonable best
efforts to make such arrangements with the Managing Underwriters so that each such
Participating Holder may, participate in such Underwritten Offering on the same terms as
other Persons selling securities in such Underwritten Offering. If the offering pursuant
to such registration is to be on any other basis, then each Participating Holder making a
request for a Piggyback Registration pursuant to this Section 2.2(a) must participate in
such offering on such basis. Notwithstanding any provision in this Agreement to the
contrary, any Participating Holder participating through a Piggyback Registration shall
have no right to change the intended method or methods of disposition otherwise
applicable.

               (c)     Priority
in Incidental Registrations.

                    (i)     If
a Piggyback Registration is an underwritten primary registration on behalf of the Company,
and the managing underwriters advise the Company that in their opinion the number of
securities requested to be included in such registration exceeds the number which can be
sold in such offering, the Company will include in such registration: (i) first, the
securities the Company proposes to sell, and (ii) second, the securities proposed to
be included in such registration by the holders (including any Participating Holder) pro
rata among the Participating Holders exercising their respective piggyback registration
rights thereof based upon the total number of securities which each such Participating
Holder beneficially owns.

                    (ii)     If
a Piggyback Registration is an underwritten secondary registration on behalf of holders
(other than any Holders hereunder) of the Company's securities, and the managing
underwriters advise the Company that in their opinion the number of securities requested
to be included in such registration exceeds the number which can be sold in such offering,
the Company will include in such registration: (i) first, the securities which such
holders (other than any Participating Holder) propose to sell; (ii) second, the
securities the Company proposed to be included in such registration; and (iii) third,
the securities proposed to be included in such registration by the holders (including any
Participating Holder) pro rata among the Participating Holders exercising their respective
piggyback registration rights based upon the total number of securities which each such
Participating Holder beneficially owns.

     2.3     Registration
Procedures. If and whenever the Company is required to effect the registration of any
Registrable Securities under the Securities Act as provided in Sections 2.1 and 2.2 the
Company shall, as expeditiously as possible:

               (a)     prepare
and (as soon thereafter as possible) file with the Commission the requisite registration
statement to effect such registration (including such audited financial statements as may
be required by the Securities Act or the rules and regulations promulgated thereunder) and
thereafter cause such registration statement to become and remain effective, provided
however

8

that the Company may discontinue any registration of its securities which are not
Registrable Securities (and, under the circumstances specified in Section 2.2(a), its
securities which are Registrable Securities) at any time prior to the effective date of
the registration statement relating thereto;

               (b)     prepare
and file with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such registration statement
until such time as all of such securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof set forth in such
registration statement;

               (c)     furnish
to each Participating Holder and each underwriter, if any, such number of conformed copies
of such registration statement and of each such amendment and supplement thereto (in each
case including all exhibits), such number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus and any summary prospectus)
and any other prospectus filed under Rule 424 under the Securities Act, in conformity with
the requirements of the Securities Act, and such other documents, as such Participating
Holder and such underwriter, if any, may reasonably request in order to facilitate the
public sale or other disposition of the Registrable Securities;

               (d)     use
its best efforts to register or qualify all Registrable Securities and other securities
covered by such registration statement under such other securities laws or blue sky laws
of such jurisdictions as any seller thereof and any underwriter of the securities being
sold by such seller shall reasonably request, to keep such registrations or qualifications
in effect for so long as such registration statement remains in effect, and take any other
action which may be reasonably necessary or advisable to enable such seller and
underwriter to consummate the disposition in such jurisdictions of the securities owned by
such seller, except that the Company shall not for any such purpose be required to qualify
generally to do business as a foreign corporation in any jurisdiction wherein it would not
but for the requirements of this subdivision (d) be obligated to be so qualified or to
consent to general service of process in any such jurisdiction;

               (e)     use
its best efforts to cause all Registrable Securities covered by such registration
statement to be registered with or approved by such other governmental agencies or
authorities as may be necessary to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;

               (f)     notify
each Participating Holder and the managing underwriter or underwriters, if any, promptly
and confirm such advice in writing promptly thereafter (v) when the registration
statement, the prospectus or any prospectus supplement related thereto or post-effective
amendment to the registration statement has been filed, and, with respect to the
registration statement or any post-effective amendment thereto, when the same has become
effective; (w) of any request by the Commission for amendments or supplements to the
registration statement or the prospectus or for additional information; (x) of the
issuance by the Commission of any stop

9

order suspending the effectiveness of the registration statement or the initiation of
any proceedings by any Person for that purpose; (y) if at any time the representations and
warranties of the Company made as contemplated by Section 2.4 below cease to be true and
correct; and (z) of the receipt by the Company of any notification with respect to the
suspension of the qualification of any Registrable Securities for sale under the
securities or blue sky laws of any jurisdiction or the initiation or threat of any
proceeding for such purpose;

               (g)     notify
each Participating Holder, at any time when a prospectus relating thereto is required to
be delivered under the Securities Act, upon discovery that, or upon the happening of any
event as a result of which, the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances under which they were made, and at the
request of any Participating Holder promptly prepare and furnish to such seller or
Participating Holder and each underwriter, if any, a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made;

               (h)     make
every reasonable effort to obtain the withdrawal of any order suspending the effectiveness
of the registration statement at the earliest possible moment;

               (i)     otherwise
use its best efforts to comply with all applicable rules and regulations of the
Commission, and will furnish to each Participating Holder at least five business days
prior to the filing thereof a copy of any amendment or supplement to such registration
statement or prospectus and shall not file any thereof to which such Participating Holder
shall have reasonably objected on the grounds that such amendment or supplement does not
comply in all material respects with the requirements of the Securities Act or of the
rules or regulations thereunder;

               (j)     provide
and cause to be maintained a transfer agent and registrar for all Registrable Securities
covered by such registration statement from and after a date not later than the effective
date of such registration statement;

               (k)     enter
into such agreements and take such other actions as any Participating Holder shall
reasonably request in order to expedite or facilitate the disposition of such Registrable
Securities;

               (l)     use
its reasonable efforts to cause all Registrable Securities covered by the applicable
registration statement to be listed on each securities exchange or market on which any of
the Company's securities of such class are then listed or quoted; and

10

               (m)     use
its best efforts to provide a CUSIP number for the Registrable Securities, not later than
the effective date of the registration statement.

The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding such
seller and the distribution of such securities as the Company may from time to time
reasonably request in writing.

The Holders agree by acquisition of the Registrable Securities that, upon receipt of
any notice from the Company of the occurrence of any event of the kind described in
subdivision (f) of this Section 2.3, the Holders will forthwith discontinue their
respective dispositions of Registrable Securities pursuant to the registration statement
relating to such Registrable Securities until each such Holder's receipt of the copies of
the supplemented or amended prospectus contemplated by subdivision (f) of this Section 2.3
and, if so directed by the Company, will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies, then in such Holder's possession of the
prospectus relating to such Registrable Securities current at the time of receipt of such
notice.

If any such registration statement refers to any Holder by name or otherwise as the
holder of any securities of the Company, then such Holder shall have the right to require
(i) the insertion therein of language, in form and substance satisfactory to such
Holder, to the effect that the holding by such Holder of such securities is not to be
construed as a recommendation by such Holder of the investment quality of the Company's
securities covered thereby and that such holding does not imply that such Holder will
assist in meeting any future financial requirements of the Company, or (ii) in the
event that such reference to such Holder by name or otherwise is not required by the
Securities Act or any similar federal statute then in force, the deletion of the reference
to such Holder.

     2.4     Underwritten Offerings.

               (a)     Requested
Underwritten Offerings. If requested by the underwriters for any underwritten offering
by any Holder pursuant to a registration requested under Section 2.1, the Company will
enter into an underwriting agreement with such underwriters for such offering, such
agreement to be satisfactory in substance and form to the Company, Participating Holders
holding a majority of the Registrable Securities included in such offering and the
underwriters, and to contain such representations and warranties by the Company and such
other terms as are generally prevailing in agreements of this type, including, without
limitation, indemnities to the effect and to the extent provided in Section 2.6. The
Participating Holder will cooperate with the Company in the negotiation of the
underwriting agreement and will give consideration to the reasonable suggestions of the
Company regarding the form thereof, provided that nothing herein contained shall
diminish the foregoing obligations of the Company. Each Participating Holder shall be
party to such underwriting agreement. A Participating Holder shall not be required to make
any representations or warranties to or agreements with the Company or the underwriters

11

other than representations and warranties contained in a writing furnished by such
holder expressly for use in such registration statement or agreements regarding such
Participating Holder, the Participating Holder's Registrable Securities and the
Participating Holder's intended method of distribution and any other representation
required by law.

               (b)     Incidental
Underwritten Offerings. If the Company at any time proposes to register any of its
securities under the Securities Act as contemplated by Section 2.2 and such securities are
to be distributed by or through one or more underwriters, the Company will, if requested
by a Holder as provided in Section 2.2 and subject to the provisions of Section 2.2(b),
use its best efforts to arrange for such underwriters to include all the Registrable
Securities to be offered and sold by any Participating Holder among the securities to be
distributed by such underwriters. Each Participating Holder shall be party to the
underwriting agreement between the Company and such underwriters. A Participating Holder
shall not be required to make any representations or warranties to or agreements with the
Company or the underwriters other than representations, warranties or agreements regarding
such Participating Holder, such Participating Holder's Registrable Securities and such
Participating Holder's intended method of distribution and any other representation
required by law.

               (c)     Holdback
Agreements. The Company agrees if so required by the Managing Underwriter not to sell,
make any short sale of, loan, grant any option for the purchase of, effect any public sale
or distribution of or otherwise dispose of its equity securities or securities convertible
into or exchangeable or exercisable for any of such securities during the seven days prior
to and the 90 days after any underwritten registration pursuant to Section 2.1 or 2.2 has
become effective, except as part of such underwritten registration and except pursuant to
registrations on Form S-4, S-8, or any successor or similar forms thereto.

               (d)     Participation
in Underwritten Offerings. No Person may participate in any underwritten offering
hereunder unless such Person (i) agrees to sell such Person's securities on the
basis provided in any underwriting arrangements approved, subject to the terms and
conditions hereof, by Participating Holders holding a majority of the Registrable
Securities to be included in such offering and (ii) completes and executes all
questionnaires, indemnities, underwriting agreements and other documents (other than
powers of attorney) required under the terms of such underwriting arrangements.
Notwithstanding the foregoing, no underwriting agreement (or other agreement in connection
with such offering) shall require a Participating Holder to make any representations or
warranties to or agreements with the Company or the underwriters other than
representations and warranties contained in a writing furnished by such holder expressly
for use in the related registration statement or agreements regarding such Participating
Holder, such Participating Holder's Registrable Securities and such Participating Holder's
intended method of distribution and any other representation required by law.

     2.5     Preparation;
Reasonable Investigation. In connection with the preparation and filing of each
registration statement under the Securities Act pursuant to this Agreement, the Company

12

will give any Participating Holder, its underwriters, if any, and their respective
counsel and accountants, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the Commission, and
each amendment thereof or supplement thereto, and will give each of them such access to
its books and records and such opportunities to discuss the business of the Company with
its officers and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinion of underwriters' counsel, to conduct a
reasonable investigation within the meaning of the Securities Act.

     2.6     Indemnification.

               (a)     Indemnification
by the Company. In the event of any registration of any securities of the Company
under the Securities Act, the Company will, and hereby does agree to, indemnify and hold
harmless (i) in the case of any registration statement filed pursuant to Section
2.1 or 2.2, a Participating Holder, its directors and officers, and each other Person, if
any, who controls such Participating Holder within the meaning of the Securities Act, and
(ii) in the case of any registration statement of the Company, a Participating
Holder, its directors and officers and each other Person, if any, who controls such
Participating Holder within the meaning of the Securities Act, against any losses, claims,
damages or liabilities, joint or several, to which such Participating Holder or any such
director or officer or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and the Company will reimburse each such
Participating Holder and each such director, officer, and controlling person for any legal
and/or any other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding, provided that the
Company shall not be liable in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises out of or
is based upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly executed by a
Participating Holder for use in the preparation thereof. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of a
Participating Holder or any such director, officer, underwriter or controlling person and
shall survive the transfer of such securities by any Participating Holder.

               (b)     Indemnification
by Participating Holder. Each Participating Holder, severally and not jointly, will
indemnify and hold harmless the Company (in the same manner and to the

13

same extent as set forth in subdivision (a) of this Section 2.6) the Company, each
director of the Company, each officer of the Company and each other person, if any, who
controls the Company within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from such registration
statement, any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with written
information furnished to the Company through an instrument duly executed by such
Participating Holder for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus, amendment or supplement;
and, subject to the limitation set forth immediately preceding this clause, shall
reimburse, as incurred, the Company for any legal or other expenses reasonably incurred by
the Company or any such controlling person in connection with investigating or defending
any loss, claim, damage, liability or action in respect thereof. Any such indemnity shall
remain in full force and effect, regardless of any investigation made by or on behalf of
the Company or any such director, officer or controlling person and shall survive the
transfer of such securities by such Participating Holder. The liability of any Holder
under this paragraph shall in no event exceed the amount by which the proceeds received by
such Holder from sales of Registrable Securities giving rise to such obligation. This
indemnity agreement will be in addition to any liability which such Participating Holder
may otherwise have to the Company or any of its controlling persons.

               (c)     Notices
of Claims, etc. Promptly after receipt by an indemnified party of notice of the
commencement of any action or proceeding involving a claim referred to in the preceding
subdivisions of this Section 2.6, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to the latter of
the commencement of such action, provided that the failure of any indemnified party
to give notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subdivisions of this Section 2.6, except to the extent
that the indemnifying party is actually prejudiced by such failure to give notice. In case
any such action is brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party shall be
entitled to participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified, to the extent that the indemnifying party may wish,
with counsel reasonably satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party for any
legal or other expenses subsequently incurred by the latter in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying party shall, without
the consent of the indemnified party, consent to entry of any judgment or enter into any
settlement of any such action which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release from all
liability, or a covenant not to sue, in respect to such claim or litigation. No

14

indemnified party shall consent to entry of any judgment or enter into any settlement
of any such action the defense of which has been assumed by an indemnifying party without
the consent of such indemnifying party.

               (d)     Other
Indemnification. Indemnification similar to that specified in the preceding
subdivisions of this Section 2.6 (with appropriate modifications) shall be given by the
Company and any Participating Holder with respect to any required registration or other
qualification of securities under any Federal or state law or regulation of any
governmental authority, other than the Securities Act.

               (e)     Indemnification
Payments. The indemnification required by this Section 2.6 shall be made by periodic
payments of the amount thereof during the course of the investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred.

               (f)     Contribution.
If the indemnification provided for in the preceding subdivisions of this Section 2.6 is
unavailable to an indemnified party in respect of any expense, loss, claim, damage or
liability referred to therein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such indemnified
party as a result of such expense, loss, claim, damage or liability. In determining the
amount of contribution to which the indemnified party is entitled, there shall be
considered with respect to any Persons involved the relative knowledge and access to
information concerning the matter with respect to which the claim was asserted, the
opportunity to correct and prevent any statement or omission, and other equitable
considerations appropriate under the circumstances. It is hereby agreed that it would not
necessarily be equitable if the amount of such contribution were determined by pro rata or
per capita allocation, provided that the foregoing contribution agreement shall not
inure to the benefit of any indemnified party if indemnification would be unavailable to
such indemnified party by reason of the provisions contained in the first sentence of
subdivision (a) of this Section 2.6, and in no event shall the obligation of any
indemnifying party to contribute under this subdivision (f) exceed the amount that such
indemnifying party would have been obligated to pay by way of indemnification if the
indemnification provided for under subdivisions (a) or (b) of this Section 2.6 had been
available under the circumstances.

              The
Company and the Holders agree that it would not be just and equitable if contribution
pursuant to this subdivision (f) were determined by pro rata allocation
(even if a Participating Holder and any underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth in the preceding sentence and subdivision (c) of this Section
2.6, any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.

15

              Notwithstanding
the provisions of this subdivision (f), neither a Participating Holder nor underwriter
shall be required to contribute any amount in excess of the amount by which (i) in
the case of a Participating Holder, the net proceeds received from the sale of Registrable
Securities or (ii) in the case of an underwriter, the total price at which the
Registrable Securities purchased by it and distributed to the public were offered to the
public exceeds, in any such case, the amount of any damages that a Participating Holder or
such underwriter has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.

     2.7     Adjustments Affecting
Registrable Securities. The Company will not effect or permit to occur any combination
or subdivision of shares which would adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in any registration of its
securities contemplated by this Section 2 or the marketability of such Registrable
Securities under any such registration.

ARTICLE III -

RULES 144 AND 144A

               The
Company shall use its best efforts to file in a timely manner the reports required to be
filed by it under the Securities Act and the Exchange Act (including but not limited to
the reports under sections 13 and 15(d) of the Exchange Act referred to in subparagraph
(c) of Rule 144 adopted by the Commission under the Securities Act) and the rules and
regulations adopted by the Commission thereunder to the extent required from time to time
to enable Holders to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or (b) any similar
rule or regulation hereafter adopted by the Commission. Upon the request of any Holder,
the Company will deliver to such Holder a written statement as to whether it has complied
with the requirements of this Section 4.

ARTICLE IV -

AMENDMENTS AND WAIVERS

               This
Agreement may be amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company shall have
obtained the written consent to such amendment, action or omission to act, of the Holders
of a majority of the Registrable Securities. Holders shall be bound by any consent
authorized by this Article IV, whether or not such Holders have given their consent.

ARTICLE V

16

MISCELLANEOUS

     5.1     Nominees for
Beneficial Owners. In the event that any Registrable Securities are held by a nominee
for the beneficial owner thereof, the beneficial owner thereof may, at its election, be
treated as the holder of such Registrable Securities for purposes of any request or other
action by any holder or holders of Registrable Securities pursuant to this Agreement or
any determination of any number or percentage of shares of Registrable Securities held by
any holder or holders of Registrable Securities contemplated by this Agreement. If the
beneficial owner of any Registrable Securities so elects, the Company may require
assurances reasonably satisfactory to it of such owner's beneficial ownership of such
Registrable Securities.

     5.2     Notices. Except
as otherwise provided in this Agreement, all notices, requests and other communications to
any Person provided for hereunder shall be in writing and shall be given to such Person (a)
in the case of the Company, addressed in the manner set forth below, or (b) in the
case of any other Person, at the address that such Person shall have furnished to the
Company in writing.

If to the Company:

Robert F. Murphy, Esq.

Sun Healthcare Group, New Mexico 97109

Telephone: (505) 821-3355

Fascimile: (505) 822-4747

with a copy to:











If to the Initial Holders:

[Address]

Facsimile:

Attn:

with a copy to:

17











[                               ]

[Address]

Facsimile:

with a copy to:











Each such notice, request or other communication shall be effective (i) if given
by mail, 72 hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (ii) if given by any other means
(including, without limitation, by air courier), when delivered at the address specified
above, provided that any such notice, request or communication to a Holder shall
not be effective until receipt is acknowledged in a writing reasonably satisfactory to
both parties.

     5.3     Assignment. This
Agreement shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors and assigns. The registration rights of any
Holder under this Agreement with respect to any Registrable Securities may be transferred
and assigned provided, however, that (a) such assignee (together with its affiliates) owns
at least 150,000 shares of Registrable Securities or (b) such assignee is an affiliate of
such Holder and provided further that no such transfer or assignment of any registration
rights under this Agreement shall be binding upon or obligate the Company under this
Agreement to any such transferee or assignee unless and until the Company shall have
received notice of such transfer or assignment and a written agreement of the transferee
or assignee to by bound by the terms of this Agreement.

     5.4     Descriptive Headings.
The descriptive headings of the several sections and paragraphs of this Agreement are
inserted for reference only and shall not limit or otherwise affect the meaning hereof.

     5.5     GOVERNING LAW.
THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE
PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO THE
PRINCIPLES OF CONFLICTS OF LAWS. THE PARTIES HERETO WAIVE THEIR RIGHT TO A JURY TRIAL WITH
RESPECT TO DISPUTES HEREUNDER.

18

     5.6     Counterparts.
This Agreement may be executed simultaneously in any number of counterparts, each of which
shall be deemed an original, but all such counterparts shall together constitute one and
the same instrument.

     5.7     Entire Agreement.
This Agreement embodies the entire agreement and understanding between the Company and
Initial Holder relating to the subject matter hereof and supersedes all prior agreements
and understandings relating to such subject matter.

     5.8     SUBMISSION TO
JURISDICTION. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE
SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE
COMPANY HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND APPELLATE COURTS FROM ANY
THEREOF. THE COMPANY HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF
THE AFOREMENTIONED COURTS IN ANY ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF TO
THE COMPANY BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO
THE COMPANY AT ITS ADDRESS SPECIFIED IN SECTION 5.2. THE COMPANY HEREBY IRREVOCABLY WAIVES
ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR
BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS.

