10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

FORM 10-K

(Mark One)

[X]    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2001

OR

[  ]    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from            to           

Commission file number 1-12040

SUN HEALTHCARE GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State of Incorporation) 85-0410612
(I.R.S. Employer Identification No.)

101 Sun Avenue NE
Albuquerque, New Mexico 87109
(505) 821-3355
(Address and telephone number of Registrant)

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share

     Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]     No [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     [X]

     On March 18, 2002, Sun Healthcare Group, Inc. had 8,949,977 outstanding shares of Common Stock. Of those, 6,769,976 shares of Common Stock were held by nonaffiliates. As of March 28, 2002, there was no established trading market for the Common Stock.

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  [X]  No  [  ]

Documents Incorporated by Reference: None

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SUN HEALTHCARE GROUP, INC.
(Debtor-in-Possession)
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

INDEX

		Page
PART I
Item 1.	Business	3
Item 2.	Properties	22
Item 3.	Legal Proceedings	24
Item 4.	Submission of Matters to a Vote of Security Holders	25
PART II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	25
Item 6.	Selected Financial Data	26
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 8.	Financial Statements and Supplementary Data	53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	53
PART III
Item 10.	Directors and Executive Officers of the Registrant	54
Item 11.	Executive Compensation	58
Item 12.	Security Ownership of Certain Beneficial Owners and Management	61
Item 13.	Certain Relationships and Related Transactions	63
PART IV
Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	65
Signatures		68

SunBridge(R), SunDance(R), SunScript(R), SunCare(R), SunFactors(R), SunPlus(R), and CareerStaff Unlimited(R) and related names herein are registered trademarks of Sun Healthcare Group, Inc. and its subsidiaries.

___________________

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PART I

Item 1. Business

General

     Sun Healthcare Group, Inc. through its direct and indirect subsidiaries (collectively referred to herein as "Sun" or the "Company"), is one of the largest providers of long-term, subacute and related specialty healthcare services in the United States. The Company currently operates through three principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, and (iii) pharmaceutical services. The following is a description of the Company's current business segments and other operations. Financial information for the business segments is set forth in "Note 21 - - Segment Information" in the Company's consolidated financial statements.

     Inpatient Services. As of March 1, 2002, Sun operated 247 long-term, subacute care and assisted living facilities (consisting of 229 skilled nursing facilities, nine assisted living facilities and nine acute rehabilitation hospitals) in 25 states with 27,954 licensed beds in the United States through its wholly owned subsidiary, SunBridge Healthcare Corporation and other direct and indirect subsidiaries (collectively, "SunBridge"). The Company intends to divest 13 skilled nursing facilities with 1,764 licensed beds during 2002. The Company's long-term and subacute care facilities provide inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. The Company provides 24-hour nursing care in these facilities by registered nurses, licensed practical nurses and certified nursing aides.

     The long-term care industry encompasses a broad range of related specialty healthcare services provided to the elderly and to other patients with medically complex needs who can be cared for outside of the acute care hospital environment but who generally cannot be efficiently and effectively cared for at home. Long-term and subacute care facilities offer skilled nursing care, routine rehabilitation therapy and other support services, primarily to elderly patients. Long-term and subacute care facilities may also provide a broad range of specialized healthcare services such as care for patients with Alzheimer's disease and subacute needs. Subacute care includes those services provided to patients with medically complex conditions who require ongoing medical and nursing supervision and access to specialized equipment and services, but do not require many of the other services provided by an acute care hospital. Services in this category include ventilator and oxygen care, HIV care, intravenous therapy, complex wound care, traumatic brain injury care, post-stroke care and hospice care. The facilities also provide a broad range of support services including rehabilitation therapy, dietary services, therapeutic recreational activities, social services, housekeeping and laundry services and pharmaceutical and medical supplies.

     The Company's acute rehabilitation hospitals provide a range of inpatient and outpatient services for people with traumatic brain injuries, strokes, arthritis, and other disabling conditions. The Company's assisted living facilities serve the elderly who do not need the level of nursing care provided by long-term or subacute care facilities, but who do need some assistance with the activities of daily living.

     Rehabilitation Therapy Services. Sun provides rehabilitation therapy services primarily through its wholly-owned subsidiary, SunDance Rehabilitation Corporation ("SunDance"). As of March 1, 2002, SunDance provided rehabilitation therapy services to 553 facilities in 40 states, 335 of which were operated by nonaffiliated parties. The Company provides a broad array of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy. These services are provided by

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approximately 3,000 licensed rehabilitation therapists and assistants employed or contracted by SunDance.

     Pharmaceutical Services. The Company provides pharmaceutical services primarily through its wholly-owned subsidiary, SunScript Pharmacy Corporation ("SunScript"). Pharmaceutical services include dispensing pharmaceuticals for such purposes as infusion therapy, oral medication, pain management, antibiotic therapy and parenteral nutrition. Additional services include providing consultant pharmacists. SunScript services are typically provided to nonaffiliated and affiliated facilities, including subacute and skilled nursing care facilities, assisted living facilities, group houses, correctional facilities, mental health facilities and home healthcare companies. As of March 1, 2002, SunScript operated 32 regional pharmacies, 11 in-house long-term care pharmacies and one pharmaceutical billing and consulting center, which together provided pharmaceutical products and services to a total of 651 long-term and subacute care facilities in 21 states, 436 of which were operated by nonaffiliated parties.