     5.9     Severability. If
any provision of this Agreement, or the application of such provisions to any Person or
circumstance, shall be held invalid, illegal or unenforceable the remainder of this
Agreement, or the application of such provision to Persons or circumstances other than
those to which it is held invalid, illegal or unenforceable, shall not be affected
thereby.

19

          IN WITNESS WHEREOF, the
parties have caused this Agreement to be executed and delivered by their respective
officers thereunto duly authorized as of the date first above written.

SUN HEALTHCARE GROUP, INC.

By

Title:

By

Title:



Name:

20

SCHEDULE I

INITIAL HOLDERS

21

WARRANT AGREEMENT

by and between

SUN HEALTHCARE GROUP, INC.

and

__________________________________

as Warrant Agent

500,000 Warrants

Dated as of
    , 2002

TABLE OF CONTENTS

Page

Article 1
     DEFINITIONS
1

Article 2
     ISSUANCE OF WARRANTS
3

2.1
Initial Issuance
3

2.2
Initial Share Amount
3

2.3
Form of Warrant Certificates
4

2.4
Execution of Warrant Certificates
4

2.5
Countersignature of Warrant Certificates
4

Article 3
     EXERCISE PERIOD
4

Article 4
     EXERCISE OF WARRANTS
5

4.1
The Exercise Price
5

4.2
Manner of Exercise
5

4.3
When Exercise Effective
5

4.4
Delivery of Certificates, Etc
5

4.5
Fractional Shares
6

Article 5
     ADJUSTMENT OF THE AMOUNT OF
COMMON STOCK     ISSUABLE AND THE EXERCISE PRICE UPON EXERCISE
7

5.1
Adjustment for Change in Capital Stock
7

5.2
Distributions
7

5.3
Adjustments for Mergers and Consolidations
8

5.4
No De Minimis Adjustments; Calculation to Nearest Cent and
One-hundredth of Share
8

5.5
Notice of Adjustment; Warrant Agent's Disclaimer
8

5.6
Other Notices
8

5.7
No Change in Warrant Terms on Adjustment
9

Article 6
MERGER, CONSOLIDATION, ETC.
9

Article 7
NOTIFICATION OF CERTAIN EVENTS
9

7.1
Corporate Action
9

7.2
Available Information
10

Article 8
RESERVATION OF STOCK
10

Article 9
LOSS OR MUTILATION
11

Article 10
WARRANT REGISTRATION
11

i

TABLE OF CONTENTS

Page

10.1
Registration
11

10.2
Transfer or Exchange
12

12.3
Valid and Enforceable
12

10.4
Endorsement
12

10.5
No Service Charge
12

10.6
Treatment of Holders of Warrant Certificates
12

10.7
Cancellation
12

Article 11
WARRANT AGENT
13

11.1
Obligations Binding
13

11.2
No Liability
13

11.3
Instructions
13

11.4
Agents
13

11.5
Cooperation
14

11.6
Agent Only
14

11.7
Right to Counsel
14

11.8
Compensation
14

11.9
Accounting
14

11.10
No Conflict
14

11.11
Resignation; Termination
15

11.12
Change of Warrant Agent
15

11.13
Successor Warrant Agent
16

Article 12
REMEDIES, ETC.
16

12.1
Remedies
16

12.2
Warrant Holder Not Deemed a Stockholder
16

12.3
Right of Action
16

Article 13
MISCELLANEOUS
16

13.1
Notices
16

13.2
Governing Law and Consent to Forum
17

13.3
Benefits of this Agreement
17

13.4
Agreement of Holders of Warrant Certificates
17

13.5
Counterparts
18

13.6
Amendments
18

ii

TABLE OF CONTENTS

Page

13.7
Consent to Jurisdiction
18

13.8
Headings
18

EXHIBITS

Exhibit A: Form of Warrant Certificate

iii

WARRANT AGREEMENT

          THIS WARRANT AGREEMENT is
made and entered into as of _________________ ___, 2002 by and between Sun Healthcare
Group, Inc., a Delaware corporation (the "Company"), and
_____________________________, as Warrant Agent (the "Warrant Agent").

WITNESSETH:

          WHEREAS, in connection with
the financial restructuring of the Company, pursuant to the Plan of Reorganization, of the
Company, and certain of its subsidiaries, dated as of November 7, 2001 (as amended, the
"Plan"), the Company is issuing warrants which are exercisable to purchase up to
500,000 shares of Common Stock (as defined herein), subject to adjustment as provided
herein (the "Warrants"), to the holders of certain allowed claims of the Company
(the "Claims") in partial exchange for such Claims and in accordance with the
Plan;

          WHEREAS, the Company
desires the Warrant Agent to act on behalf of the Company and the Warrant Agent is willing
to act, in connection with the issuance, transfer, exchange, replacement and exercise of
the Warrant Certificates (as defined herein) and other matters as provided herein; and

          WHEREAS, the Company
desires to enter into this Agreement to set forth the terms and conditions of the Warrants
and the rights of the holders thereof;

          NOW, THEREFORE, in
consideration of the foregoing premises and of the mutual agreements set forth herein, the
Company and the Warrant Agent hereby agree as follows:

ARTICLE I

DEFINITIONS

As used herein, the following terms have the following respective meanings:

          "Agreement"
means this Warrant Agreement, as the same may be amended or modified from time to time
hereafter.

          "Bankruptcy Court"
means the United States Bankruptcy Court for the District of Delaware that has
jurisdiction of the chapter 11 case of the Company under title 11 of the United States
Code.

          "Business Day"
means any day other than a Saturday or a Sunday or a day on which commercial banking
institutions in New York City, New York are authorized or required by law to be closed; provided,
that, in determining the period within which certificates or Warrants are to be issued
and delivered at a time when shares of Common

Stock (or Other Securities) are listed or admitted to trading on any national
securities exchange or in the over-the-counter market and in determining the Fair Value of
any securities listed or admitted to trading on any national securities exchange or in the
over-the-counter market, "Business Day" shall mean any day when the principal
exchange on which such securities are then listed or admitted to trading is open for
trading or, if such securities are traded in the over-the-counter market in the United
States, such market is open for trading; and provided, further, that any
reference in this Agreement to "days" (unless Business Days are specified) shall
mean calendar days.

          "Cashless Exercise
Ratio" means a fraction, the numerator of which is the excess of the Fair Value
per share of Common Stock on the Exercise Date over the Exercise Price per share as of the
Exercise Date and the denominator of which is the Fair Value per share of the Common Stock
on the Exercise Date.

          "Claims"
has the meaning specified in the recitals hereto.

          "Commission"
means the Securities and Exchange Commission or any other Federal agency at the time
administering the Securities Act of 1933, as amended, or the Exchange Act, whichever is
the relevant statute for the particular purpose.

          "Common Stock"
means the Company's Common Stock, par value $0.01 per share.

          "Company"
has the meaning specified in the preamble hereof.

          "Exchange Act"
means the Securities Exchange Act of 1934, or any successor Federal statute, and the rules
and regulations of the Commission thereunder, all as the same shall be amended and in
effect at the time. Any reference herein to a particular section of the Securities
Exchange Act of 1934 shall include a reference to the comparable section, if any, of any
such successor Federal statute.

          "Exercise Date"
means, for a given Warrant, the day on which such Warrant is exercised pursuant to Article
4.

          "Exercise Period"
means the period commencing on [the Effective Date] (as defined in the Plan) and ending at
5:00 P.M., New York time, on [the third anniversary of the Effective Date].

          "Exercise Price"
has the meaning specified in Section 4.1 hereof.

          "Fair Value"
means (i) with respect to Common Stock or any Other Security, in each case, if such
security is listed on one or more stock exchanges or quoted on the National Market System
or Small Cap Market of NASDAQ (the "NASDAQ Market"), the average of the closing
or last reported sales prices of a share of Common Stock or, if an Other Security in the
minimum denomination in which such security is traded, on the primary national or regional
stock exchange on which such security is listed or on the NASDAQ Market if quoted thereon
or (ii) if the Common Stock or Other Security, as the case may be, is not so listed or
quoted but is traded in the over-the-counter market (other

2

than the NASDAQ Market), the average of the closing bid and asked prices of a share of
such Common Stock or Other Security, in each case quoted for the 30 Business Days (or such
lesser number of Business Days as such Common Stock (or Other Security) shall have been so
listed, quoted or traded) next preceding the date of measurement; provided, however,
that if no such sales price or bid and asked prices have been quoted during the preceding
30-day period or there is otherwise no established trading market for such security, then
"Fair Value" means the value of such Common Stock or Other Security as
determined reasonably and in good faith by the Board of Directors of the Company. Anything
herein to the contrary notwithstanding, in case the Company shall issue any shares of
Common Stock, rights, options, or Other Securities in connection with the acquisition by
the Company of the stock or assets of any other Person or the merger of any other Person
into the Company, the Fair Value of the Common Stock or Other Securities so issued shall
be determined as of the date the number of shares of Common Stock, rights, options or
Other Securities was determined (as set forth in a written agreement between the Company
and the other party to the transaction) rather than on the date of issuance of such shares
of Common Stock, rights, options or Other Securities.

          "Original Issue
Date" means the Effective Date (as defined in the Plan).

          "Other Securities"
means any stock (other than Common Stock) and other securities of the Company or any other
Person (corporate or otherwise) that the holders of the Warrants at any time shall be
entitled to receive or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or that at any time shall be issuable or shall have been
issued in exchange for or in replacement of Common Stock or Other Securities.

          "Other Securities"
has the meaning specified in Section 5.2 hereof.

          "Person"
means any individual, partnership, association, joint venture, corporation, limited
liability company, business trust, unincorporated organization, government or department,
agency or subdivision thereof, or other person or entity.

          "Plan" has
the meaning specified in the recitals hereto.

          "Warrant Agent"
has the meaning specified in the preamble hereof.

          "Warrant
Certificates" has the meaning specified in Section 2.3 hereof.

          "Warrants"
has the meaning set forth in the recitals hereto.

ARTICLE 2

ISSUANCE OF WARRANTS

          Section 2.1  Initial
Issuance. On the Original Issue Date, the Company shall, pursuant to the Plan, deliver
to the Company's disbursing agent under the Plan for re-

3

distribution to the holders of the certain claims against the Company a global
certificate for an aggregate of 500,000 Warrants.

          2.2  Initial
Share Amount. The number of shares of Common Stock purchasable upon exercise of the
Warrants shall be one (1) share of Common Stock to one (1) Warrant, subject to adjustments
from and after the Original Issue Date as provided in Article 5 of this Agreement.

          2.3  Form of
Warrant Certificates. The Warrants shall be evidenced by certificates substantially in
the form attached hereto as Exhibit A (the "Warrant Certificates") or
may, if the Corporation so directs, be issued in book-entry form. Each Warrant Certificate
shall be dated as of the Original Issue Date or, in the event of a division, exchange,
substitution or transfer of any of the Warrants, on the date of such event. The Warrant
Certificate may have such further legends and endorsements stamped, printed, lithographed
or engraved thereon as the Company may deem appropriate and as are not inconsistent with
the provisions of this Agreement, or as may be required to comply with any law or with any
rule or regulation pursuant thereto or with any rule or regulation of any securities
exchange, market or trading facility on which the Warrants may be listed or admitted for
trading.

          2.4  Execution
of Warrant Certificates. Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, President, any Senior Vice
President, any Vice President, Treasurer or Secretary, either manually or by facsimile
signature printed thereon. In case any such officer of the Company whose signature shall
have been placed upon any Warrant Certificate shall cease to be such officer of the
Company before countersignature by the Warrant Agent or issuance and delivery thereof,
such Warrant Certificate nevertheless may be countersigned by the Warrant Agent and issued
and delivered with the same force and effect as though such person had not ceased to be
such officer of the Company.

          The term "holder"
or "holder of a Warrant Certificate" as used herein shall mean any Person in
whose name at the time any Warrant Certificate shall be registered upon the books to be
maintained by the Warrant Agent for that purpose.

          2.5  Countersignature
of Warrant Certificates. Warrant Certificates shall be manually countersigned by an
authorized signatory of the Warrant Agent and shall not be valid for any purpose unless so
countersigned. Such manual countersignature shall constitute conclusive evidence of such
authorization. No Warrant Certificate shall be valid for any purpose, and no Warrant
evidenced thereby shall be exercisable, until such Warrant Certificate has been
countersigned by the manual signature of the Warrant Agent. The Warrant Agent is hereby
authorized to countersign, in accordance with the provisions of this Section 2.5, and
deliver any new Warrant Certificates, as directed by the Company pursuant to Section 2.1
and as and when required pursuant to the provisions of Articles 9 and 10. Each Warrant
Certificate shall, when manually countersigned by an authorized signatory of the Warrant
Agent, entitle the registered holder thereof to exercise the rights as the holder of the
number of Warrants set forth thereon, subject to the provisions of this Agreement.

4

ARTICLE 3

EXERCISE PERIOD

          Each Warrant shall entitle
the holder thereof to purchase from the Company one (1) share of Common Stock (subject to
the adjustments provided herein), at any time during the Exercise Period. Any Warrant not
exercised during the Exercise Period shall become void, and all rights of the holder of
the Warrant Certificate evidencing such Warrant under the Warrant Certificate or this
Agreement shall cease.

ARTICLE 4

EXERCISE OF WARRANTS

          4.1  The
Exercise Price. The exercise price of each Warrant is $76.00 per share of Common Stock
(the "Exercise Price"). The Exercise Price is subject to adjustment pursuant to
Article 5 hereof.

          4.2  Manner of
Exercise. (a)  During the Exercise Period, all or any whole number of
Warrants represented by a Warrant Certificate may be exercised by the registered holder
thereof during normal business hours on any Business Day, by surrendering such Warrant
Certificate, with the subscription form set forth therein duly completed and executed by
such holder, by hand, by overnight courier or by mail to the Warrant Agent at its office
addressed to ___________________________________
_______________________________________________________, New York, New York ________. Such
Warrant Certificate shall be accompanied by payment in full in respect of each Warrant
that is exercised, which shall be made either by (i) certified or official bank or bank
cashier's check payable to the order of the Company, or by wire transfer of immediately
available funds to an account designated by the Warrant Agent for the benefit of the
Company, or (ii) without the payment of cash, by reducing the number of shares of Common
Stock obtainable upon the exercise of a Warrant so as to yield a number of shares of
Common Stock upon the exercise of such Warrant equal to the product of (a) the number of
shares of Common Stock issuable as of the Exercise Date upon the exercise of such Warrant
(if payment of the Exercise Price were being made in cash) and (b) the Cashless Exercise
Ratio. An exercise of a Warrant in accordance with the immediately preceding sentence is
herein called a "Cashless Exercise". Upon surrender of a Warrant Certificate
representing more than one Warrant in connection with the holder's option to elect a
Cashless Exercise, the number of shares of Common Stock deliverable upon a Cashless
Exercise shall be equal to the number of shares of Common Stock issuable upon the exercise
of Warrants that the Holder specifies are to be exercised pursuant to a Cashless Exercise
multiplied by the Cashless Exercise Ratio. Upon such surrender and payment prior to the
expiration of the Exercise Period, such holder shall thereupon be entitled to receive the
number of duly authorized, validly issued, registered, fully paid and nonassessable shares
of Common Stock (or Other Securities) determined as provided in Articles 2 and 3, and as
and if adjusted pursuant to Article 5.

5

          4.3  When
Exercise Effective. Each exercise of any Warrant pursuant to Section 4.2 shall be
deemed to have been effected immediately prior to the close of business on the Business
Day on which the Warrant Certificate representing such Warrant, duly executed, with
accompanying payment, shall have been delivered as provided in Section 4.2, and at such
time the Person or Persons in whose name or names the certificate or certificates for
Common Stock (or Other Securities) shall be issuable upon such exercise as provided in
Section 4.4 shall be deemed to have become the holder or holders of record thereof.

          4.4  Delivery
of Certificates, Etc. (a)  As promptly as practicable after the exercise of
any Warrant, and in any event within three (3) Business Days thereafter, the Company at
its expense (other than as to payment of transfer taxes which will be paid by the holder)
will cause to be issued and delivered to such holder, or as such holder may otherwise
direct in writing (subject to Article 9),

     (i)  a certificate or certificates for the
number of shares of Common Stock (or Other Securities) to which such holder is entitled,
and
     (ii)  if less than all the Warrants represented
by a Warrant Certificate are exercised, a new Warrant Certificate or Certificates of the
same tenor and for the aggregate number of Warrants that were not exercised, executed and
countersigned in accordance with Sections 2.4 and 2.5.

          (b)  The Warrant
Agent shall countersign any new Warrant Certificate, register it in such name or names as
may be directed in writing by such holder, and shall deliver it to the Person entitled to
receive the same in accordance with this Section 4.4. The Company, whenever required by
the Warrant Agent, will supply the Warrant Agent with Warrant Certificates executed on
behalf of the Company for such purpose.

          (c)  Upon any
exercise of Warrants, the Warrant Agent shall, from time to time, as promptly as
practicable, advise the Treasurer of the Company or his or her designee of (i) the
number of Warrants exercised, (ii) the instruction of each holder of the Warrant
Certificates evidencing such Warrants with respect to delivery of the Common Stock to
which such holder is entitled upon such exercise, (iii) the timing of delivery of
Warrant Certificates evidencing the balance, if any, of the Warrants remaining after such
exercise, and (iv) such other information as the Company shall reasonably require.

          (d)  The Company
shall not be required to pay any stamp or other tax or other governmental charge required
to be paid in connection with any transfer involved in the issue of the Common Stock to a
Person other than a registered holder; and in the event that any such transfer is
involved, the Company shall not be required to issue or deliver any Warrant Certificate or
share of Common Stock until such tax or other charge shall have been paid or it has been
established to the Company's reasonable satisfaction that no such tax or other charge is
due.

6

          4.5  Fractional
Shares. No fractional shares of Common Stock (or Other Securities) shall be issued
upon the exercise of any Warrant. If more than one Warrant Certificate shall be delivered
for exercise at one time by the same holder, the number of full shares or securities that
shall be issuable upon exercise shall be computed on the basis of the aggregate number of
Warrants exercised. As to any fraction of a share of Common Stock (or Other Securities),
the Company shall pay a cash adjustment in respect thereto in an amount equal to the
product of the Fair Value per share of Common Stock (or Other Securities) as of the
Business Day next preceding the date of such exercise multiplied by such fraction of a
share.

ARTICLE 5

ADJUSTMENT OF THE AMOUNT OF COMMON STOCK

ISSUABLE AND THE EXERCISE PRICE UPON EXERCISE

          5.1  Adjustment
for Change in Capital Stock. If the Company shall (i) declare or pay a dividend
on its outstanding shares of Common Stock or make a distribution to holders of its Common
Stock, in either case in shares of Common Stock, (ii) subdivide its outstanding
shares of Common Stock into a greater number of shares of Common Stock, (iii) combine
its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or
(iv) issue by reclassification of its shares of Common Stock other securities of the
Company, then the number of shares of Common Stock issuable for each Warrant and the
Exercise Price in effect immediately prior thereto shall be adjusted so that the holder of
any Warrants thereafter exercised shall be entitled to receive the number and kind of
shares of Common Stock or other securities that the holder would have owned or been
entitled to receive after the happening of any of the events described above had such
Warrants been exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this Section 5.1 shall become
effective on the date of the dividend payment, subdivision, combination or issuance
retroactive to the record date with respect thereto, if any, for such event. Such
adjustment shall be made successively.

          5.2  Distributions.
If after the date hereof the Company shall distribute to all holders of its shares of
Common Stock evidences of its indebtedness, shares of another class of capital stock
("Other Securities"), assets (excluding cash distributions made as a dividend
payable out of earnings or out of surplus legally available for dividends under the laws
of the jurisdiction of incorporation of the Company) or rights to subscribe to shares of
Common Stock, then in each such case, unless the Company elects to reserve such
indebtedness, assets, rights or shares for distribution to each holder of a Warrant upon
the exercise of the Warrants so that such holder will receive upon such exercise, in
addition to the shares of Common Stock to which such holder is entitled, the amount and
kind of such indebtedness, assets, rights or shares which such holder would have received
if such holder had, immediately prior to the record date for the distribution of such
indebtedness, assets, rights or shares, exercised the Warrants and received Common Stock,
the Exercise Price in effect immediately prior to such distribution shall be decreased to
an amount determined by multiplying such Exercise Price by a fraction, the numerator of
which is the Fair Value of a share of the Common Stock at the date of such

7

distribution less the fair value of the evidences of indebtedness, Other Securities,
assets or subscription rights as the case may be, so distributed (as determined in good
faith by the Board of Directors of the Company, whose determination shall be conclusive,
and described in a statement filed with the Warrant Agent) and the denominator of which is
the Fair Value of a share of Common Stock at such date. Such adjustment shall be made
whenever any such distribution is made, and shall become effective retroactively on the
date immediately after the record date for the determination of stockholders entitled to
receive such distribution.