     Other Operations. The Company is a nationwide provider of temporary medical staffing primarily through its wholly-owned subsidiary, CareerStaff Unlimited, Inc. ("CareerStaff"). CareerStaff derives approximately 46% of its revenues from schools and governmental agencies, 43% from hospitals and other providers and 11% from skilled nursing facilities. CareerStaff provides (i) licensed therapists skilled in the areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists, pharmacist technicians and medical imaging technicians and (iv) related medical personnel. As of March 1, 2002, CareerStaff had 25 division offices which provided temporary therapy and nursing staffing services in major metropolitan areas and one division office which specialized in the placement of temporary traveling therapists in smaller cities and rural areas.

     Through the Company's wholly-owned subsidiaries, SunAlliance Healthcare Services, Inc. ("SunAlliance") and SunPlus Home Health Services, Inc. ("SunPlus"), the Company provides mobile radiology, medical laboratory and home healthcare services in certain locations. Through its majority-owned subsidiary, Shared Healthcare Systems, Inc., which also does business under the trade name SHS.com, the Company develops certain software for use in the long-term care industry.

     General Information. Sun Healthcare Group, Inc. was incorporated in 1993. The Company's principal executive offices are located at 101 Sun Avenue, NE, Albuquerque, NM 87109, and its telephone number is (505) 821-3355. The Company maintains a web site at www.sunh.com.

Reorganization

     Emergence from Chapter 11 Bankruptcy Proceedings. On October 14, 1999, Sun and substantially all of its U.S. operating subsidiaries filed voluntary petitions for protection under chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), (case nos. 99-3657 through 99-3841, inclusive). On February 3, 2000, HoMed Convalescent Equipment, Inc. ("HoMed"), an indirect subsidiary of Sun, commenced its chapter 11 case in the Bankruptcy Court (case no. 00-00841). On February 6, 2002, the Bankruptcy Court approved the Company's joint plan of reorganization (the "Plan") and on February 28, 2002 the Company consummated the Plan. The principal provisions of the Plan are set forth below:

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	Type of Claim/Security	Treatment under Plan
1.	General unsecured creditors with claims less than $50,000	To be issued cash payments at the rate of 7% of their claims
2.	General unsecured creditors with claims of $50,000 or more	To be issued an aggregate of approximately 900,000 shares (9%) of new common stock
3.	Senior bank lenders	Issued approximately 8.9 million shares of new common stock (89%) and received a cash payment of approximately $6.6 million
4.	Senior subordinated note holders	To be issued an aggregate of 200,000 shares (2%) of new common stock and warrants to purchase an additional 500,000 shares (5%)
5.	Common stock, options, warrants, convertible debt, and convertible trust issued preferred securities	Canceled with no recovery to holders

See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" and "Note 23 -Subsequent Events" in the Company's consolidated financial statements.

     New Management Team. In November 2001, Richard K. Matros was appointed as Chief Executive Officer. Also, in November 2001, the then remaining members of the Board of Directors of the Company resigned and Mr. Matros, Gregory S. Anderson, Bruce C. Vladeck, Steven L. Volla and Milton J. Walters were appointed to the Board. In February 2002, John W. Adams, Charles W. McQueary, John F. Nickoll and Sanjay H. Patel were added to the Board. Kevin W. Pendergest was appointed as the Company's Chief Financial Officer and William A. Mathies was appointed as the President of SunBridge in March 2002 and Heidi J. Fisher was appointed Senior Vice President of Human Resources in February 2002. See "Item 10 - Directors and Executive Officers of the Registrant."

     New Loan Agreements. On February 28, 2002, the Company entered into (i) a Loan and Security Agreement with certain lenders, led by Heller Healthcare Finance, Inc. as collateral agent, and Citicorp USA, Inc., as administrative agent (the "Revolving Loan Agreement") and (ii) a Term Loan and Note Purchase Agreement with certain lenders, led by U.S. Bank National Association as administrative and collateral agent (the "Term Loan Agreement," and together with the Revolving Loan Agreement, the "Loan Agreements"). The Revolving Loan Agreement is a $150.0 million three-year revolving line of credit that is secured by the Company's accounts receivable, inventory, equipment and other assets, a first priority pledge of the stock of the Company's subsidiaries, other than those subsidiaries providing pharmaceutical services, and a second priority pledge of the pharmaceutical services subsidiaries. The Company's borrowing availability under the Revolving Loan Agreement is limited to up to 85% of the Company's net eligible accounts receivable and up to 50% of the Company's net eligible inventory, but not to exceed $150.0 million. As of March 1, 2002, there was $39.9 million available to the Company for

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additional borrowing under the Loan Agreements. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

     The Term Loan Agreement is comprised of a three-year $20 million term loan (the "Term Loan") and a three-year $23.7 million original issue discount note (the "Discount Note" and together with the Term Loan, the "Term Debt"). The Term Debt is secured primarily by a first priority pledge of the stock of the Company's subsidiaries that provide pharmaceutical services and a second priority security interest in substantially all of the Company's other assets. Under the Discount Note, the Company's borrowing availability is approximately $20.0 million. Provided that an event of default has not occurred, interest accrues on the Term Loan at the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) plus 4.00% or (ii) 9.00%. The Company will pay interest on the Discount Note for base rate borrowings a rate of interest equal to the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) or (ii) 2.65% and for Eurodollar borrowings a rate of interest equal to the Adjusted Eurodollar Rate (as defined in the Term Loan Agreement) plus 0.50%.