          5.3  Adjustments
for Mergers and Consolidations. In case the Company, after the date hereof, shall
merge or consolidate (other than a merger or consolidation in which the Company is the
continuing corporation and which does not result in any change in the shares of Common
Stock) with another Person, then, in the case of any such transaction, proper provision
shall be made so that, upon the basis and terms and in the manner provided in this Warrant
Agreement, the holders of the Warrants, upon the exercise thereof at any time after the
consummation of such transaction (subject to the Exercise Period), shall be entitled to
receive (at the aggregate Exercise Price in effect at the time of the transaction for all
Common Stock or Other Securities issuable upon such exercise immediately prior to such
consummation), in lieu of the Common Stock or Other Securities issuable upon such exercise
prior to such consummation, the greatest amount of securities, cash or other property to
which such holder would have been entitled as a holder of Common Stock (or Other
Securities) upon such consummation if such holder had exercised the rights represented by
the Warrants held by such holder immediately prior thereto.

          5.4  No De
Minimis Adjustments; Calculation to Nearest Cent and One-hundredth of Share. No
adjustment in the Exercise Price shall be required under this Article 5 unless such
adjustment would require an increase or decrease of at least one percent (1%) of such
price. All calculations under this Article 5 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be.

          5.5  Notice of
Adjustment; Warrant Agent's Disclaimer.   Whenever the Exercise Price and
securities issuable shall be adjusted as provided in this Article 5, the Company shall
forthwith file with the Warrant Agent a statement, signed by the Chairman of the Board,
Chief Executive Officer, President, any Senior Vice President, any Vice President, the
Treasurer or Secretary of the Company, stating in detail the facts requiring such
adjustment, the method of calculation thereof, the Exercise Price that will be effective
after such adjustment and the impact of such adjustment on the number and kind of
securities issuable upon exercise of the Warrants. The Company shall also cause the
Warrant Agent to mail (first class, postage prepaid) a notice setting forth any such
adjustments to each registered holder of Warrants at its last address appearing on the
Warrant register.

          (b)  Except as
provided in paragraph (a) above, the Warrant Agent shall have no duty with respect to any
statement filed with it except to keep the same on file and available for inspection by
registered holders of Warrants during reasonable business hours. The Warrant Agent shall
not at any time be under any duty or responsibility to

8

any holder of a Warrant to determine whether any facts exist which may require any
adjustment to the Exercise Price or securities issuable, or with respect to the nature or
extent of any adjustment of the Exercise Price or securities issuable when made or with
respect to the method employed in making such adjustment. The Warrant Agent shall not be
responsible for the Company's failure to comply with any provision of this Article 5.

          5.6  Other
Notices. In case the Company after the date hereof shall propose to take any action of
the type described in Section 5.1 or 5.2 of this Article 5, the Company shall give
notice to the Warrant Agent and to each registered holder of a Warrant in the manner set
forth in subsection 5.5 of this Article 5, which notice shall specify the date on which a
record shall be taken with respect to any such action. Such notice shall be given at least
ten (10) days prior to the record date with respect thereto. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of any such action. Where
appropriate, such notice may be given in advance and may be included as part of a notice
required to be mailed under the provision of subsection 5.5 of this Article 5.

          5.7  No Change
in Warrant Terms on Adjustment. Irrespective of any adjustments in the Exercise Price
or the number of shares of Common Stock (or any inclusion of Other Securities) issuable
upon exercise, Warrants theretofore or thereafter issued may continue to express the same
prices and number of shares as are stated in the similar Warrants issuable initially, or
at some subsequent time, pursuant to this Agreement, and the Exercise Price and such
number of shares issuable upon exercise specified thereon shall be deemed to have been so
adjusted.

ARTICLE 6

MERGER, CONSOLIDATION, ETC.

          Notwithstanding anything
contained herein to the contrary, the Company will not effect a merger or consolidation
unless, prior to the consummation of such transaction, each Person (other than the
Company) which may be required to deliver any Common Stock, Other Securities, securities,
cash or property upon the exercise of this Warrant as provided herein shall assume, by
written instrument delivered to the Warrant Agent, the obligations of the Company under
this Warrant Agreement and under each of the Warrants, including, without limitation, the
obligation to deliver such shares of Common Stock, Other Securities, cash or property as
may be required pursuant to Article 5 hereof or the certificate or articles of
incorporation or other constituent document, shall be equivalent to the adjustments
provided for in Article 5 hereof.

9

ARTICLE 7

NOTIFICATION OF CERTAIN EVENTS

          7.1  Corporate
Action. In the event of:

          (a)     any
taking by the Company of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any dividend
(excluding cash distributions made as a dividend payable out of earnings or out of surplus
legally available for dividends under the laws of the jurisdiction of incorporation of the
Company) or other distribution of any kind, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or property, or
to receive any other right or interest of any kind; or

          (b)     (i) any
capital reorganization of the Company, (ii) any reclassification of the capital
shares of the Company (other than a change in par value or from par value to no par value
or from no par value to par value or as a result of a split-up or combination),
(iii) the consolidation or merger of the Company with or into any other corporation
(other than a consolidation or merger in which the Company is the continuing corporation
and which does not result in any change in the shares of Common Stock), (iv) the sale
or transfer of the properties and assets of the Company as, or substantially as, an
entirety to another Person, or (v) an exchange offer for Common Stock (or Other
Securities); or

          (c)     the
voluntary or involuntary dissolution, liquidation, or winding up of the Company,

the Company shall cause to be filed with the Warrant Agent and mailed to each holder of
a Warrant a notice specifying (x) the date or expected date on which any such record
is to be taken for the purpose of such dividend, distribution or right, and the amount and
character of any such dividend, distribution or right or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to such
dividend, distribution, or right are to be determined, and the amount and character of
such dividend, distribution or right, or (y) the date or expected date on which any
such reorganization, reclassification, consolidation, merger, sale, transfer, exchange
offer, dissolution, liquidation or winding up is expected to become effective, and the
time, if any such time is to be fixed, as of which holders of record of Common Stock (or
Other Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for the securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, transfer, exchange offer, dissolution,
liquidation or winding up. Such notice shall be delivered not less than twenty (20) days
prior to such date therein specified, in the case of any such date referred to in clause
(x) of the preceding sentence, and not less than thirty (30) days prior to such date
therein specified, in the case of any such date referred to in clause (y) of the preceding
sentence. Failure to give such notice within the time provided or any defect therein shall
not affect the legality or validity of any such action.

10

          7.2  Available
Information. The Company shall promptly file with the Warrant Agent copies of its
annual reports and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may by rules and regulations prescribe)
that the Company is required to file with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act. If the Company is not required to make such filings, the Company
shall promptly deliver to the Warrant Agent copies of any annual, quarterly or other
reports and financial statements that are generally provided to holders of equity or debt
securities of the Company (other than bank or similar institutional debt) in their
capacity as holders of such securities.

ARTICLE 8

RESERVATION OF STOCK

          The Company shall at all
times reserve and keep available, free from preemptive rights, out of its authorized but
unissued Common Stock (or out of authorized Other Securities), solely for issuance and
delivery upon exercise of Warrants, the full number of shares of Common Stock (and Other
Securities) from time to time issuable upon the exercise of all Warrants and any other
outstanding warrants, options or similar rights, from time to time outstanding. All shares
of Common Stock (and Other Securities) shall be duly authorized and, when issued upon such
exercise, shall be duly and validly issued, and (in the case of shares) fully paid and
nonassessable, and free from all taxes, liens, charges, security interests, encumbrances
and other restrictions created by or through the Company.

ARTICLE 9

LOSS OR MUTILATION

          Upon receipt by the Company
and the Warrant Agent of evidence reasonably satisfactory to them of the ownership of and
the loss, theft, destruction or mutilation of any Warrant Certificate and of an indemnity
bond reasonably satisfactory to them in form or amount, and (in the case of mutilation)
upon surrender and cancellation thereof, then, in the absence of notice to the Company or
the Warrant Agent that the Warrants represented thereby have been acquired by a bona fide
purchaser, the Company shall execute and deliver to the Warrant Agent and, upon the
Company's request, an authorized signatory of the Warrant Agent shall manually countersign
and deliver, to the registered holder of the lost, stolen, destroyed or mutilated Warrant
Certificate, in exchange for or in lieu thereof, a new Warrant Certificate of the same
tenor and for a like aggregate number of Warrants. Upon the issuance of any new Warrant
Certificate under this Article 9, the Company may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the reasonable fees and expenses of the Warrant Agent) in
connection therewith. Every new Warrant Certificate executed and delivered pursuant to
this Article 9 in lieu of any lost, stolen or destroyed Warrant Certificate shall be
entitled to the same benefits of this Agreement equally and proportionately with any and
all other Warrant Certificates, whether or not the allegedly lost, stolen or destroyed
Warrant

11

Certificate shall be at any time enforceable by anyone. The provisions of this Article
9 are exclusive and shall preclude (to the extent lawful) all other rights or remedies
with respect to the replacement of mutilated, lost, stolen or destroyed Warrant
Certificates.

ARTICLE 10

WARRANT REGISTRATION

          10.1  Registration.
The Warrant Certificates shall be issued in registered form only and shall be registered
in the names of the record holders of the Warrant Certificates to whom they are to be
delivered. The Warrant Agent shall maintain or cause to be maintained a register in which,
subject to such reasonable regulations as it may prescribe, the Warrant Agent shall
provide for the registration of Warrants and of transfers or exchanges of Warrant
Certificates as provided in this Agreement. Such register shall be maintained at the
office of the Warrant Agent located at the address therefor as provided in Section 13.1.
Such register shall be open for inspection upon notice at all reasonable times by the
Warrant Agent and each holder of a Warrant.

          10.2  Transfer
or Exchange. At the option of the holder, Warrant Certificates may be exchanged or
transferred for other Warrant Certificates for a like aggregate number of Warrants, upon
surrender of the Warrant Certificates to be exchanged at the office of the Warrant Agent
maintained for such purpose at the address therefor as provided in Section 13.1, and upon
payment of the charges herein provided. Whenever any Warrant Certificates are so
surrendered for exchange or transfer, the Company shall execute, and an authorized
signatory of the Warrant Agent shall manually countersign and deliver, the Warrant
Certificates that the holder making the exchange is entitled to receive.

          10.3  Valid
and Enforceable. All Warrant Certificates issued upon any registration of transfer or
exchange of Warrant Certificates shall be the valid obligations of the Company, evidencing
the same obligations, and entitled to the same benefits under this Agreement, as the
Warrant Certificates surrendered for such registration of transfer or exchange.

          10.4  Endorsement.
Every Warrant Certificate surrendered for registration of transfer or exchange shall (if
so required by the Company or the Warrant Agent) be duly endorsed, or be accompanied by an
instrument of transfer in form reasonably satisfactory to the Company and the Warrant
Agent and duly executed by the registered holder thereof or such holder's officer or
representative duly authorized in writing.

          10.5  No
Service Charge. No service charge shall be made to the Warrant Holder for any
registration of transfer or exchange of Warrant Certificates.

          10.6  Treatment
of Holders of Warrant Certificates. The Company and the Warrant Agent may treat the
registered holder of a Warrant Certificate as the absolute owner

12

thereof for any purpose and as the person entitled to exercise the rights represented
by the Warrants evidenced thereby, any notice to the contrary notwithstanding.

          10.7  Cancellation.
Any Warrant Certificate surrendered for registration of transfer, exchange or the exercise
of the Warrants represented thereby shall, if surrendered to the Company, be delivered to
the Warrant Agent, and all Warrant Certificates surrendered or so delivered to the Warrant
Agent shall be promptly cancelled by the Warrant Agent. Any such Warrant Certificate shall
not be reissued and, except as provided in this Article 10 in case of an exchange or
transfer, in Article 9 in case of a mutilated Warrant Certificate and in Article 4 in case
of the exercise of less than all the Warrants represented thereby, no Warrant Certificate
shall be issued hereunder in lieu thereof. The Warrant Agent shall deliver to the Company
from time to time or otherwise dispose of such cancelled Warrant Certificates in a manner
reasonably satisfactory to the Company.

ARTICLE 11

WARRANT AGENT

          11.1  Obligations
Binding. The Warrant Agent undertakes the duties and obligations imposed by this
Agreement upon the terms and conditions set forth in this Article 11. The Company, and the
holders of Warrants by their acceptance thereof, shall be bound by all of such terms and
conditions.

          11.2  No
Liability. The Warrant Agent shall not by countersigning Warrant Certificates or by
any other act hereunder be accountable with respect to or be deemed to make any
representations as to the validity or authorization of the Warrants or the Warrant
Certificates (except as to its countersignature thereon), as to the validity,
authorization or value (or kind or amount) of any Common Stock or of any Other Securities
or other property delivered or deliverable upon exercise of any Warrant, or as to the
purchase price of such Common Stock, securities or other property. The Warrant Agent shall
not (i) be liable for any recital or statement of fact contained herein or in the
Warrant Certificates or for any action taken, suffered or omitted by the Warrant Agent in
good faith in the belief that any Warrant Certificate or any other document or any
signature is genuine or properly authorized, (ii) be responsible for determining
whether any facts exist that may require any adjustment of the purchase price and the
number of shares of Common Stock purchasable upon exercise of Warrants, or with respect to
the nature or extent of any such adjustments when made, or with respect to the method of
adjustment employed, (iii) be responsible for any failure on the part of the Company
to issue, transfer or deliver any Common Stock or Other Securities or property upon the
surrender of any Warrant for the purpose of exercise or to comply with any other of the
Company's covenants and obligations contained in this Agreement or in the Warrant
Certificates or (iv) be liable for any act or omission in connection with this
Agreement except for its own bad faith, negligence or willful misconduct.

          11.3  Instructions.
The Warrant Agent is hereby authorized to accept instructions with respect to the
performance of its duties hereunder from the Chairman of the Board,

13

Chief Executive Officer, President, any Senior Vice President, any Vice President,
Treasurer or any Assistant Treasurer of the Company and to apply to any such officer for
advice or instructions. The Warrant Agent shall not be liable for any action taken,
suffered or omitted by it in good faith in accordance with the instructions of any such
officer, except to the extent that it is determined in a final judgment by a court of
competent jurisdiction that such action or omission resulted directly from the Warrant
Agent's negligence.

          11.4  Agents.
The Warrant Agent may execute and exercise any of the rights and powers hereby vested in
it or perform any duty hereunder either itself or by or through its attorneys, agents or
employees, provided reasonable care has been exercised in the selection and in the
continued employment of any such attorney, agent or employee. The Warrant Agent shall not
be under any obligation or duty to institute, appear in, or defend any action, suit or
legal proceeding in respect hereof, but this provision shall not affect the power of the
Warrant Agent to take such action as the Warrant Agent may consider proper. The Warrant
Agent shall promptly notify the Company in writing of any claim made or action, suit or
proceeding instituted against the Warrant Agent arising out of or in connection with this
Agreement.

          11.5  Cooperation.
The Company will perform, execute, acknowledge and deliver or cause to be performed,
executed, acknowledged and delivered all such further acts, instruments and assurances as
may reasonably be required by the Warrant Agent in order to enable the Warrant Agent to
carry out or perform its duties under this Agreement.

          11.6  Agent
Only. The Warrant Agent shall act solely as agent. The Warrant Agent shall not be
liable except for the performance of such duties as are specifically set forth herein, and
no implied covenants or obligations shall be read into this Agreement against the Warrant
Agent, whose duties and obligations shall be determined solely by the express provisions
hereof.

          11.7   Right
to Counsel. The Warrant Agent may at any time consult with legal counsel satisfactory
to it (who may be legal counsel for the Company), and the Warrant Agent shall incur no
liability or responsibility to the Company or to any Warrant holder for any action taken,
suffered or omitted by the Warrant Agent in good faith in accordance with the opinion or
advice of such counsel.

          11.8  Compensation.
The Company agrees to pay the Warrant Agent reasonable compensation for its services
hereunder to be agreed upon and to reimburse the Warrant Agent for its reasonable expenses
hereunder; and further agrees to indemnify the Warrant Agent and hold it harmless against
any and all liabilities, including, but not limited to, judgments, costs and reasonable
counsel fees, for anything done, suffered or omitted by the Warrant Agent in the execution
of its duties and powers hereunder, except for any such liabilities that arise as a result
of the Warrant Agent's bad faith, negligence or willful misconduct.

14

          11.9  Accounting.
The Warrant Agent shall account promptly to the Company with respect to Warrants exercised
and concurrently pay to the Company all moneys received by the Warrant Agent on behalf of
the Company on the purchase of shares of Common Stock (or Other Securities) through the
exercise of Warrants. The Warrant Agent shall advise the Company by telephone at the end
of each day on which a payment for the exercise of Warrants is received of the amount so
deposited to such account. The Warrant Agent shall promptly confirm such telephone advice
to the Company in writing.

          11.10  No
Conflict. The Warrant Agent and any stockholder, director, officer or employee of the
Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the
Company or become pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as fully and
freely as though it were not Warrant Agent under this Agreement. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.

          11.11  Resignation;
Termination. The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result of the
Warrant Agent's bad faith, negligence or willful misconduct), after giving thirty (30)
days' prior written notice to the Company. The Company may remove the Warrant Agent upon
thirty (30) days' written notice, and the Warrant Agent shall thereupon in like manner be
discharged from all further duties and liabilities hereunder, except as to liabilities
arising as a result of the Warrant Agent's bad faith, negligence or willful misconduct.
The Company shall cause to be mailed promptly (by first class mail, postage prepaid) to
each registered holder of a Warrant at such holder's last address as shown on the register
of the Company, at the Company's expense, a copy of such notice of resignation or notice
of removal, as the case may be. Upon such resignation or removal the Company shall
promptly appoint in writing a new warrant agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after it has been notified in writing of
such resignation by the resigning Warrant Agent or after such removal, then the holder of
any Warrant may apply to any court of competent jurisdiction for the appointment of a new
warrant agent. Pending appointment of a successor to the Warrant Agent, either by the
Company or by such a court, the duties of the Warrant Agent shall be carried out by the
Company. Any successor warrant agent, whether appointed by the Company or by such a court,
shall be a corporation, incorporated under the laws of the United States or of any state
thereof and authorized under such laws to exercise corporate trust powers, be subject to
supervision and examination by Federal or state authority, and have a combined capital and
surplus of not less than $100,000,000 as set forth in its most recent published annual
report of condition. After acceptance in writing of such appointment by the new warrant
agent it shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named herein as the Warrant Agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or expedient to
execute and deliver any further assurance, conveyance, act or deed, the same shall be done
at the expense of the Company and shall be legally and validly executed and delivered by
the resigning or removed Warrant Agent. Not later than the effective date of

15

any such appointment the Company shall file notice thereof with the resigning or
removed Warrant Agent and shall forthwith cause a copy of such notice to be mailed (by
first class, postage prepaid) to each registered holder of a Warrant at such holder's last
address as shown on the register of the Company. Failure to give any notice provided for
in this Section 11.11, or any defect in any such notice, shall not affect the legality or
validity of the resignation of the Warrant Agent or the appointment of a new warrant
agent, as the case may be.

          11.12  Change
of Warrant Agent. If at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not delivered,
the Warrant Agent may adopt the countersignature under its prior name and deliver Warrant
Certificates so countersigned; and if at that time any of the Warrant Certificates shall
not have been countersigned, the Warrant Agent may countersign such Warrant Certificates
either in its prior name or in its changed name; and in all such cases such Warrant
Certificates shall have the full force and effect provided in the Warrant Certificates and
this Agreement.

          11.13  Successor
Warrant Agent. Any corporation or entity into which the Warrant Agent or any new
warrant agent may be merged or any corporation or entity resulting from any consolidation
to which the Warrant Agent or any new warrant agent shall be a party or any corporation or
entity succeeding to all or substantially all the agency business of the Warrant Agent or
any new warrant agent shall be a successor Warrant Agent under this Agreement without any
further act, provided that such corporation would be eligible for appointment as a
new warrant agent under the provisions of Section 11.11 of this Article 11. The Company
shall promptly cause the successor Warrant Agent to mail notice of its succession as
Warrant Agent (by first class mail, postage prepaid) to each registered holder of a
Warrant at its last address as shown on the register of the Company.

ARTICLE 12

REMEDIES, ETC.

          Prior to the exercise of
the Warrants represented thereby, no holder of a Warrant Certificate, as such, shall be
entitled to any rights of a stockholder of the Company, including, but not limited to, the
right to vote, to receive dividends or other distributions, to exercise any preemptive
right or to receive any notice of meetings of stockholders, and no such holder shall be
entitled to receive notice of any proceedings of the Company except as provided in this
Agreement. Nothing contained in this Agreement shall be construed as imposing any
liabilities on such holder to purchase any securities or as a stockholder of the Company,
whether such liabilities are asserted by the Company or by creditors or stockholders of
the Company or otherwise.

16

ARTICLE 13

MISCELLANEOUS

          13.1  Notices.
Any notice, demand or delivery authorized by this Agreement shall be sufficiently given or
made if sent by first class mail, postage prepaid, delivered by hand or delivered by
overnight courier, in each case addressed to any registered holder of a Warrant at such
holder's last known address appearing on the register of the Company or the Warrant Agent,
and to the Company or the Warrant Agent as follows, or delivered by facsimile (in the case
of notices to any registered holder, to the last known facsimile number of such holder
appearing on the register of the Company or the Warrant Agent):

If to the Company:

Sun Healthcare Group, Inc.

101 Sun Avenue, N.E.

Albuquerque, New Mexico 87109

Attn: Robert F. Murphy, Esq.

Secretary and General Counsel

Telephone:     (505) 821-3355

Facsimile:      (505) 822-4747

If to the Warrant Agent:






Attn:

Telephone:     (    )     -

Facsimile:      (    )     -

or such other address as shall have been furnished in writing, in accordance with this
Section 13.1, to the party giving or making such notice, demand or delivery.

          13.2  Governing
Law and Consent to Forum. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, AS APPLIED TO CONTRACTS MADE AND
PERFORMED WITHIN THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
THE COMPANY AND THE WARRANT AGENT EACH HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF
ANY DELAWARE STATE COURT SITTING IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN
THE CITY OF WILMINGTON IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT, AND EACH IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF ANY PERSON TO SERVE PROCESS IN ANY

17

MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE COMPANY IN ANY OTHER JURISDICTION.

          13.3  Benefits
of this Agreement. This Agreement shall be binding upon and inure to the benefit of
the Company and the Warrant Agent and their respective successors and assigns, and the
registered and beneficial holders from time to time of the Warrants and of holders of the
Common Stock, where applicable. Nothing in this Agreement is intended or shall be
construed to confer upon any other Person, any right, remedy or claim under or by reason
of this Agreement or any part hereof.

          13.4  Agreement
of Holders of Warrant Certificates. Every holder of a Warrant Certificate, by
accepting the same, covenants and agrees with the Company, the Warrant Agent and with
every other holder of a Warrant Certificate that the Warrant Certificates are transferable
on the registry books of the Warrant Agent only upon the terms and conditions set forth in
this Agreement, and the Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the absolute owner for all purposes
whatsoever and neither the Company nor the Warrant Agent shall be affected by any notice
to the contrary.

          13.5   Counterparts.
This Agreement may be executed in any number of counterparts and each such counterpart
shall for all purposes be deemed to be an original, and all such counterparts shall
together constitute but one and the same instrument.

          13.6  Amendments.
This Agreement may be amended by the parties hereto, without the consent of the holder of
any Warrant Certificate, for the purpose of curing any manifest error, or of curing,
correcting or supplementing any defective provision contained herein, or making any other
provisions with respect to matters or questions arising under this Agreement as the
Company and the Warrant Agent may deem necessary or desirable; provided, that such
action shall not adversely affect the interests of the holders of the Warrant
Certificates. Any other amendment shall require the consent of the holders of Warrants
representing a majority in number of the then outstanding Warrants.

          Any such modification or
amendment will be conclusive and binding on all present and future holders of Warrant
Certificates whether or not they have consented to such modification or amendment or
waiver and whether or not notation of such modification or amendment is made upon such
Warrant Certificates. Any instrument given by or on behalf of any holder of a Warrant
Certificate in connection with any consent to any modification or amendment will be
conclusive and binding on all subsequent holders of such Warrant Certificate.

          13.7  Consent
to Jurisdiction. Notwithstanding anything to the contrary contained in
Section 13.2 hereof, (a) the parties hereby expressly acknowledge and agree
that, to the extent permitted by applicable law, the Bankruptcy Court shall have exclusive
jurisdiction to hear and determine any and all disputes concerning the distribution of
Warrants hereunder to holders of Claims pursuant to the Plan, and (b) the Warrant
Agent

18

hereby consents to the jurisdiction of the Bankruptcy Court with respect to any such
disputes and waives any argument of lack of such jurisdiction.

          13.8  Headings.
The table of contents hereto and the descriptive headings of the several sections hereof
are inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.

19

          IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be duly executed, as of the day and year
first above written.

SUN HEALTHCARE GROUP, INC.

By:

      Name:

      Title:



By:

      Name:

      Title:

EXHIBIT A

FORM OF WARRANT CERTIFICATE

A-1

[FORM OF FACE OF WARRANT CERTIFICATE]

CUSIP No.

Warrant No.                                        Number
of Warrant(s):

Exercisable During the Period that Commences at 9:00 a.m., New York City time, on

[Insert Date of Effective Date] and Terminates at 5:00 p.m., New York City time, on

[Insert third anniversary of Effective Date] except as provided below.

WARRANT TO PURCHASE

COMMON STOCK, PAR VALUE $.01 PER SHARE,

OF

SUN HEALTHCARE GROUP, INC.

          This certifies that

          or registered assigns, is
the registered owner of the number of warrants set forth above (the "Warrants"),
each of which represents the right, at any time after __________ ___, 2002 (the
"Original Issue Date") and on or before 5:00 p.m., New York City time, on
______________, 2005 (the "Exercise Period"), to purchase from Sun Healthcare
Group, Inc., a Delaware corporation (the "Company"), at the price per share of
$76.00 (the "Exercise Price"), one share of Common Stock, $0.01 par value (the
"Common Stock"), of the Company as such stock was constituted as of the Original
Issue Date, subject to adjustment as provided in the Warrant Agreement hereinafter
referred to, upon surrender hereof, with the subscription form on the reverse hereof duly
executed, by hand or by mail to________________________ _____________________ _____, or to
any successor thereto, as the warrant agent under the Warrant Agreement, at the office of
such successor maintained for such purpose (any such warrant agent being herein called the
"Warrant Agent") (or, if such exercise shall be in connection with an
underwritten public offering of shares of such Common Stock (or Other Securities) (as such
term and other capitalized terms used herein are defined in the Warrant Agreement) subject
to the Warrant Agreement, at the location at which the Company shall have agreed to
deliver such securities), and simultaneous payment in full (which shall be made either by
(i) certified or official bank or bank cashier's check payable to the order of the
Company, or by wire transfer of immediately available funds to an account designated by
the Warrant

Agent for the benefit of the Company, or (ii) or by Cashless Exercise referred to
below, all subject to the terms and conditions hereof and of the Warrant Agreement.

          Upon any partial exercise
of the Warrants represented by this Warrant Certificate, there shall be issued to the
holder hereof a new Warrant Certificate representing the Warrants that were not exercised.

          Subject to the terms of the
Warrant Agreement, the Warrants may be exercised in whole or in part (i) by presentation
of this Warrant Certificate with the Election to Purchase attached hereto duly executed
and with the simultaneous payment of the Exercise Price in cash (subject to adjustment) to
the Warrant Agent for the account of the Company at the office of the Warrant Agent or
(ii) by Cashless Exercise. Payment of the Exercise Price in cash shall be made by
certified or official bank check payable to the order of the Company or by wire transfer
of funds to an account designated by the Company for such purpose. Payment by Cashless
Exercise shall be made without the payment of cash by reducing the amount of Common Stock
that would be obtainable upon the exercise of a Warrant and payment of the Exercise Price
in cash so as to yield a number of shares of Common Stock upon the exercise of such
Warrant equal to the product of (1) the number of shares of Common Stock for which such
Warrant is exercisable as of the Exercise Date (if the Exercise Price were being paid in
cash) and (2) a fraction, the numerator of which is the excess of the Fair Value per share
of Common Stock on the Exercise Date over the Exercise Price per share as of the Exercise
Date and the denominator of which is the Fair Value per share of the Common Stock on the
Exercise Date.

          No fractional shares may be
issued upon the exercise of rights to purchase hereunder, and as to any fraction of a
share otherwise issuable, the Company will make a cash payment in lieu of such issuance,
as provided in the Warrant Agreement.

          This Warrant Certificate is
issued under and in accordance with a Warrant Agreement, dated as of _____________ ___,
2002 (the "Warrant Agreement"), between the Company and ______________________,
as Warrant Agent, and is subject to the terms and provisions contained therein. The
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation of
rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company
and the registered holders of the Warrants. The holder of this Warrant Certificate
consents to all terms and provisions of the Warrant Agreement by acceptance hereof. Copies
of the Warrant Agreement are on file at the above-mentioned office of the Warrant Agent
and may be obtained by writing to the Warrant Agent.

          REFERENCE IS HEREBY MADE TO
THE FURTHER PROVISIONS OF THIS WARRANT SET FORTH ON THE REVERSE HEREOF, WHICH FURTHER
PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE.

This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent.

2

Dated:                         ,
2002

SUN HEALTHCARE GROUP, INC.

By:

     Name:

     Title:

Countersigned:



          as Warrant Agent

By:

     Name:

     Title:

3

[FORM OF REVERSE OF WARRANT CERTIFICATE]

SUN HEALTHCARE GROUP, INC.

          The transfer of this
Warrant Certificate and all rights hereunder is registrable by the registered holder
hereof, in whole or in part, on the register of the Company upon surrender of this Warrant
Certificate at the office or agency of the Company or the office of the Warrant Agent
maintained for such purpose at ________ ______________________ ______, duly endorsed or
accompanied by a written instrument of transfer duly executed and in form satisfactory to
the Company and the Warrant Agent, by the registered holder hereof or his attorney duly
authorized in writing and upon payment of any necessary transfer tax or other governmental
charge imposed upon such transfer or registration thereof. Upon any partial transfer the
Company will cause to be delivered to such holder a new Warrant Certificate or
Certificates with respect to any portion not so transferred.

          This Warrant Certificate
may be exchanged at the office or agency of the Company or the office of the Warrant Agent
maintained for such purpose at ________ ______________________ ______, attention:
Compliance Department, for Warrant Certificates representing the same aggregate number of
Warrants, each new Warrant Certificate to represent such number of Warrants as the holder
hereof shall designate at the time of such exchange.

          Prior to the exercise of
the Warrants represented hereby, the holder of this Warrant Certificate, as such, shall
not be entitled to any rights of a stockholder of the Company, including, but not limited
to, the right to vote, to receive dividends or other distributions, to exercise any
preemptive right or to receive any notice of meetings of stockholders, and shall not be
entitled to receive notice of any proceedings of the Company except as provided in the
Warrant Agreement. Nothing contained herein shall be construed as imposing any liabilities
upon the holder of this Warrant Certificate to purchase any securities or as a stockholder
of the Company, whether such liabilities are asserted by the Company or by creditors or
stockholders of the Company or otherwise.

          This Warrant Certificate
shall be void and all rights represented hereby shall cease unless exercised before the
close of business on ________, 2005.

          This Warrant Certificate
shall not be valid for any purpose until it shall have been manually countersigned by an
authorized signatory of the Warrant Agent.

          Witness the facsimile seal
of the Company and the signature of its duly authorized officer.

4

SUBSCRIPTION FORM

(To be executed only upon exercise of warrant)

TO SUN HEALTHCARE GROUP, INC.

                                               ,
as Warrant Agent

Attention:

          The undersigned:

          (i) irrevocably exercises
___ Warrants represented by the within Warrant Certificate,

          (ii) purchases____ shares
of common stock, par value $.01 per share, of Sun Healthcare Group, Inc. (before giving
effect to the adjustments provided in the Warrant Agreement referred to in the within
Warrant Certificate) for each Warrant so exercised and herewith makes payment in full of
the purchase price of $76.00 per share, in respect of each Warrant so exercised as
provided in the Warrant Agreement ((which shall be made either by (a) certified or
official bank or bank cashier's check payable to the order of the Company, or by wire
transfer of immediately available funds to an account designated by the Warrant Agent for
the benefit of the Company, or (b) by Cashless Exercise. Payment of the Exercise Price in
cash shall be made by certified or official bank check payable to the order of the Company
or by wire transfer of funds to an account designated by the Company for such purpose.
Payment by Cashless Exercise shall be made without the payment of cash by reducing the
amount of Common Stock that would be obtainable upon the exercise of a Warrant and payment
of the Exercise Price in cash so as to yield a number of shares of Common Stock upon the
exercise of such Warrant equal to the product of (1) the number of shares of Common Stock
for which such Warrant is exercisable as of the Exercise Date (if the Exercise Price were
being paid in cash) and (2) a fraction, the numerator of which is the excess of the Fair
Value per share of Common Stock on the Exercise Date over the Exercise Price per share as
of the Exercise Date and the denominator of which is the Fair Value per share of the
Common Stock on the Exercise Date, all on the terms and conditions specified in the
Warrant Certificate and the Warrant Agreement,

          (iii) surrenders this
Warrant Certificate and all right, title and interest therein to Sun Healthcare Group,
Inc. and

          (iv) directs that the
securities or other property deliverable upon the exercise of such Warrants be registered
or placed in the name and at the address specified below and delivered thereto.

Dated:
     , 200_

5



(Owner)*



(Signature of Authorized Representative)



(Street Address)



(City) (State) (Zip Code)

6

Securities or property to be

issued and delivered to:



Signature Guaranteed**

     Please insert social

     security or other

     identifying number



Name

Street Address

City, State and Zip Code

          *The signature must
correspond with the name as written upon the face of the within Warrant Certificate in
every particular, without alteration or enlargement or any change whatsoever.

          **The signature must be
guaranteed by a Securities Transfer Association medallion program ("stamp")
participant or an institution receiving prior approval from the Warrant Agent.

7

FORM OF ASSIGNMENT

          FOR VALUE RECEIVED, the
undersigned registered holder of the within Warrant Certificate hereby sells, assigns and
transfers unto the Assignee named below all of the rights of the undersigned under the
within Warrant Certificate, with respect to the number of warrants set forth below:

Name of

Assignee

Address
No. of

Warrants

Please insert social

security or other

identifying number

of Assignee



and does hereby irrevocably constitute and appoint
attorney to make such transfer on the books of Sun Healthcare Group, Inc. maintained for
the purpose, with full power of substitution in the premises.

Dated:                                  ,
200

Name                                            *

Signature of Authorized

Representative

Signature Guaranteed                            **

          * The signature must
correspond with the name as written upon the face of the within Warrant Certificate in
every particular, without alteration or enlargement or any change whatsoever.

          ** The signature must be
guaranteed by a Securities Transfer Association medallion program ("stamp")
participant or an institution receiving prior approval from the Warrant Agent.

8

RESTATED

CERTIFICATE OF INCORPORATION

OF

SUN HEALTHCARE GROUP, INC.

     The present name of the corporation is
Sun Healthcare Group, Inc. (the "Corporation"). The Corporation was incorporated
under the name "Sun Healthcare Group, Inc." by the filing of its original
Certificate of Incorporation with the Secretary of State of the State of Delaware on April
15, 1993. This Restated Certificate of Incorporation of the Corporation, which both
restates and further amends the provisions of the Corporation's Certificate of
Incorporation, was duly adopted in accordance with the provisions of Sections 245 and 303
of the General Corporation Law of the State of Delaware. Provision for the filing of this
Restated Certificate of Incorporation is contained in an order dated _____________ ___,
2002, of the United States Bankruptcy Court for the District of Delaware, in In re Sun
Healthcare Group, Inc., Debtors, Chapter 11, Case No. 99-3657 (MSW) (the
"Order"). The date of filing of the Bankruptcy was October 14, 1999. The
confirmation date was _____________ ____, 2002. The Certificate of Incorporation of the
Corporation is hereby amended and restated to read in its entirety as follows:

          FIRST. The
name of the Corporation is Sun Healthcare Group, Inc.

          SECOND. The
address of the Corporation's registered office in the State of Delaware is Corporation
Trust Center, 1209 Orange St., in the City of Wilmington, County of New Castle, 19801. The
name of its registered agent at such address is Corporation Trust Corporation.

          THIRD. The
purpose of the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of Delaware.

          FOURTH.¹
The aggregate number of shares of capital stock which the Corporation shall have authority
to issue is Eighty Million (80,000,000) shares, divided into:

          (a) Fifty
Million (50,000,000) shares of common stock with One Penny ($.01) par value of which [Ten
Million (10,000,000) shares will be classified as Convertible Common Stock] and [Forty
Million (40,000,000)] shares will be classified as Common Stock; and

          [(b) Thirty
Million (30,000,000) shares of preferred stock with One Penny ($.01) par value]²}
          [FIFTH. The relative rights, powers, preferences, and privileges, and the qualifications, restrictions and limitations thereof, of the Convertible Common Stock, par value $0.01 per share (the "Convertible Common Stock") and of the Common Stock, par value $0.01 (the "Common Stock") are as set forth below:


^{1If Class F under the Plan votes for the Plan, all references to Convertible
Common Stock and Series A Preferred Stock will be taken out of the Restated Certificate of
Incorporation and all 50,000,000 shares of common stock will be authorized and 10,000,000
shares of preferred stock will be authorized.
^{2If Class F under the Plan votes for the Plan, 50,000,000 shares of common stock
will be authorized and 10,000,000 shares of preferred stock will be authorized.

          (a) Equal
Rights. Shares of Convertible Common Stock shall have the same rights, powers,
preferences, and privileges, and the qualifications, restrictions and limitations, as
shares of Common Stock, including (i) the right to dividends on an equal and pro rata
basis, (ii) the right to distributions on an equal and pro rata basis in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, of the entire assets and funds of the Corporation legally available for
distribution, if any, after distributions to the holders of any Corporation stock entitled
to a preference over the Convertible Common Stock and the Common Stock in accordance with
the terms thereof and (iii) the right, in addition to any voting rights provided by law,
to one vote per share of Convertible Common Stock and share of Common Stock; provided,
however, that the holders of the Convertible Common Stock shall be entitled to convert
such shares into shares of Series A Preferred Stock in accordance with Section (b) of this
Article FIFTH or shares of Common Stock in accordance with Section (c) of this Article
FIFTH.

          (b) Conversion
into Series A Preferred Stock. (1) Subject to the provisions for adjustment
hereinafter set forth and subject to any applicable requirement of law, from __________
(the "Original Issue Date") until [___________, 2005][three years from the
Effective Date] each share of Convertible Common Stock shall be convertible at any time
and from time to time, at the option of the holder thereof (such conversion, a
"Conversion") into fully paid and nonassessable shares of Series A Preferred
Stock. The number of shares of Series A Preferred Stock deliverable upon conversion of a
share of Convertible Common Stock shall initially be one (1), adjusted as hereinafter
provided, and is referred to herein as the "Conversion Ratio." No fractional
shares shall be issued upon the conversion of any shares of Convertible Common Stock. All
shares of Series A Preferred Stock (including fractions thereof) issuable upon conversion
of more than one share of Convertible Common Stock by a holder thereof shall be aggregated
for purposes of determining whether conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would result in
the issuance of a fraction of a share of Series A Preferred Stock, the Corporation shall,
in lieu of issuing any fractional share, pay the holder otherwise entitled to such
fraction a sum in cash equal to the Liquidation Preference of one share of Series A
Preferred Stock multiplied by such fraction on the date of conversion. All shares of
Convertible Common Stock converted pursuant to this subsection (b) from the Original Issue
Date until [______, 2003][the first anniversary of the Effective Date] shall be converted
into Series A-1 Preferred Stock. All shares of Convertible Common Stock converted pursuant
to this subsection (b) from [______, 2003][the first anniversary of the Effective Date]
until [________-, 2004][the second anniversary of the Effective Date] shall be converted
into Series A-2 Preferred Stock. All shares of Convertible Common Stock converted pursuant
to this subsection (b) from [________,2004][the second anniversary of the Effective Date]
until [______, 2005][the third anniversary of the Effective Date] shall be converted into
Series A-3 Preferred Stock. Series A-1 Preferred Stock, Series A-2 Preferred Stock and
Series A-3 Preferred Stock are collectively referred to in this Article FIFTH as the
Series A Preferred Stock. References to the Series A Preferred Stock in Article FIFTH
shall refer to any of Series A-1 Preferred Stock, Series A-2 Preferred Stock or Series A-3
Preferred Stock into which the holder of the Convertible Common Stock has converted or is
converting.

          (2) (i) A
conversion of the Convertible Common Stock into Series A Preferred Stock may be effected
by any such holder upon the surrender to the Corporation at the principal office of the
Corporation of the certificate for such Convertible Common Stock to be converted
accompanied

2

by a written notice stating that such holder elects to convert all or a
specified number of such shares in accordance with the provisions of Section (b) of this
Article FIFTH and specifying the name or names in which such holder wishes the certificate
or certificates for shares of Series A Preferred Stock to be issued.

               (ii)
In case the written notice specifying the name or names in which such holder wishes the
certificate or certificates for shares of Series A Preferred Stock to be issued shall
specify a name or names other than that of such holder, such notice shall be accompanied
by payment of all transfer taxes payable upon the issuance of shares of Series A Preferred
Stock in such name or names. As promptly as practicable, and in any event within five
business days after the surrender of such certificate or certificates and the receipt of
such notice relating thereto and, if applicable, payment of all transfer taxes (or the
demonstration to the satisfaction of the Corporation that such taxes have been paid), the
Corporation shall deliver or cause to be delivered (i) certificates representing the
number of validly issued, fully paid and nonassessable full shares of Series A Preferred
Stock to which the holder of shares of Convertible Common Stock being converted shall be
entitled (together with any cash in lieu of fractional shares) and (ii) if less than the
full number of shares of Convertible Common Stock evidenced by the surrendered certificate
or certificates is being converted, a new certificate or certificates, of like tenor, for
the number of shares evidenced by such surrendered certificate or certificates less the
number of shares being converted.

               (iii)
Such conversion shall be deemed to have been made at the close of business on the date of
giving the written notice referred to in the Section (b)(2)(i) of this Article FIFTH and
of such surrender of the certificate or certificates representing the shares of
Convertible Common Stock to be converted so that the rights of the holder thereof as to
the shares being converted shall cease except for the right to receive shares of Series A
Preferred Stock in accordance herewith (together with any cash in lieu of fractional
shares), and the person entitled to receive the shares of Series A Preferred Stock shall
be treated for all purposes as having become the record holder of such shares of Series A
Preferred Stock at such time.

          (3) The
Corporation shall at all times reserve, and keep available for issuance upon the
conversion of the Convertible Common Stock, such number of its authorized but unissued
shares of Series A Preferred Stock as will from time to time be sufficient to permit the
conversion of all outstanding shares of Convertible Common Stock, and shall take all
action required to increase the authorized number of shares of Series A Preferred Stock if
necessary to permit the conversion of all outstanding shares of Convertible Common Stock.

           (4) The
Conversion Ratio will be subject to adjustment from time to time as follows: In case the
Corporation shall at any time or from time to time after the [Effective Date of the Plan],
(A) subdivide the outstanding shares of Convertible Common Stock into a greater number of
shares, (B) combine the outstanding shares of Convertible Common Stock into a smaller
number of shares or (C) issue by reclassification of the shares of Convertible Common
Stock any shares of capital stock of the Corporation, then, and in each such case, the
Conversion Ratio in effect immediately prior to such event or the record date therefor,
whichever is earlier, shall be adjusted so that the holder of any shares of Convertible
Common Stock thereafter surrendered for conversion shall be entitled to receive, in the
aggregate, the number of shares of Series A Preferred Stock or other securities of the
Corporation which such holder would have owned or have been entitled to receive after the
happening of any of the events described above, had all

3

such shares of Convertible Common Stock been surrendered for conversion
immediately prior to the happening of such event or the record date therefor, whichever is
earlier. An adjustment made pursuant to this Section (b)(4) of this Article FIFTH shall
become effective in the case of such subdivision, reclassification or combination, at the
close of business on the day upon which such corporate action becomes effective.

           (5) Reports
as to Adjustments. Upon any adjustment of the Conversion Ratio then in effect and any
increase or decrease in the number of shares of Series A Preferred Stock issuable upon the
operation of the conversion set forth in this Section (b) of this Article FIFTH, then, and
in each such case, the Corporation shall promptly deliver to each holder of the
Convertible Common Stock, a certificate signed by the President or a Vice President and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation setting forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated and specifying the Conversion Ratio then in
effect following such adjustment and the increased or decreased number of shares issuable
upon the conversion granted by this Section (b) of this Article FIFTH, and shall set forth
in reasonable detail the method of calculation of each and a brief statement of the facts
requiring such adjustment. Where appropriate, such notice to holders of the Convertible
Common Stock may be given in advance.

           (6) Right
to Convert Into Series A Preferred Stock Not Transferable. Notwithstanding anything
herein to the contrary, shares of Convertible Common Stock held by any particular person
shall not be convertible by such person into shares of Series A Preferred Stock pursuant
to this Section (b) of this Article FIFTH if such shares have not been held continuously
by the holder thereof from the Original Issue Date through the date of the surrender of
the certificate for the Convertible Common Stock pursuant to Section (b)(2) of this
Article FIFTH (or any Affiliate (as defined in Section (c) of this Article FIFTH)
thereof).

           (c) Conversion
of Convertible Common Stock into Common Stock. (1) Subject to the provisions for
adjustment hereinafter set forth and subject to any applicable requirement of law, (i)
prior to [___________, 2005][three years from the Effective Date], each share of
Convertible Common Stock shall be convertible at any time and from time to time, at the
option of the holder thereof (such conversion, an "Optional Common Conversion")
into fully paid and nonassessable shares of Common Stock, (ii) upon the transfer of a
share of Convertible Common Stock to any person (other than an Affiliate of the holder of
such share of Convertible Common Stock as of the Original Issue Date), such share of
Convertible Common Stock shall automatically be converted into fully paid and
nonassessable shares of Common Stock (a "Third Party Transfer") and (iii) on
[___________, 2005][three years from the Effective Date] (the "Mandatory Conversion
Date") all outstanding shares of Convertible Common Stock shall be converted into
fully paid and nonassessable shares of Common Stock (such conversion referred to in
clauses (ii) and (iii) are "Mandatory Common Conversions" and, together with the
Optional Common Conversion, the "Common Conversion"). The number of shares of
Common Stock deliverable upon conversion of a share of Convertible Common Stock shall
initially be one (1) and is referred to herein as the "Common Conversion Ratio."
For purposes hereof, the term "Affiliate" has the meaning ascribed to such term
in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of
1934, as amended, or any similar Federal statute, and the rules and regulations of the
Securities and Exchange Commission thereunder, all as the same shall be in effect at the
time.

4

          (2)(i) An
Optional Common Conversion of the Convertible Common Stock may be effected by any such
holder upon the surrender to the Corporation at the principal office of the Corporation of
the certificate for such Convertible Common Stock to be converted accompanied by a written
notice stating that such holder elects to convert all or a specified number of such shares
in accordance with the provisions of this subsection (c) of Article FIFTH and specifying
the name or names in which such holder wishes the certificate or certificates for shares
of Common Stock to be issued. A Mandatory Common Conversion of the Convertible Common
Stock shall be immediately effective and shall be deemed to be made as of the date of the
Third Party Transfer or the Mandatory Conversion Date. Any holder may surrender to the
Corporation the certificate for such Convertible Common Stock converted pursuant to a
Mandatory Common Conversion accompanied by a written notice specifying the name or names
in which such holder wishes the certificate or certificates for shares of Common Stock to
be issued. Until such time as the holder surrenders its certificate pursuant to a
Mandatory Common Conversion, the certificates representing the Convertible Common Stock
shall represent the number of shares of Common Stock issuable upon conversion of such
certificate.

               (ii)
In case the written notice specifying the name or names in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued shall specify a name
or names other than that of such holder, such notice shall be accompanied by payment of
all transfer taxes payable upon the issuance of shares of Common Stock in such name or
names. As promptly as practicable, and in any event within five Business Days after the
surrender of such certificate or certificates and the receipt of such notice relating
thereto and, if applicable, payment of all transfer taxes (or the demonstration to the
satisfaction of the Corporation that such taxes have been paid), the Corporation shall
deliver or cause to be delivered (i) certificates representing the number of validly
issued, fully paid and nonassessable shares of Common Stock to which the holder of shares
of Convertible Common Stock being converted shall be entitled and (ii) if less than the
full number of shares of Convertible Common Stock evidenced by the surrendered certificate
or certificates is being converted, a new certificate or certificates, of like tenor, for
the number of shares of Convertible Common Stock evidenced by such surrendered certificate
or certificates less the number of shares of Convertible Common Stock being converted.

                (iii)
In the case of an Optional Common Conversion, such conversion shall be deemed to have been
made at the close of business on the date of giving the written notice referred to in the
first sentence of Section(c)(2)(i) of this Article FIFTH above and of such surrender of
the certificate or certificates representing the shares of Convertible Common Stock to be
converted so that the rights of the holder thereof as to the shares being converted shall
cease except for the right to receive shares of Common Stock in accordance herewith, and
the person entitled to receive the shares of Common Stock shall be treated for all
purposes as having become the record holder of such shares of Common Stock at such time.

          (3) The
Corporation shall at all times reserve, and keep available for issuance upon the
conversion of the Convertible Common Stock, such number of its authorized but unissued
shares of Common Stock as will from time to time be sufficient to permit the conversion of
all outstanding shares of Convertible Common Stock, and shall take all action required to
increase the authorized number of shares of Common Stock if necessary to permit the
conversion of all outstanding shares of Convertible Common Stock.

5

          (d) No
Reissuance of Convertible Common Stock. Convertible Common Stock acquired by the
Corporation by reason of redemption, purchase, or otherwise shall be prohibited from being
reissued, and all such shares shall be cancelled, retired and eliminated from the shares
which the Corporation shall be authorized to issue.

           (e) Notices.
All notices to the Corporation permitted hereunder shall be personally delivered or sent
by first class mail, postage prepaid, addressed to its principal office located at
_____________________________________, or to such other address at which its principal
office is located and as to which notice thereof is similarly given to the holders of the
Convertible Common Stock at their addresses appearing on the books of the Corporation.]

          SIXTH.
The Board of Directors is authorized, subject to limitations prescribed by law and the
provisions of Article FOURTH, to provide for the issuance of the shares of preferred stock
in one or more series, and by filing a certificate pursuant to the applicable law of the
State of Delaware, to establish from time to time the number of shares to be included in
each such series, and to fix or, subject to applicable law, alter the designation, number,
voting powers, preferences and relative, participating, optional and other special rights
of the shares of each such series and the qualifications, limitations or restrictions
thereof.

          The
authority of the Board of Directors with respect to each series shall include, but not be
limited to, determination of the following:

          (a)  The
number of shares constituting that series and the distinctive designation of that series;

          (b)  The
rights in respect of dividends, if any, of the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative right of
priority, if any, of payment of dividends on shares of that series;

          (c)  Whether
that series shall have voting rights, in addition to the voting rights provided by law,
and, if so, the terms of such voting rights;

          (d)  Whether
the series shall have a right to elect one or more directors, and if so, the term or terms
of such directors;

          (e)  Whether
that series shall have conversion privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion rate in such events as
the Board of Directors shall determine;

          (f)  Whether
or not the shares of that series shall be redeemable, and, if so, the terms and conditions
of such redemption, including the date of date upon or after which they shall be
redeemable, and the amount per share payable in case of redemption, which amount may vary
under different conditions and at different redemption dates;

          (g)  Whether
that series shall have a sinking fund for the redemption of purchase of shares of that
series, and, if so, the terms and amount of such sinking fund;

6

          (h)  The
rights of the shares of that series in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, and the relative rights of priority, if any,
of payment of shares of that series; and

          (i)  Any
other relative rights, preferences and limitations of that series.

          SEVENTH.  Notwithstanding
Articles FOURTH, FIFTH and SIXTH hereof, the Corporation shall not be authorized to issue
non-voting capital stock to the extent prohibited by Section 1123(a)(6) of Title 11 of the
United States Code (the "Bankruptcy Code"); provided however that this Article
Fifth will have no further force and effect beyond that required by Section 1123 of the
Bankruptcy Code.

          EIGHTH.  Unless
and except to the extent that the by-laws of the Corporation shall so require, the
election of directors of the Corporation need not be by written ballot.

          NINTH.  (a)
The business and affairs of the Corporation shall be managed by, or under the direction
of, the Board of Directors of the Corporation (the "Board"). Except as otherwise
provided for or fixed pursuant to the provisions of Article SIXTH of this Restated
Certificate of Incorporation relating to the rights of the holders of any series of
preferred stock to elect additional directors, the Board shall consist of one or more
members, the number thereof to be determined from time to time by resolution of the Board.

          (b)  II
Subject to the rights of the holders of any one or more series of preferred stock then
outstanding, newly created directorships resulting from any increase in the authorized
number of directors or any vacancies in the Board resulting from death, resignation,
retirement, disqualification, removal from office or other cause shall be filled solely by
the affirmative vote of a majority of the remaining directors then in office, even though
less than a quorum of the Board. Any director so chosen shall hold office until the next
election of the class for which such director shall have been chosen and until his
successor shall be elected and qualified. No decrease in the number of directors shall
shorten the term of any incumbent director.

          (c)  Except
for such additional directors, if any, as are elected by the holders of any series of
preferred stock as provided for or fixed pursuant to the provisions of Article SIXTH
hereof, any director, or the entire Board, may be removed from office at any time, with or
without cause and only by the affirmative vote of at least 66 2/3% in voting power of the
outstanding shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.

          (d)  During
any period when the holders of any series of preferred stock have the right to elect
additional directors as provided for or fixed pursuant to the provisions of Article SIXTH
hereof, then upon commencement and for the duration of the period during which such right
continues: (i) the then otherwise total authorized number of directors of the Corporation
shall automatically be increased by such specified number of directors, and the holders of
such preferred stock shall be entitled to elect the additional directors so provided for
or fixed pursuant to said provisions, and (ii) each such additional director shall serve
until such director's successor shall have been duly elected and qualified, or until such
director's right to hold such office terminates pursuant to said provisions, whichever
occurs earlier, subject to his earlier death, disqualification, resignation or removal.
Except as otherwise provided by the Board in the

7

resolution or resolutions establishing such series, whenever the
holders of any series of preferred stock having such right to elect additional directors
are divested of such right pursuant to the provisions of such stock, the terms of office
of all such additional directors elected by the holders of such stock, or elected to fill
any vacancies resulting from the death, resignation, disqualification or removal of such
additional directors, shall forthwith terminate and the total and authorized number of
directors of the Corporation shall automatically be reduced accordingly.

          TENTH.  (a)
In furtherance and not in limitation of the powers conferred by the laws of the State of
Delaware, the Board is expressly authorized to make, amend, alter
and repeal the by-laws of the Corporation.

          (b)  Notwithstanding
anything in this Restated Certificate of Incorporation to the contrary, the affirmative
vote of at least 66 2/3% in voting power of the outstanding shares of capital stock of the
Corporation entitled to vote thereon, voting together as a single class, shall be required
in order for the stockholders of the Corporation to make, amend, alter or repeal the
by-laws of the Corporation.

          ELEVENTH.  A
director of the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is not permitted under the General
Corporation Law of the State of Delaware as the same exists or may hereafter be amended.
Any amendment, modification or repeal of the foregoing sentence shall not adversely affect
any right or protection of a director of the Corporation hereunder in respect of any act
or omission occurring prior to the time of such amendment, modification or repeal.

          TWELFTH.  All
corporate powers shall be exercised by or under the direction of the Board except as
otherwise provided by law or by this Restated Certificate of Incorporation. There shall be
no limitation on the qualification of any person to be a director or on the ability of any
director to vote on any matter brought before the Board or any committee thereof, except
(i) as required by applicable law, (ii) as set forth in this Restated Certificate of
Incorporation or (iii) as set forth in any by-law adopted by the Board.

          THIRTEENTH.  The
Corporation reserves the right at any time, and from time to time, to amend, alter, change
or repeal any provision contained in this Restated Certificate of Incorporation, and other
provisions authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed by law; and all rights,
preferences and privileges of whatsoever nature conferred upon stockholders, directors or
any other persons whomsoever by and pursuant to this Restated Certificate of Incorporation
in its present form or as hereafter amended are granted subject to the rights reserved in
this article; provided, however, that notwithstanding anything contained in this Restated
Certificate of Incorporation to the contrary, the affirmative vote of at least 66 2/3% in
voting power of the outstanding shares of capital stock of the Corporation entitled to
vote thereon, voting together as a single class, shall be required to amend, alter, or
repeal Article NINTH, Article TENTH, Article TWELFTH, or this Article THIRTEENTH of this
Restated Certificate of Incorporation.

8

          IN WITNESS
WHEREOF, the undersigned has executed this Restated Certificate of Incorporation as of
______________, 2002.

SUN HEALTHCARE GROUP, INC.

By:

Name:

Office:

9

AMENDED AND RESTATED

BY-LAWS

OF

SUN HEALTHCARE GROUP, INC.



ARTICLE I

Meetings of Stockholders

               Section
1.1.  Annual Meetings. If required by applicable law, an annual meeting
of stockholders shall be held for the election of directors at such date, time and place,
either within or without the State of Delaware, as may be designated by resolution of the
Board of Directors from time to time. Any other proper business may be transacted at the
annual meeting.

               Section
1.2.  Special Meetings. Special meetings of stockholders for any purpose
or purposes may be called at any time by any of the Chairman of the Board, the Chief
Executive Officer or upon the majority vote of the Board of Directors, but such special
meetings may not be called by any other person or persons. Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the notice.

               Section
1.3.  Notice of Meetings. Whenever stockholders are required or permitted
to take any action at a meeting, a notice of the meeting shall be given that shall state
the place, date and hour of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called. Unless otherwise provided by law, the
certificate of incorporation or these by-laws, the notice of any meeting shall be given
not less than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed
to be given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.

               Section
1.4.  Adjournments. Any meeting of stockholders, annual or special, may
adjourn from time to time to reconvene at the same or some other place, and notice need
not be given of any such adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting the corporation
may transact any business which might have been transacted at the original meeting. If the
adjournment is for more than thirty (30) days, or if after the adjournment a new record
date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.

               Section
1.5.  Quorum. Except as otherwise provided by law, the certificate of
incorporation or these by-laws, at each meeting of stockholders the presence in person or
by proxy of the holders of a majority in voting power of the outstanding shares of stock
entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum.
In the absence of a quorum, the stockholders so present may, by a majority in voting power
thereof, adjourn the meeting from time to time in the manner provided in Section 1.4 of
these by-laws until a quorum shall attend. Shares of its own stock belonging to the
corporation or to another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly, by the
corporation, shall neither be entitled to vote nor be counted for quorum purposes;
provided, however, that the foregoing shall not limit the right of the corporation or any
subsidiary of the corporation to vote stock, including but not limited to its own stock,
held by it in a fiduciary capacity.

               Section
1.6.  Organization. Meetings of stockholders shall be presided over by
the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if
any, or in his absence by the Chief Executive Officer, or in his absence by the President
or a Vice President, or in the absence of the foregoing persons by a chairman designated
by the Board of Directors, or in the absence of such designation by a chairman chosen at
the meeting. The Secretary shall act as secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the meeting.

               Section
1.7.  Voting; Proxies. Except as otherwise provided by or pursuant to the
provisions of the certificate of incorporation, each stockholder entitled to vote at any
meeting of stockholders shall be entitled to one vote for each share of stock held by such
stockholder which has voting power upon the matter in question. Each stockholder entitled
to vote at a meeting of stockholders or to express consent to corporate action in writing
without a meeting may authorize another person or persons to act for such stockholder by
proxy, but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. A proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A stockholder may revoke any proxy
which is not irrevocable by attending the meeting and voting in person or by delivering to
the Secretary of the corporation a revocation of the proxy or a new proxy bearing a later
date. Voting at meetings of stockholders need not be by written ballot. At all meetings of
stockholders for the election of directors a plurality of the votes cast shall be
sufficient to elect. All other elections and questions shall, unless otherwise provided by
the certificate of incorporation, these by-laws, the rules or regulations of any stock
exchange applicable to the corporation, or applicable law or pursuant to any regulation
applicable to the corporation or its securities, be decided by the affirmative vote of the
holders of a majority in voting power of the shares of stock of the corporation which are
present in person or by proxy and entitled to vote thereon.

               Section
1.8.  Fixing Date for Determination of Stockholders of Record. In order
that the corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to express consent to corporate
action

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in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment thereof,
shall, unless otherwise required by law, not be more than sixty (60) nor less than ten
(10) days before the date of such meeting; (2) in the case of determination of
stockholders entitled to express consent to corporate action in writing without a meeting,
shall not be more than ten (10) days from the date upon which the resolution fixing the
record date is adopted by the Board of Directors; and (3) in the case of any other
action, shall not be more than sixty (60) days prior to such other action. If no record
date is fixed: (1) the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the close of
business on the day next preceding the day on which the meeting is held; (2) the
record date for determining stockholders entitled to express consent to corporate action
in writing without a meeting, when no prior action of the Board of Directors is required
by law, shall be the first date on which a signed written consent setting forth the action
taken or proposed to be taken is delivered to the corporation in accordance with
applicable law, or, if prior action by the Board of Directors is required by law, shall be
at the close of business on the day on which the Board of Directors adopts the resolution
taking such prior action; and (3) the record date for determining stockholders for
any other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.

               Section
1.9.  List of Stockholders Entitled to Vote. The Secretary shall prepare
and make, at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder, for any
purpose germane to the meeting, as required by applicable law. Except as otherwise
provided by law, the stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list of stockholders or the books
of the corporation, or to vote in person or by proxy at any meeting of stockholders.

               Section
1.10.  Inspectors of Election. The corporation may, and shall if required
by law, in advance of any meeting of stockholders, appoint one or more inspectors of
election, who may be employees of the corporation, to act at the meeting or any
adjournment thereof and to make a written report thereof. The corporation may designate
one or more persons as alternate inspectors to replace any inspector who fails to act. In
the event that no inspector so appointed or designated is able to act at a meeting of
stockholders, the person presiding at the

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meeting shall appoint one or more inspectors to act at the meeting.
Each inspector, before entering upon the discharge of his or her duties, shall take and
sign an oath to execute faithfully the duties of inspector with strict impartiality and
according to the best of his or her ability. The inspector or inspectors so appointed or
designated shall (i) ascertain the number of shares of capital stock of the corporation
outstanding and the voting power of each such share, (ii) determine the shares of capital
stock of the corporation represented at the meeting and the validity of proxies and
ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable
period a record of the disposition of any challenges made to any determination by the
inspectors, and (v) certify their determination of the number of shares of capital stock
of the corporation represented at the meeting and such inspectors' count of all votes and
ballots. Such certification and report shall specify such other information as may be
required by law. In determining the validity and counting of proxies and ballots cast at
any meeting of stockholders of the corporation, the inspectors may consider such
information as is permitted by applicable law. No person who is a candidate for an office
at an election may serve as an inspector at such election.

               Section
1.11.  Conduct of Meetings. The date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a meeting
shall be announced at the meeting by the person presiding over the meeting. The Board of
Directors may adopt by resolution such rules and regulations for the conduct of the
meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board of Directors, the person presiding
over any meeting of stockholders shall have the right and authority to convene and to
adjourn the meeting, to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper conduct of
the meeting. Such rules, regulations or procedures, whether adopted by the Board of
Directors or prescribed by the presiding officer of the meeting, may include, without
limitation, the following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of
those present; (iii) limitations on attendance at or participation in the meeting to
stockholders of record of the corporation, their duly authorized and constituted proxies
or such other persons as the chairman of the meeting shall determine; (iv) restrictions on
entry to the meeting after the time fixed for the commencement thereof; and (v)
limitations on the time allotted to questions or comments by participants. Unless and to
the extent determined by the Board of Directors or the person presiding over the meeting,
meetings of stockholders shall not be required to be held in accordance with the rules of
parliamentary procedure.

               Section
1.12.  Notice of Stockholder Business and Nominations.

               (A)     Annual
Meetings of Stockholders. (1) Nominations of persons for election to the Board of
Directors of the corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders only (a) pursuant to the
corporation's notice of meeting (or any supplement thereto), (b) by or at the direction of
the Board of Directors or (c) by any stockholder of the corporation who was a stockholder
of

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record of the corporation at the time the notice provided for in this
Section 1.12 is delivered to the Secretary of the corporation, who is entitled to vote at
the meeting and who complies with the notice procedures set forth in this Section 1.12.

                        (2)     For
nominations or other business to be properly brought before an annual meeting by a
stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 1.12, the
stockholder must have given timely notice thereof in writing to the Secretary of the
corporation and any such proposed business other than the nominations of persons for
election to the Board of Directors must constitute a proper matter for stockholder action.
To be timely, a stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the ninetieth
day nor earlier than the close of business on the one hundred twentieth day prior to the
first anniversary of the preceding year's annual meeting (provided, however, that in the
event that the date of the annual meeting is more than thirty days before or more than
seventy days after such anniversary date, notice by the stockholder must be so delivered
not earlier than the close of business on the one hundred twentieth day prior to such
annual meeting and not later than the close of business on the later of the ninetieth day
prior to such annual meeting or the tenth day following the day on which public
announcement of the date of such meeting is first made by the corporation). In no event
shall the public announcement of an adjournment or postponement of an annual meeting
commence a new time period (or extend any time period) for the giving of a stockholder's
notice as described above. Such stockholder's notice shall set forth: (a) as to each
person whom the stockholder proposes to nominate for election as a director (i) all
information relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise required, in
each case pursuant to and in accordance with Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (ii) such person's written
consent to being named in the proxy statement as a nominee and to serving as a director if
elected; (b) as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the meeting, the
text of the proposal or business (including the text of any resolutions proposed for
consideration and in the event that such business includes a proposal to amend the by-laws
of the corporation, the language of the proposed amendment), the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and
(c) as to the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such stockholder, as
they appear on the corporation's books, and of such beneficial owner, (ii) the class and
number of shares of capital stock of the corporation which are owned beneficially and of
record by such stockholder and such beneficial owner, (iii) a representation that the
stockholder is a holder of record of stock of the corporation entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to propose such
business or nomination, and (iv) a representation whether the stockholder or the
beneficial owner, if any, intends or is part of a group which intends (a) to deliver a
proxy statement and/or form of proxy to holders of at least the percentage of the
corporation's outstanding capital stock required to approve or adopt the proposal or elect
the nominee and/or (b) otherwise to solicit proxies from stockholders in support of such

-5-

proposal or nomination. The foregoing notice requirements shall be
deemed satisfied by a stockholder if the stockholder has notified the corporation of his
or her intention to present a proposal at an annual meeting in compliance with Rule 14a-8
(or any successor thereof) promulgated under the Exchange Act and such stockholder's
proposal has been included in a proxy statement that has been prepared by the corporation
to solicit proxies for such annual meeting. The corporation may require any proposed
nominee to furnish such other information as it may reasonably require to determine the
eligibility of such proposed nominee to serve as a director of the corporation.

                        (3)     Notwithstanding
anything in the second sentence of paragraph (A)(2) of this Section 1.12 to the contrary,
in the event that the number of directors to be elected to the Board of Directors of the
corporation at an annual meeting is increased and there is no public announcement by the
corporation naming the nominees for the additional directorships at least one hundred days
prior to the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this Section 1.12 shall also be considered timely, but only with
respect to nominees for the additional directorships, if it shall be delivered to the
Secretary at the principal executive offices of the corporation not later than the close
of business on the tenth day following the day on which such public announcement is first
made by the corporation.

               (B)     Special
Meetings of Stockholders. Only such business shall be conducted at a special meeting
of stockholders as shall have been brought before the meeting pursuant to the
corporation's notice of meeting. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (1) by or at the direction of the
Board of Directors or (2) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the corporation who is a
stockholder of record at the time the notice provided for in this Section 1.12 is
delivered to the Secretary of the corporation, who is entitled to vote at the meeting and
upon such election and who complies with the notice procedures set forth in this Section
1.12. In the event the corporation calls a special meeting of stockholders for the purpose
of electing one or more directors to the Board of Directors, any such stockholder entitled
to vote in such election of directors may nominate a person or persons (as the case may
be) for election to such position(s) as specified in the corporation's notice of meeting,
if the stockholder's notice required by paragraph (A)(2) of this Section 1.12 shall be
delivered to the Secretary at the principal executive offices of the corporation not
earlier than the close of business on the one hundred twentieth day prior to such special
meeting and not later than the close of business on the later of the ninetieth day prior
to such special meeting or the tenth day following the day on which public announcement is
first made of the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public announcement of an
adjournment or postponement of a special meeting commence a new time period (or extend any
time period) for the giving of a stockholder's notice as described above.

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               (C)     General.
(1) Only such persons who are nominated in accordance with the procedures set forth in
this Section 1.12 shall be eligible to be elected at an annual or special meeting of
stockholders of the corporation to serve as directors and only such business shall be
conducted at a meeting of stockholders as shall have been brought before the meeting in
accordance with the procedures set forth in this Section 1.12. Except as otherwise
provided by law, the chairman of the meeting shall have the power and duty (a) to
determine whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set forth in
this Section 1.12 (including whether the stockholder or beneficial owner, if any, on whose
behalf the nomination or proposal is made solicited (or is part of a group which
solicited) or did not so solicit, as the case may be, proxies in support of such
stockholder's nominee or proposal in compliance with such stockholder's representation as
required by clause (A)(2)(c)(iv) of this Section 1.12) and (b) if any proposed nomination
or business was not made or proposed in compliance with this Section 1.12, to declare that
such nomination shall be disregarded or that such proposed business shall not be
transacted. Notwithstanding the foregoing provisions of this Section 1.12, if the
stockholder (or a qualified representative of the stockholder) does not appear at the
annual or special meeting of stockholders of the corporation to present a nomination or
business, such nomination shall be disregarded and such proposed business shall not be
transacted, notwithstanding that proxies in respect of such vote may have been received by
the corporation.

                    (2)     For
purposes of this Section 1.12, "public announcement" shall include disclosure in
a press release reported by the Dow Jones News Service, Associated Press or comparable
national news service or in a document publicly filed by the corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.

                    (3)     Notwithstanding
the foregoing provisions of this Section 1.12, a stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 1.12. Nothing in this Section 1.12 shall
be deemed to affect any rights (a) of stockholders to request inclusion of proposals in
the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) of
the holders of any series of Preferred Stock to elect directors pursuant to any applicable
provisions of the certificate of incorporation.

ARTICLE II

Board of Directors

               Section
2.1.   Number; Qualifications. The Board of Directors shall consist of
one or more members, the number thereof to be determined from time to time by resolution
of the Board of Directors. Directors need not be stockholders.

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               Section
2.2.  Resignation. Any director may resign at any time upon notice to the
corporation.

               Section
2.3.  Regular Meetings. Regular meetings of the Board of Directors may be
held at such places within or without the State of Delaware and at such times as the Board
of Directors may from time to time determine.

               Section
2.4.  Special Meetings. Special meetings of the Board of Directors may be
held at any time or place within or without the State of Delaware whenever called by the
Chairman of the Board, the Chief Executive Officer, the Secretary, or not less than
one-third of the members of the Board of Directors upon written notice to the Secretary.
Notice of a special meeting of the Board of Directors shall be given by the person or
persons calling the meeting at least twenty-four hours before the special meeting.

               Section
2.5.  Telephonic Meetings Permitted. Members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a meeting
thereof by means of conference telephone or other communications equipment by means of
which all persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this by-law shall constitute presence in person at such meeting.

               Section
2.6.  Quorum; Vote Required for Action. At all meetings of the Board of
Directors a majority of the whole Board of Directors shall constitute a quorum for the
transaction of business. Except in cases in which the certificate of incorporation, these
by-laws or applicable law otherwise provides, the vote of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board of
Directors.

               Section
2.7.  Organization. Meetings of the Board of Directors shall be presided
over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the
Board, if any, or in his absence by the Chief Executive Officer or President, or in their
absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.

               Section
2.8.  Action by Unanimous Consent of Directors. Unless otherwise
restricted by the certificate of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the Board of Directors, or of any committee
thereof, may be taken without a meeting if all members of the Board of Directors or such
committee, as the case may be, consent thereto in accordance with applicable law.

ARTICLE III

Committees

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               Section
3.1.  Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the corporation.
The Board of Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of the committee, the member or
members thereof present at any meeting and not disqualified from voting, whether or not he
or they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified member. Any
such committee, to the extent permitted by law and to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all papers
which may require it.

               Section
3.2.  Committee Rules. Unless the Board of Directors otherwise provides,
each committee designated by the Board of Directors may make, alter and repeal rules for
the conduct of its business. In the absence of such rules each committee shall conduct its
business in the same manner as the Board of Directors conducts its business pursuant to
Article II of these by-laws.

ARTICLE IV

Officers

               Section
4.1.  Executive Officers; Election; Qualifications; Term of Office;
Resignation; Removal; Vacancies. The Board of Directors shall elect a Chief Executive
Officer, Chief Financial Officer and Secretary, and it may, if it so determines, choose a
Chairman of the Board and a Vice Chairman of the Board from among its members. The Board
of Directors may also elect a President, one or more Vice Presidents, one or more
Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer
shall hold office until the first meeting of the Board of Directors after the annual
meeting of stockholders next succeeding his election, and until his successor is elected
and qualified or until his earlier resignation or removal. Any officer may resign at any
time upon written notice to the corporation. The Board of Directors may remove any officer
with or without cause at any time, but such removal shall be without prejudice to the
contractual rights of such officer, if any, with the corporation. Any number of offices
may be held by the same person. Any vacancy occurring in any office of the corporation by
death, resignation, removal or otherwise may be filled for the unexpired portion of the
term by the Board of Directors at any regular or special meeting.

               Section
4.2.  Powers and Duties of Executive Officers. The officers of the
corporation shall have such powers and duties in the management of the corporation as may
be prescribed in these by-laws, in a resolution by the Board of Directors and, to the
extent not so provided, as generally pertain to their respective offices, subject to the
control of the Board

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of Directors. The Board of Directors may require any officer, agent or
employee to give security for the faithful performance of his duties.

-10-

ARTICLE V

Stock

               Section
5.1.  Certificates. Every holder of stock shall be entitled to have a
certificate signed by or in the name of the corporation by the Chairman or Vice Chairman
of the Board of Directors, if any, or the Chief Executive Officer or President, and by the
Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
corporation certifying the number of shares owned by him in the corporation. Any of or all
the signatures on the certificate may be a facsimile. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar before such
certificate is issued, it may be issued by the corporation with the same effect as if he
were such officer, transfer agent, or registrar at the date of issue.

               Section
5.2.  Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The corporation may issue a new certificate of stock in the place of any
certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and
the corporation may require the owner of the lost, stolen or destroyed certificate, or his
legal representative, to give the corporation a bond sufficient to indemnify it against
any claim that may be made against it on account of the alleged loss, theft or destruction
of any such certificate or the issuance of such new certificate.

ARTICLE VI

Indemnification

               Section
6.1.  Right to Indemnification. The corporation shall indemnify and hold
harmless, to the fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person (a "Covered Person") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding"), by
reason of the fact that he, or a person for whom he is the legal representative, is or was
a director of the corporation or an officer of the corporation elected by the Board of
Directors or, while a director of the corporation or an officer of the corporation elected
by the Board of Directors, is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership, joint
venture, trust, enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including attorneys'
fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence,
except as otherwise provided in Section 6.3, the corporation shall be required to
indemnify a Covered Person in connection with a proceeding (or part thereof) commenced by
such Covered Person only if the commencement of such proceeding (or part thereof) by the
Covered Person was authorized by the Board of Directors of the corporation.

-11-

               Section
6.2.  Prepayment of Expenses. The corporation shall pay the expenses
(including attorneys' fees) incurred by a Covered Person in defending any proceeding in
advance of its final disposition, provided, however, that, to the extent
required by law, such payment of expenses in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by the Covered Person to
repay all amounts advanced if it should be ultimately determined that the Covered Person
is not entitled to be indemnified under this Article VI or otherwise.

               Section
6.3.  Claims. If a claim for indemnification or advancement of expenses
under this Article VI is not paid in full within thirty days after a written claim
therefor by the Covered Person has been received by the corporation, the Covered Person
may file suit to recover the unpaid amount of such claim and, if successful in whole or in
part, shall be entitled to be paid the expense of prosecuting such claim. In any such
action the corporation shall have the burden of proving that the Covered Person is not
entitled to the requested indemnification or advancement of expenses under applicable law.

               Section
6.4.  Nonexclusivity of Rights. The rights conferred on any Covered
Person by this Article VI shall not be exclusive of any other rights which such Covered
Person may have or hereafter acquire under any statute, provision of the certificate of
incorporation, these by-laws, agreement, vote of stockholders or disinterested directors
or otherwise.

               Section
6.5.  Other Sources. The corporation's obligation, if

any, to indemnify or to advance expenses to any Covered Person who was
or is serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be
reduced by any amount such Covered Person may collect as indemnification or advancement of
expenses from such other corporation, partnership, joint venture, trust, enterprise or
non-profit enterprise.

               Section
6.6.  Amendment or Repeal. Any repeal or modification of the foregoing
provisions of this Article VI shall not adversely affect any right or protection hereunder
of any Covered Person in respect of any act or omission occurring prior to the time of
such repeal or modification.

               Section
6.7.  Other Indemnification and Prepayment of Expenses. The Chief
Executive Officer of the corporation shall, to the fullest extent permitted by applicable
law, have the authority to indemnify and to advance expenses to persons other than Covered
Persons.

-12-

ARTICLE VII

Miscellaneous

               Section
7.1.  Fiscal Year. The fiscal year of the corporation shall be determined
by resolution of the Board of Directors.

               Section
7.2.  Seal. The corporate seal shall have the name of the corporation
inscribed thereon and shall be in such form as may be approved from time to time by the
Board of Directors.

               Section
7.3.  Manner of Notice. Except as otherwise provided herein or permitted
by applicable law, notices to directors and stockholders shall be in writing and delivered
personally or mailed to the directors or stockholders at their addresses appearing on the
books of the corporation. Notice to directors may be given by telegram, telecopier,
telephone or other means of electronic transmission.

               Section
7.4.   Waiver of Notice of Meetings of Stockholders, Directors and Committees.
Any waiver of notice, given by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or convened.
Neither the business to be transacted at nor the purpose of any regular or special meeting
of the stockholders, directors, or members of a committee of directors need be specified
in a waiver of notice.

               Section
7.5.  Form of Records. Any records maintained by the corporation in the
regular course of its business, including its stock ledger, books of account, and minute
books, may be kept on, or by means of, or be in the form of, any information storage
device or method, provided that the records so kept can be converted into clearly legible
paper form within a reasonable time.

-13-

CERTIFICATE OF DESIGNATION

of

SERIES A-1 PREFERRED STOCK, SERIES A-2 PREFERRED STOCK AND

SERIES A-3 PREFERRED STOCK

of

SUN HEALTHCARE GROUP, INC.

     Pursuant to Section 151 of the General Corporation
Law of the State of Delaware:

     Sun Healthcare Group Inc., a corporation organized
and existing under the General Corporation Law of the State of Delaware, in accordance
with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:

     That pursuant to the authority vested in the Board of
Directors in accordance with the provisions of the Restated Certificate of Incorporation
of the said corporation, the said Board of Directors adopted the following resolution
creating three series of preferred stock designated as "Series A-1 Preferred
Stock", "Series A-2 Preferred Stock" and "Series A-3 Preferred
Stock":

     RESOLVED, that pursuant to the authority vested in
the Board of Directors of this corporation in accordance with the provisions of the
Restated Certificate of Incorporation, three series of preferred stock, par value $.01 per
share, of the said corporation be and hereby are created, and that the designation and
number of shares thereof and the voting and other powers, preferences and relative,
participating, optional or other rights of the shares of such series and the
qualifications, limitations and restrictions thereof are as follows:

          1.
     Definitions. For purposes hereof, the following
definitions shall apply:

          "Business
Day" shall mean any day other than a Saturday, Sunday, or a day on which banking
institutions in the State of California are authorized or obligated by law or executive
order to close.

          "Common
Stock" shall mean the Common Stock, $0.01 par value per share, of the Company.

          "Company"
shall mean Sun Healthcare Group, Inc., a Delaware corporation.

          "Convertible
Common Stock" shall mean the Convertible Common Stock, $0.01 par value per share, of
the Company.

          "Dividend
Rate" shall mean 7% per annum, calculated on a 360 day per year basis, based on the
actual number of days elapsed.

          "EBITDA"
means, with respect to any Person for any period, an amount equal to: (a) consolidated net
income of such Person for such period; plus (b) the sum of, in each case to the extent
included in the calculation of such consolidated net income but without duplication, (i)
any provision for income taxes, (ii) interest expense, (iii) loss from extraordinary
items, (iv) depreciation, depletion and amortization of intangibles or financing or
acquisition costs and (v) all other non-cash charges and non-cash losses for such period,
including the amount of any compensation deduction as the result of any grant of stock or
stock equivalents to employees, officers, directors or consultants, other than charges
representing accruals of future cash expenses; minus (c) the sum of, in each case to the
extent included in the calculation of such consolidated net income but without
duplication, (i) any credit for income tax, (ii) interest income, (iii) gains from
extraordinary items for such period, (iv) any aggregate net gain (but not any aggregate
net loss) from the sale, exchange or other disposition of capital assets by such Person,
(v) any other non-cash gains or other items which have been added in determining
consolidated net income, including any reversal of a change referred to in clause (b) (v)
above by reason of a decrease in the value of any stock or stock equivalent and (vi) cash
payments for previously reserved charges, in each case, calculated in accordance with
GAAP.

          "GAAP" shall
mean generally accepted accounting principles in the United States of America as in effect
from time to time.

          "Liquidation
Preference" shall mean $25 per share, as such may be adjusted pursuant to Section 7
hereof.

          "Original Issue
Date" shall mean, with respect to each share, the date of the original issuance of
such share of Series A Preferred Stock.

          "Person"
shall mean any individual, firm, corporation or other entity, and shall include any
successor (by merger or otherwise) of such entity.

          "Redemption
Date" shall mean the date on which any shares of Series A Preferred Stock are
redeemed by the Company.

          "Redemption
Price" has the meaning set forth in Section 6 hereof.

          "Required
Holders" shall mean the holders of at least of a majority of the outstanding shares
of Series A Preferred Stock (i.e., Series A-1 Preferred Stock, Series A-2 Preferred Stock
and Series A-3 Preferred Stock voting together as a single class).

2

          "Subsidiary"
of any Person means any corporation or other entity of which a majority of the voting
power or the voting equity securities or equity interest is owned, directly or indirectly,
by such Person.

          2.     Designation:  Number
of Shares. The designation of the preferred stock authorized by this resolution shall
be "Series A-1 Preferred Stock", "Series A-2 Preferred Stock", and
"Series A-3 Preferred Stock" (collectively, the "Series A Preferred
Stock") and the number of shares of Series A-1 Preferred Stock, Series A-2
Preferred Stock and Series A-3 Preferred Stock authorized hereby shall be 10,000,000
shares, 10,000,000 shares and 10,000,000 shares respectively. Series A-1 Preferred Stock,
Series A-2 Preferred Stock And Series A-3 Preferred Stock are referred to herein,
collectively, as the Series A Preferred Stock.

          3.     Dividends.

               (a)     So
long as any shares of Series A Preferred Stock shall be outstanding, the holders of such
Series A Preferred Stock shall be entitled to receive out of any funds legally
available therefor, when, as and if declared by the Board of Directors of the Company
(which shall be at the Board's discretion), preferential dividends in cash at the Dividend
Rate on the Liquidation Preference hereunder, payable quarterly on the first Business Day
of each calendar quarter. With respect to each share of Series A-1 Preferred Stock, such
dividends shall be cumulative and begin to accrue from [the first anniversary of the
effective date of the Plan], whether or not declared and whether or not there shall be net
profits or net assets of the Company legally available for the payment of those
dividends. With respect to each share of Series A-2 Preferred Stock, such dividends shall
be cumulative and begin to accrue from [the second anniversary of the effective date of
the Plan], whether or not declared and whether or not there shall be net profits or net
assets of the Company legally available for the payment of those dividends. With
respect to each share of Series A-3 Preferred Stock, such dividends shall be cumulative
and begin to accrue from [the third anniversary of the effective date of the Plan],
whether or not declared and whether or not there shall be net profits or net assets
of the Company legally available for the payment of those dividends.

               (b)     Notwithstanding
the foregoing, the Company shall not be obligated to make any payments of any such
dividends in cash in respect of the Series A Preferred Stock, if any agreement governing
any debt obligation of the Company and/or its Subsidiaries prohibits the payment of such
cash dividends or if a default would result (immediately or with the passage of time or
the giving of notice) under any such agreement as a result of the payment of such cash
dividends.

               (c)     So
long as any Series A Preferred Stock shall be outstanding, no dividend whatsoever shall be
paid or declared, and no distribution shall be made, on account of any Common Stock or any
Convertible Common Stock unless all dividends in respect of the Series A Preferred Stock
provided for in this Section 3 for all past and current dividend periods have been paid
(or declared and set aside), and all amounts in respect of the redemption of Series A

3

Preferred Stock pursuant to Section 6 hereof have been paid (or set aside pursuant to
the terms hereof).

          4.     Liquidation
Rights of Series A Preferred Stock.

               (a)     In
the event of any liquidation, dissolution or winding up of the Company, whether voluntary
or involuntary, the holders of Series A Preferred Stock then outstanding shall be entitled
to be paid out of the assets of the Company available for distribution to its
stockholders, whether such assets are capital, surplus or earnings, before any payment or
declaration and setting apart for payment of any amount shall be made in respect of any
shares of Common Stock or any Convertible Common Stock or any share of any other class or
series of the Company's preferred stock ranking junior to the Series A Preferred Stock
with respect to the payment of dividends or distribution of assets on liquidation,
dissolution or winding up of the Company, an amount equal to the Liquidation Preference
plus an amount equal to all accrued and unpaid dividends.

               (b)     If
upon any liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, the assets to be distributed among the holders of Series A Preferred Stock
shall be insufficient to permit the payment to such stockholders of the full preferential
amounts aforesaid, then the entire assets of the Company to be distributed shall be
distributed ratably among the holders of Series A Preferred Stock, based on the full
preferential amounts for the number of shares of Series A Preferred Stock held by each
holder (i.e., the amount equal to the Liquidation Preference plus the amount equal to all
accrued and unpaid dividends).

               (c)     After
payment to the holders of Series A Preferred Stock of the amounts set forth in Section
4(a) hereof, the entire remaining assets and funds of the Company legally available for
distribution, if any, shall be distributed among the holders of any Company stock entitled
to a preference over the Common Stock and the Convertible Common Stock in accordance with
the terms thereof and, thereafter, to the holders of Common Stock and the Convertible
Common Stock.

               (d)     Neither
the merger or consolidation of the Company into or with another entity nor the sale of all
or substantially all the assets of the Company shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section 4.

          5.     Voting
Rights. In addition to any voting rights provided by law, the holders of shares of
Series A Preferred Stock shall have the following voting rights:

               (a)     So
long as any of the Series A Preferred Stock is outstanding, each share of Series A
Preferred Stock shall entitle the holder thereof to vote on all matters voted on by the
holders of Common Stock, voting together as a single class with other shares entitled to
vote at all meetings of the stockholders of the Company. With respect to any such vote,
each share of Series A Preferred Stock shall entitle the holder thereof to cast one vote
per share.

4

               (b)     The
affirmative vote of the Required Holders shall be necessary to

                       (i)     authorize,
adopt or approve an amendment to the Certificate of Incorporation of the Company which
would alter or change in any manner the terms, powers, preferences or special rights of
the shares of Series A Preferred Stock or grant waivers thereof, or which would otherwise
adversely affect the rights of the Series A Preferred Stock, provided that no such
modification or amendment may, without the consent of each holder of Series A Preferred
Stock affected thereby, (A) change the date of mandatory redemption of the Series A
Preferred Stock or the date of the Special Payment; (B) reduce the Liquidation Preference,
Dividend Rate, or Redemption Price of the Series A Preferred Stock or the Special Payment;
or (C) reduce the percentage of outstanding Series A Preferred Stock necessary to modify
or amend the terms thereof or to grant waivers thereof; or
                       (ii)     issue
any shares of the capital stock of the Company ranking senior to, or pari passu with
(either as to the payment of dividends or distributions upon voluntary or involuntary
liquidation, dissolution or winding up) the Series A Preferred Stock.

          6.     Redemption
of Series A Preferred Stock.

               (a)     Optional
Redemption. From time to time at the option of the Company, the Company may redeem, at
a redemption price equal to the sum of the Liquidation Preference per share plus an amount
equal to all accrued and unpaid dividends per share (the "Redemption Price"),
such shares of the Series A Preferred Stock as selected by the Company. If less than all
shares of Series A Preferred Stock are to be redeemed, the minimum number of shares that
may be redeemed at any one time shall be 100,000 shares (or, if less, all of the
outstanding shares of Series A Preferred Stock) and the outstanding shares shall be
redeemed pro rata among each of the series of Series A Preferred Stock (i.e., the Series
A-1 Preferred Stock, the Series A-2 Preferred Stock and the Series A-3 Preferred Stock)
and then pro rata among the holders (based upon the number of shares of the relevant
series held by each holder).

               (b)     Mandatory
Redemption. The Company shall redeem, at the Redemption Price, all of the outstanding
shares of Series A Preferred Stock (which are outstanding as of the end of such fiscal
year) ninety (90) days after the end of any fiscal year after December 31, 2001 for which
the EBITDA of Company and its Subsidiaries for such fiscal year exceeds $250,000,000.

               (c)     Procedures
for Redemption.

                       (i)     At
least twenty (20) Business Days and not more than sixty (60) Business Days prior to the
date fixed for the redemption of the Series A Preferred Stock, written notice (the "Redemption
Notice") shall be mailed, postage prepaid, to each holder of record of the Series
A Preferred Stock at its post office address last shown on the
5

records of the Company. The Redemption Notice shall state:

(A)     the number of shares of Series A Preferred Stock held
by the holder that the Company intends to redeem;
(B)     the date fixed for redemption and the Redemption
Price; and
(C)     that the holder is to surrender to the Company, in the
manner and at the place designated, its certificate or certificates representing the
shares of Series A Preferred Stock to be redeemed.

                      (ii)     On
or before the Redemption Date, each holder of Series A Preferred Stock shall surrender the
certificate or certificates representing such shares of Series A Preferred Stock to the
Company, in the manner and at the place designated in the Redemption Notice, and thereupon
the Redemption Price for such shares shall be payable in cash on the Redemption Date to
the person whose name appears on such certificate or certificates as the owner thereof,
and each surrendered certificate shall be cancelled. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate shall be
issued representing the unredeemed shares.
                      (iii)     Unless
the Company defaults in the payment in full of the Redemption Price, dividends on the
Series A Preferred Stock called for redemption shall cease to accumulate on the Redemption
Date, and the holders of such shares redeemed shall cease to have any further rights with
respect thereto on the Redemption Date, other than to receive the Redemption Price without
interest, regardless of whether the certificates representing the shares of Series A
Preferred Stock have been surrendered to the Company.
                      (iv)     If,
at the time of any redemption pursuant to this Section 6, the funds of the Company legally
available for redemption of Series A Preferred Stock are insufficient to redeem the number
of shares required to be redeemed, those funds which are legally available shall be used
to redeem the maximum possible number of such shares, pro rata among each series of Series
A Preferred Stock (i.e., the Series A-1 Preferred Stock, the Series A-2 Preferred Stock
and the Series A-3 Preferred Stock) and then pro rata among the holders (based upon the
number of shares of the relevant series held by each holder) based upon the number of
shares to be redeemed or by any other method determined by the Company in its sole
discretion to be equitable. At any time thereafter when additional funds of the Company
become legally available for the redemption of Series A Preferred Stock, such funds shall
immediately be used to redeem the balance of the shares of Series A Preferred Stock which
the Company has become obligated to redeem pursuant to this subparagraph, but which it has
not redeemed.

6

               (d)     Discharge.
At its option, the Company may, on or prior to a Redemption Date, deposit the aggregate
amount payable upon redemption of shares to be redeemed with a bank or trust company
having a combined capital and surplus (as shown by its latest published statement) of at
least $100,000,000 (hereinafter referred to as the "Depositary") designated by
the Board of Directors of the Company, to be held in trust by the Depositary for payment
to the holders of the shares then to be redeemed. If such deposit is made and the funds so
deposited are made available on such Redemption Date to holders of the shares to be
redeemed, the Company shall thereupon be released and discharged (subject to the
provisions of paragraph (e) of this Section 6) from any obligation to make payment of the
amount payable upon redemption of the shares to be redeemed, and the holders of such
shares shall look only to the Depositary for such payment.

               (e)     Return
of Funds. Any funds remaining unclaimed at the end of four years from and after such
Redemption Date in respect of which funds were deposited, shall be returned to the
Company; thereafter the holders of shares of Series A Preferred Stock redeemed on such
Redemption Date shall look only to the Company for the payment of the amount payable upon
redemption thereof. Any interest accrued on any funds deposited with the Depositary shall
belong to the Company and shall be paid to it from time to time on demand.

          7.     Special
Payment. (a) On January 31, 2007, the holders of Series A Preferred Stock shall be
entitled to receive out of funds legally available therefor, a special payment of $5.00
per share (or, if less, the Liquidation Preference per share) (the "Special
Payment"), payable on such date (provided funds are legally available to be used for
such purpose). On January 31, 2007, if the Special Payment is made by the Company, the
Liquidation Preference per share shall be reduced by such $5 per share.

     (b) Unless the Company defaults in the payment of the
Special Payment pursuant to Section 7(a), dividends on the Series A Preferred Stock shall
be adjusted to accrue from and after January 31, 2007 on the Liquidation Preference, as
adjusted, on January 31, 2007.

          8.     Certain Covenants.
Any registered holder of Series A Preferred Stock may proceed to protect and enforce its
rights and the rights of such holders by any available remedy by proceeding at law or in
equity to protect and enforce any such rights, whether for the specific enforcement of any
provision hereof or in aid of the exercise of any power granted herein, or to enforce any
other proper remedy.

          9.     No
Reissuance of Series A Preferred Stock. Series A Preferred Stock acquired by the
Company by reason of redemption, purchase, or otherwise shall be prohibited from being
reissued as Series A Preferred Stock, and all such shares shall be cancelled, retired and
eliminated from the shares of Series A Preferred Stock which the Company shall be
authorized to issue and restored to the status of authorized preferred stock undesignated
as to series.

7

          10.    Notices.
All notices to the Company permitted hereunder shall be personally delivered or sent by
first class mail, postage prepaid, addressed to its principal office located at
_____________________________________, or to such other address at which its principal
office is located and as to which notice thereof is similarly given to the holders of the
Series A Preferred Stock at their addresses appearing on the books of the Company.

          IN WITNESS WHEREOF, Sun
Healthcare Group, Inc. has caused this Certificate to be signed by its President on this
____ day of ________, 2002.



Name:

Title:

8

MEMORANDUM OF UNDERSTANDING

Settlement Class Members

The individuals taking under this settlement are comprised of the following two groups:

Group One:

All current and former Occupational Therapists ("OT"), Physical Therapists
("PT"), Speech Language Pathologists ("SLP"), Certified Occupational
Therapy Assistants ("COTA"), and/or Physical Therapy Assistants
("PTA"), employed by Sundance Rehabilitation Corporation between August 11, 1996
and August 11, 1999.

Group Two:

All current and former Registered Nurses ("RN"), Licensed Practical Nurses
("LPN") and two types of Nursing Assistants ("NAC" and
"CNA"), employed by Sunrise Healthcare Corporation between May 26, 1996 and May
26, 1999.

          Sunrise Healthcare
Corporation and Sundance Rehabilitation Corporation (the "Defendants") will
agree to class certification of these two groups, for these settlement purposes only,
under the provisions of Fed. R. Civ. P. 23(b)(3). These two groups will be treated as one
class for purposes of this settlement. The parties will work together to ensure that the
settlement of the claims of these two groups can be administered in one proceeding in
order to promote judicial economy and efficiency and to reduce costs. The parties may have
to first move for consolidation of the Sundance and Sunrise cases prior to seeking
approval of this settlement.

Notice

          Notice of the settlement
and claim application shall be sent to all Sun Class Members identified in Sun's records.
At the present, Sun believes this number to be approximately 87, 620 individuals. Sun
agrees to supply Gilardi & Company with the names and addresses of those individuals
in ASCII Delimited (fixed field) electronic format within 7 days of signing the
Stipulation of Settlement. Plaintiffs' counsel will not be given access to the disk
or hard copies of the information contained therein. Plaintiffs' counsel will be given
access to and may discuss with Gilardi & Co. any and all claimant information
necessary to the adequate and proper administration of the claims of Class Members,
including but not limited to name, address, telephone number, hours worked, and
distribution amount. Plaintiffs and Defendants agree to seek a Confidentiality Order from
the Bankruptcy Court imposing disclosure restrictions on Gilardi & Company, all
counsel, and all parties with respect to the disk and hard copies of information contained
on the disk.

          The parties agree that
notice shall be effected through direct mailing and some form of publication notice. The
parties agree to work together to mutually agree on the nature and scope of publication.

          The parties agree to work
together to mutually agree on the language of the Notice to be mailed to Class Members and
to the language of the Summary Notice for publication purposes.

Administration

          Administration of the
settlement will be handled by Gilardi & Company, an independent agency and will be
subject to court oversight. Plaintiffs' counsel shall have supervisory responsibility over
the settlement administrator.

          Defendants agree to pay up
to $500,000 to cover the cost of Notice and Claims Administration, and Hagens Berman
agrees to pay any notice and claims administration costs in excess of that amount.
Defendants shall be billed on a monthly basis for the costs associated with the notice and
claims administration, as those costs are incurred. Gilardi & Co. will also send a
copy of their monthly invoices to Hagens Berman. Defendants agree to pay Gilardi &
Co.'s monthly invoices directly and in a timely manner. Defendants will provide Hagens
Berman with a copy of the checks or cover letters verifying such payments at the time they
are made. However, Defendants agree to provide an advance payment for notice and claims
administration costs to Gilardi & Company in the amount of $100,000.

Attorneys Fees and Costs

          In addition to providing a
Settlement Fund, defendants agree to pay reasonable attorneys' fees and costs in the
amount of $300,000. The payment structure is as follows:

     -     $100,000 upon the
effective date of the Plan of Reorganization;

     -     $100,000 six months after
the effective date of the Plan of Reorganization; and

     -     $100,000 twelve months
after the effective date of the Plan of Reorganization.

          Upon plaintiffs' counsels'
application to the Court for approval of $300,000 in fees and costs, defendants agree not
to challenge the reasonableness or amount for which the application is made.

2

Payment of the Settlement Fund and Claims

          The Settlement Fund shall
consist of up to an aggregate $3 million allowed general unsecured claim which will
receive the distribution provided to general unsecured creditors in the manner provided by
the Debtors' plan of reorganization. No individual claimant shall be awarded more than a
$10,000 allowed general unsecured claim. In the event that the electing claimants do not
aggregate a total of $3 million, the $3 million general unsecured claim shall be reduced
accordingly.

No Admission of Liability

          The parties agree that the
settlement agreement shall contain a non-admission of liability clause. The parties wish
to resolve their dispute, each without admitting any liability or making any concessions
to the merits of their respective positions.

Bankruptcy Court Approval

          This settlement shall be
subject to the Bankruptcy Court's approval. Upon execution of the Stipulation of
Settlement, the parties shall submit the final Settlement Agreement to the Bankruptcy
Court for preliminary approval together with the proposed notice of the class action
settlement. The parties shall cooperate in obtaining approval of the settlement.

          Final Court Approval shall
mean the expiration of any applicable appeals period following the Bankruptcy Court's
approval of the settlement.

Settlement Agreement

          This settlement is
contingent on a formal written Stipulation of Settlement to be approved by the parties.

3

MOU

          As of the execution date of
this MOU, all further activity by the parties, with regard to the pending Sunrise and
Sundance proposed class action lawsuits, except for those activities specifically
authorized herein and save for those activities relating to the Stipulation of Settlement
and approval by the courts, will be suspended.

          The parties to this MOU
acknowledge and agree that this MOU does not set forth all of the substantive terms
necessary and appropriate for a complete and final settlement, and undertake to work in
good faith to reach further agreement as to such terms.

Dated: December 6, 2001

/s/ Joanne M. Guerrera
/s/ Steve W. Berman

Weil, Gotshal & Manges LLP
Hagens Berman, LLP

1501 K Street, N.W., Suite 100
1301 Fifth Avenue, Ste. 2900

Washington, D.C. 20005
Seattle, WA 98101

For Defendants
For Plaintiffs

4

EMPLOYMENT AGREEMENT

          THIS EMPLOYMENT AGREEMENT
("Agreement") is entered into this ____ day of January, 2002, by and between Richard
Matros ("Mr. Matros") and Sun Healthcare Group, Inc., a
Delaware corporation ("Sun" or "Company").

          WHEREAS, Mr. Matros has
been appointed to serve as the Chairman of the Board of Directors and Chief Executive
Officer ("CEO") of Sun; and

          WHEREAS, Sun and Mr. Matros
desire to set forth the terms and conditions of Mr. Matros' employment as CEO in an
employment agreement, and Mr. Matros is willing to perform such services for Sun
under the terms and conditions set forth below.

          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 term of employment of Mr. Matros under this Agreement is for a period of four
years (the "Term", and Term shall include any extension after it occurs)
commencing November 7, 2001 (the "Effective Date"), and terminating November 6,
2005; provided, however, that the term of employment shall be extended for an additional
year on November 6, 2004, and on each anniversary thereafter unless Sun or Mr. Matros
provides to the other party no later than ninety days (90) prior to such anniversary a
written notice of non-extension of the term of employment prior to such extension.

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, 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 $650,000 ("Base
Salary"), such salary to be payable in accordance with Sun's customary payroll
practices (but not less frequently than monthly). 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.
b.     Cash Bonus/Incentive Compensation.
Subject to the approval of this Agreement by a majority of Sun's shareholders, each year
in addition to the Base Salary provided for in Section 3(a) above, Mr. Matros shall be
entitled to an annual bonus for each fiscal year during the Term in which Sun achieves or
exceeds consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") targets as follows:

1.     If EBITDA is equal to or greater than 100% of target
but less than 120% of target, Mr. Matros shall receive an annual bonus equal to 50% of
Base Salary earned during such fiscal year.
2.     If EBITDA is equal to or greater than 120% of target
but less than 140% of target, Mr. Matros shall receive an annual bonus equal to 75% of
Base Salary earned during such fiscal year.
3.     If EBITDA is equal to or greater than 140% of target,
Mr. Matros shall receive an annual bonus equal to 100% of Base Salary earned during such
fiscal year.
The bonus for the 2001 fiscal year shall be pro-rated based on Mr. Matros' employment
during such year. EBITDA targets for FY 01 and FY 02 are equal to the projections set
forth in Sun's April 6, 2001 Five Year Business Plan (FY 01: $50.2 million; FY 02: $74.9
million). Bonus targets for subsequent years shall be set by the Compensation Committee of
the Board of Directors, which may use as performance measurements, EBITDA, return on
capital, gross revenues or any combination of such factors. Such bonus shall be payable at
the same time as other annual bonuses are paid to senior management personnel of Sun. In
order to have fully 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
Internal Revenue Code, to the extent necessary to preserve the Company's ability to deduct
such bonus. The maximum annual bonus that may be paid pursuant to this Section 3(b) is $2
million.
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c.     Equity Incentives. Sun shall use its
reasonable best efforts to obtain approval of an equity incentive plan ("Equity
Plan") that permits stock awards, stock options and phantom stock units by a majority
of the shareholders of Sun as of the effective date of a plan of reorganization of Sun
('Emergence Date"). Subject to approval of any Equity Plan by a majority of such
shareholders, Mr. Matros shall be entitled to the following equity incentives as of the
Emergence Date under such plan:
1.     On the Emergence Date, Mr. Matros will receive 150,000
restricted shares of common stock of Sun ("Common Stock") or, at Mr. Matros'
request, units representing such shares, equal to 150,0000 shares of Common Stock (the
"Restricted Stock Grant"), and the shares made available under the Equity Plan
shall be treated as outstanding for purposes hereof. One-fifth of the total number of
shares of Common Stock underlying the Restricted Stock Grant will vest on the Emergence
Date and an additional one-fifth on each of the first four anniversaries thereof provided
Mr. Matros is employed by Sun on each such date of vesting.
2.     On the Emergence Date, Mr. Matros will receive under
the Equity Plan a non-qualified stock option ("Stock Option") to purchase
150,000 shares of Common Stock at an exercise price of $27 per share, subject to approval
of the Equity Plan by a majority of the shareholders of Sun on the Emergence Date.
One-fifth of the shares of Common Stock underlying the Stock Option will vest on the
Emergence Date and an additional one-fifth on each of the first four anniversaries thereof
provided Mr. Matros is employed with Sun on each such date of vesting. The Stock Option
shall have a 7 year term unless sooner terminated pursuant to the terms of the Equity
Plan.
3.     If, during the Term, Mr. Matros' employment with Sun 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 Restricted Stock Grant and
Stock Options will thereupon immediately be vested.

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.
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f.     Car Allowance. During the Term, Mr.
Matros shall be entitled to a car allowance under terms equivalent to those provided to
other senior executive officers of Sun.
g.     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 directors' and officers' liability insurance and Mr.
Matros shall be covered by such insurance.
h.     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.

Section 4:  Travel and Housing. Sun agrees to relocate the principal
executive offices for Sun's senior management team to Orange County, California. Such
relocation shall be completed within a reasonable time upon location of acceptable office
space as approved by the Board of Directors. Until such relocation is completed, Mr.
Matros shall be entitled to reimbursement for reasonable travel and housing expenses
incurred by him in connection with his performance of services pursuant to this Agreement.
Mr. Matros shall be responsible for submitting receipts and other documentation to the
Chairman of the Compensation Committee of the Board of Directors in accordance with Sun's
normal reimbursement procedures.

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:

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
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Board of Directors, renders Mr. Matros unsuitable for the position of either Chairman
or CEO;
2.     Mr. Matros' continued failure to substantially 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; and
3.     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.

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 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).

1.     "Good Reason" shall mean the occurrence of
any one of the following events or conditions (but only if Mr. Matros provides a notice of
resignation to Sun within sixty (60) days following such event or condition):
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(a)     A meaningful and detrimental reduction, without
Mr. Matros' written consent, in the nature of his responsibilities at Sun, or a
meaningful and detrimental change in his reporting responsibilities or titles;
(b)     A reduction of compensation as set forth in Sections
3(a) - 3(c) (collectively the "Compensation"), a reduction of the benefits set
forth in Sections 3(d) - 3(g) (collectively, the "Benefits") (other than a
reduction of Benefits uniformly applicable to other members of senior management), or
failure by Sun to pay to Mr. Matros any portion of the Compensation or Benefits within
seven (7) business days of the date such compensation or other payments and benefits are
due, including, but not limited to, any failure of a majority of the shareholders of Sun
as of the Emergence Date to approve the Equity Plan; or
(c)     (i)     Prior to the date on
which the principal executive offices for Sun's senior management team is moved to Orange
County, California, a change in Mr. Matros' principal work location to a place other than
Albuquerque, New Mexico or Orange County, California;

(ii)     On and after the date on which the principal
executive offices for Sun's senior management team is moved to Orange County, California,
a change in Mr. Matros' principal work location to a place other than Orange County,
California.

In the event a majority of the shareholders of Sun as of the Emergence Date fails to
approve the Equity Plan, Sun shall be deemed to have fully corrected such failure if Sun
nonetheless provides to Mr. Matros the Restricted Stock Grant and Stock Option prior to
the date of termination specified in the notice of resignation delivered by Mr. Matros.

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
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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 and reasonably acceptable to Mr. Matros 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)

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. 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 any accrued
and unpaid bonus for any prior fiscal year and a pro rata portion (based on the number of
days of employment in the fiscal year of termination divided by 365) of the bonus, if any,
for the fiscal year in which the termination occurs. 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 termination of employment during the Term pursuant to Sections 5(b) or
5(c) or at the expiration of the Term following Sun's provision to Mr. Matros of a notice
of non-extension, as provided in Section 1, Mr. Matros shall be entitled to a lump
sum severance payment in the amount equal to the greater of: (i) the unpaid and unearned
portion of his Base Salary for the remainder of the Term (without regard to any
acceleration of the expiration of the Term as a result of such termination) 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. Notwithstanding the foregoing, Mr.
Matros' right to receive the severance payment hereunder shall be conditioned upon his
execution of a release in favor of Sun, which shall not be inconsistent with the terms of
this Agreement. Mr. Matros shall also be entitled to any earned but unpaid Bonus pursuant
to Section 3(b) through the date of termination and payment of any accrued paid time off
pursuant to Section 3(e) in accordance with Company policy. 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 first 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.
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 and 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;
8

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 Emergence 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(b)(1), 6(b)(2), 6(b)(3) and
6(b)(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 hereunder. A
Change in Control shall not, by itself, constitute Good Reason hereunder.

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
9

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 7c), 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. Sun shall pay to Mr. Matros the initial Gross-Up Payment within
five days of the receipt by Mr. Matros and Sun of the Accounting Firm's determination. 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 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 7c) below, shall promptly pay to Mr. Matros 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
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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 advance the amount of such payment to Mr. Matros
on an after-tax and interest-free basis (the "Advance"). 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 Mr. Matros an additional Gross-Up Payment in
respect of the excess parachute payments that are the subject of the claim, and Mr. Matros
agrees to pay the amount of the Excise Tax that is the subject of the claim to the
applicable taxing authority in accordance with applicable law.
d.     Repayments. If, after receipt by Mr.
Matros of an Advance, Mr. Matros becomes entitled to a refund with respect to the claim to
which such Advance 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
receipt by Mr. Matros of an Advance, 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 Advance shall
not be required to be repaid by Mr. Matros and the amount thereof shall offset the amount
of the additional Gross-Up Payment then owing to Mr. Matros.
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 Advance 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).

Section 8:  Protection of Sun's Interests.

a.     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
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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 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.
b.     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 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.
c.     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.
d.     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.

Section 9:  Miscellaneous Provisions.

12

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 and supersedes all prior agreements and understandings of the
parties with respect to the subject matter hereof. No agreements or representations, oral
or otherwise, express or implied, with respect to the subject matter hereof have been made
by either party which are not expressly set forth in this Agreement and this Agreement
shall supersede all prior agreements, 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(d) 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 as a
result 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
13

existence of Good Reason in the event of Mr. Matros' termination of employment
during the Term for Good Reason; provided, however that this provision shall not apply if
the relevant trier-of-fact determines that Mr. Matros' claim or position was without
reasonable foundation.
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:

Attention: General Counsel

101 Sun Avenue N.E.

Albuquerque, New Mexico 87109

To Mr. Matros:

Richard Matros

1214 Swarthmore Drive

Glendale, California 91206

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




Richard Matros
Date

SUN HEALTHCARE GROUP, INC.

By


Date

Its

14

Sun Healthcare Group Inc.

The executive officers and directors of Sun as of January 5, 2002 were:

     Richard K. Matros, age 48, has been the Chairman
of the Board and Chief Executive Officer of the Company since November 2001. Mr. Matros
served as Chief Executive Officer and President of Bright Now! Dental from 1998 to 2000.
He served Regency Health Services, Inc. ("Regency"), a publicly held long-term
care operator, as Chief Executive Officer from 1995 to 1997, as President and a director
from 1994 to 1997, and as Chief Operating Officer from 1994 to 1995. He served Care
Enterprises, Inc. as Chief Executive Officer during 1994, as President, Chief Operating
Officer and a director from 1991 to 1994, and as Executive Vice President - Operations
from 1988 to 1991. Mr. Matros currently serves on the board of directors of Bright Now!
Dental, Care Meridian LLC, Geriatrix and Protocare, Inc.

     Wallace E. Boston, Jr., age 47, has been the Chief
Financial Officer of the Company since August 2001. Mr. Boston served Neighborcare
Pharmacies, an institutional pharmacy company, as President and Chief Executive Officer
from 1999 to 2001 and as Executive Vice President and Chief Operating Officer from 1998 to
1999. He served Manor Care Health Services, Inc., a long-term care company, as Vice
President-Acquisitions & Development from 1996 to 1998 and as Vice President-Finance
from 1993 to 1996. Mr. Boston previously served as Vice President and Chief Financial
Officer of Meridian Healthcare, Inc. from 1985 to 1992, as Senior Vice President and Chief
Financial Officer of National Realty Services from 1983 to 1985, and with Price Waterhouse
Management Advisory Services from 1978 to 1983, most recently as Manager.

     Warren C. Schelling, age 48, has been Senior Vice
President of Ancillary Services of the Company since 2000. Mr. Schelling previously served
the Company as President and Chief Operating Officer of its international operations from
1999 to 2001, as Senior Vice President for its pharmaceuticals division from 1996 to 1999,
on the Board of Directors from 1996 to 1998 and as President of SunScript Pharmacy
Corporation from 1994 to 1996. Mr. Schelling was the President and Chief Operating Officer
of HPI Health Care Services, Inc., which provided pharmacy management services, from 1993
to 1994. During 1994, Mr. Schelling also served as the Executive Vice President/Pharmacy
Services Officer at Diagnostek, Inc. From 1985 to 1993, Mr. Schelling was a manager at HPI
Health Care Services, Inc.

     Robert F. Murphy, age 48, has been General Counsel
of the Company since 1995 and Secretary of the Company since 1996. From 1986 to 1995
Mr. Murphy served in several capacities as an officer and legal counsel to FHP
International Corporation, including most recently as Vice President and Associate General
Counsel. Prior to 1986, Mr. Murphy was in private practice.

     Chauncey Hunker, Ph.D., age 51, has been Corporate
Compliance Officer of the Company since 2000. From 1996 to 2000, Dr. Hunker served as Vice
President of Continuous Quality Improvement of SunDance Rehabilitation Corporation, the
Company's rehabilitation therapy subsidiary ("SunDance"). From 1995 to 1996, he
was a Clinical Director of SunDance, and from 1992 to 1995 he was Regional Vice President
of Learning Services - Midwestern Regional Facility in Madison, Wisconsin. Dr. Hunker has
also served as Adjunct Assistant Professor, Department of Neurology, at the University of
Wisconsin Medical School since 1989.

     Robert K. Schneider, age 54, has been a Vice
President and the Treasurer of the Company since July 2001. Mr. Schneider provided
investment banking consulting services from 1996 to 2001. He was Treasurer of the
Hillhaven Corporation and Vencor, Inc. (after Vencor's acquisition of Hillhaven) from

1990 to 1996. Mr. Schneider was a Vice President and Manager of Seattle First National
Bank from 1974 to 1990.

     Jennifer L. Botter, age 39, has been Vice
President and Corporate Controller of the Company since 2000. From 1998 to 1999, Ms.
Botter held various positions within the Company. From 1996 to 1998, she was Director of
Finance for Fulcrum Direct, Inc., a manufacturer and cataloguer of children's apparel.
From 1984 to 1996 she held financial consulting and accounting positions in the high
technology and manufacturing industries.

     Gregory S. Anderson, age 45, has served as a
Director of the Company since November 2001. Mr. Anderson has served as the President and
Chief Executive Officer of Quality Care Solutions, Inc. ("QCSI"), a publicly
held provider of software and services for the healthcare industry, since 1998. Prior to
1998 Mr. Anderson was in the venture capital business. From 1993 to 1998 he was President
of Anderson & Wells Co., the venture capital manager of Sundance Venture Partners and
El Dorado Investment Co. Mr. Anderson currently serves on the board of directors of QCSI,
American OBGYN, Inc., Glendora Hospital and Valley Commerce Bank.

     Bruce C. Vladeck, Ph.D., age 52, has served as a
Director of the Company since November 2001. Dr. Vladeck has served as Senior Vice
President for Policy for Mount Sinai NYU Health, Director of the Institute for Medicare
Practice and Professor of Health Policy and Geriatrics at the Mount Sinai School of
Medicine since 1998. From 1993 to 1997 Dr. Vladeck was Administrator of the Health Care
Financing Administration (HCFA) of the U.S. Department of Health and Human Services. From
1983 to 1993, Dr. Vladeck served as President of United Hospital Fund of New York. Dr.
Vladeck currently serves on the board of directors of Senior Health Partners, a managed
long-term care program, and as a Trustee of Ascension Health, the March of Dimes Birth
Defects Foundation and the Medicare Rights Center.

     Steven L. Volla, age 55, has been a director of
the Company since November 2001. Mr. Volla has served as President of Health Equities
Management, Inc., an investor in and advisor to healthcare companies, since 1994. He
served as Chairman of Primary Health Systems, Inc., an acute care hospital management
company, from 1994 to 2001. He served as President, Chief Executive Officer and Chairman
of the Board of American Healthcare Management, Inc., a publicly held hospital management
company, from 1989 to 1994. He has also served Universal Health Services, Inc. as Senior
Vice President - Operations and UHS Hospital Company as President. Mr. Volla currently
serves on the board of directors of Pathmark Stores, Inc., a publicly held operator of
supermarkets; Brown Schools, Inc., a privately held education company; and Specialty
Hospital of America, a privately held long-term acute care hospital management company.

     Milton J. Walters, age 59, has been a director of
the Company since November 2001. Mr. Walters has served with investment banking companies
for over 30 years, including: Tri-River Capital since 1999 and from 1988 to 1997, as a
principal; Prudential Securities from 1997 to 1999, most recently as Managing Director;
Smith Barney from 1984 to 1988, most recently as Senior Vice President and Managing
Director; Warburg Paribas Becker from 1965 to 1984, most recently as Managing Director. He
currently serves on the Board of Directors of Quest Products Corporation, a publicly held
marketing company, and as Chairman of MDHIO, Inc. Marketing, a privately held marketer of
golf contests.}}

OIG:	Civil Recoveries Branch - Compliance Unit
		Office of Counsel to the Inspector General
		Office of Inspector General
		U.S. Department of Health and Human Services
		Cohen Building, Room 5527
		330 Independence Avenue, SW
		Washington, DC 20201
		Phone: 202.619.2078
		Fax: 202.205.0604
Sun:	Mr. Chauncey Hunker, Ph.D.
		Corporate Compliance Officer
		Sun HealthCare Group, Inc.
		101 Sun Lane, N.E.
		Albuquerque, N.M. 87109
		Phone: 866.468.2125 (ext.6853)
		505.468.6853
		Fax: 505.821.9532
		Chauncey.hunker@sunh.com


Mark Wimer	Date
Chief Executive Officer
Sun Healthcare Group, Inc.





Chauncey Hunker	Date
Corporate Compliance Officer
Sun Healthcare Group, Inc.


Lewis Morris	Date
Assistant Inspector General for Legal Affairs
Office of Inspector General
U.S. Department of Health & Human Services

TO BE COMPLETED BY MEDICARE CONTRACTOR
Date:
Contractor Deposit Control # Date of Deposit: Contractor Contact Name: Phone #
Contractor Address:
Contractor Fax:

TO BE COMPLETED BY PROVIDER/PHYSICIAN/SUPPLIER
Please complete and forward to Medicare Contractor. This form, or a similar document containing the following information, should accompany every voluntary refund so that receipt of check is properly recorded and applied.
PROVIDER/PHYSICIAN/SUPPLIERNAME
ADDRESS
PROVIDER/PHYSICIAN/SUPPLIER # CHECK NUMBER#
CONTACT PERSON: PHONE # AMOUNT OF CHECK $ CHECK DATE

REFUND INFORMATION
For each Claim, provide the following:
Patient Name HIC #
Medicare Claim Number Claim Amount Refunded $
Reason Code for Claim Adjustment: (Select reason code from list below. Use one reason per claim)
(Please list all claim numbers involved. Attach separate sheet, if necessary)
Note: If Specific Patient/HIC/Claim #/Claim Amount data not available for all claims due to Statistical Sampling, please indicate methodology and formula used to determine amount and reason for overpayment:
For Institutional Facilities Only:
Cost Report Year(s)
(If multiple cost report years are involved, provide a breakdown by amount and corresponding cost report year.)
For OIG Reporting Requirements:
Do you have a Corporate Integrity Agreement with OIG? Yes No
Reason Codes:
Billing/Clerical Error	MSP/Other Payer Involvement	Miscellaneous
01 - Corrected Date of Service	08 - MSP Group Health Plan Insurance	13 - Insufficient Documentation
02 - Duplicate	09 - MSP No Fault Insurance	14 - Patient Enrolled in an HMO
03 - Corrected CPT Code	10 - MSP Liability Insurance	15 - Services Not Rendered
04 - Not Our Patient(s)	11 - MSP, Workers Comp.(Including	16 - Medical Necessity
05 - Modifier Added/Removed	Black Lung)	17 - Other (Please Specify)
06 - Billed in Error	12 - Veterans Administration	_________________________
07 - Corrected CPT Code

Term	Section Where Defined or First Used
Acquiring Person	12(d)(i)
Beneficial Owner	12(d)(i)
Benefits	4
Change in Control	12(d)
Chapter 11 Plan	12(d)
Code	2(a)
Committee	2(a)
Common Stock	1
Company	1
Dividend Equivalent Right	10(d)
Effective Date	22
Exchange Act	2(a)
Fair Market Value	15
Incentive Stock Option	6(a)
Non-Employee Director	2(a)
Nonqualified Stock Option	6(a)
Parent Corporation	6(f)
Performance-Based Awards	10(a)
Plan	1
Restoration Stock Options	6(e)
Stock Appreciation Rights	7
Stock Award	8
Stock Options	6
Stock Unit	9(d)
Subsidiary Corporation	6(f)

		Page
Article 1	DEFINITIONS	1
Article 2	ISSUANCE OF WARRANTS	3
2.1	Initial Issuance	3
2.2	Initial Share Amount	3
2.3	Form of Warrant Certificates	4
2.4	Execution of Warrant Certificates	4
2.5	Countersignature of Warrant Certificates	4
Article 3	EXERCISE PERIOD	4
Article 4	EXERCISE OF WARRANTS	5
4.1	The Exercise Price	5
4.2	Manner of Exercise	5
4.3	When Exercise Effective	5
4.4	Delivery of Certificates, Etc	5
4.5	Fractional Shares	6
Article 5	ADJUSTMENT OF THE AMOUNT OF COMMON STOCK ISSUABLE AND THE EXERCISE PRICE UPON EXERCISE	7
5.1	Adjustment for Change in Capital Stock	7
5.2	Distributions	7
5.3	Adjustments for Mergers and Consolidations	8
5.4	No De Minimis Adjustments; Calculation to Nearest Cent and One-hundredth of Share	8
5.5	Notice of Adjustment; Warrant Agent's Disclaimer	8
5.6	Other Notices	8
5.7	No Change in Warrant Terms on Adjustment	9
Article 6	MERGER, CONSOLIDATION, ETC.	9
Article 7	NOTIFICATION OF CERTAIN EVENTS	9
7.1	Corporate Action	9
7.2	Available Information	10
Article 8	RESERVATION OF STOCK	10
Article 9	LOSS OR MUTILATION	11
Article 10	WARRANT REGISTRATION	11

		Page
10.1	Registration	11
10.2	Transfer or Exchange	12
12.3	Valid and Enforceable	12
10.4	Endorsement	12
10.5	No Service Charge	12
10.6	Treatment of Holders of Warrant Certificates	12
10.7	Cancellation	12
Article 11	WARRANT AGENT	13
11.1	Obligations Binding	13
11.2	No Liability	13
11.3	Instructions	13
11.4	Agents	13
11.5	Cooperation	14
11.6	Agent Only	14
11.7	Right to Counsel	14
11.8	Compensation	14
11.9	Accounting	14
11.10	No Conflict	14
11.11	Resignation; Termination	15
11.12	Change of Warrant Agent	15
11.13	Successor Warrant Agent	16
Article 12	REMEDIES, ETC.	16
12.1	Remedies	16
12.2	Warrant Holder Not Deemed a Stockholder	16
12.3	Right of Action	16
Article 13	MISCELLANEOUS	16
13.1	Notices	16
13.2	Governing Law and Consent to Forum	17
13.3	Benefits of this Agreement	17
13.4	Agreement of Holders of Warrant Certificates	17
13.5	Counterparts	18
13.6	Amendments	18

/s/ Joanne M. Guerrera	/s/ Steve W. Berman
Weil, Gotshal & Manges LLP	Hagens Berman, LLP
1501 K Street, N.W., Suite 100	1301 Fifth Avenue, Ste. 2900
Washington, D.C. 20005	Seattle, WA 98101

For Defendants	For Plaintiffs