     Divestitures. During the years ended December 31, 2001 and 2000, Sun divested 43 and 49 skilled nursing facilities in the United States, respectively. In addition, Sun divested 20 assisted living facilities during 2000. The Company did not receive cash consideration from the skilled nursing facility divestitures during 2001 or 2000. The Company received cash consideration of approximately $1.2 million in 2000 for the 20 divested assisted living facilities. The aggregate net operating losses of the skilled nursing facilities and the assisted living facilities were approximately $7.5 million in 2001 and $5.7 million and $3.2 million in 2000, respectively. See "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements. During the period of January 1, 2002 through March 1, 2002, no skilled nursing facilities were divested.

     During January 2001, the Company sold substantially all of the assets of its SunChoice medical supplies operations to Medline Industries, Inc. The Company received proceeds of $16.6 million in exchange for the SunChoice assets.

     During February 2001, the Company sold its operations in the United Kingdom. Those operations included 146 long-term care facilities with 8,326 licensed beds. The Company did not receive any material cash payments in exchange for these operations, however the Company was released from approximately $112.9 million of aggregate debt, capital lease obligations, notes payable and other liabilities upon consummation of the sale. The Company's operations in Australia were liquidated in July 2001 and the Company received liquidation proceeds of approximately $0.9 million. The Company divested its long-term care and pharmacy operations in Germany in February 2001 for approximately $3.5 million. The Company sold its long-term care operations in Spain in October 2000 for approximately $7.6 million. At December 31, 2001, the Company had no operations outside of the U.S.

     In March 2002, the Company divested its respiratory therapy supplies and equipment business that was operated by its wholly-owned subsidiary, SunCare Respiratory Services, Inc. The Company received $0.9 million in cash for these assets.

     Restructuring. The Company's restructuring began in 1998. The approximate number of full and part-time employees of the Company worldwide has decreased from approximately 80,700 on February 20, 1999 to 57,100 on March 31, 2000, to 42,000 on February 28, 2001 and to 36,000 on March 1, 2002. The decrease in 1999 was primarily attributable to the elimination of rehabilitation therapy employees through attrition, layoffs and the disposition of a number of inpatient facilities. The Company restructured its domestic operations to more closely align the inpatient, rehabilitation and pharmaceutical services divisions. The Company also decreased the number of layers in its management structure. The

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decreases in 2000 and early 2001 primarily resulted from the disposition of the Company's international operations, medical supplies operations and inpatient facilities. The Company intends to continue its restructuring efforts in 2002 in its efforts to reduce overhead costs.

Reimbursement from Medicare and Medicaid

     Revenue Sources. The Company receives revenues from Medicare, Medicaid, private insurance, self-pay residents, other third party payors and long term care facilities which utilize the Company's specialty medical services. The healthcare industry is experiencing the effects of the trend toward cost containment as federal and state governments and other third party payors seek to impose lower reimbursement and negotiate reduced payment schedules with providers. These cost containment measures, combined with the increasing influence of managed care payors and competition for patients, generally have resulted in reduced rates of reimbursement for services provided by the Company.

     The sources and amounts of the Company's inpatient services revenues are determined by a number of factors, including the number of licensed beds and occupancy rates of the Company's facilities, the acuity level of patients and the rates of reimbursement among payors. Likewise, payment for ancillary medical services, including the institutional pharmacy services of SunScript and the therapy services provided by SunDance, will vary based upon payor and payment methodologies. Changes in the case mix of the patients, as well as payor mix among private pay, Medicare, and Medicaid will significantly affect the Company's profitability.

     The following table sets forth the total revenues and percentage of revenues by payor source for the Company's U.S. operations only for the years indicated (in thousands):

	Years Ended December 31,
Sources of Revenues	2001		2000		1999
Medicaid	$940,110	45.8%	$1,025,600	46.8%	$1,041,662	46.7%
Medicare	536,113	26.1%	515,492	23.5%	446,820	20.0%
Private pay and other (1)	575,124	28.1%	652,334	29.7%	743,651	33.3%

(1) Includes revenues from the provision of ancillary services, which includes payments for rehabilitation and respiratory therapy, temporary medical staffing services and pharmaceutical services provided to nonaffiliated long-term and subacute facilities and not directly charged to Medicaid or Medicare. Nonaffiliated sources may themselves derive all or a portion of their revenues from Medicaid and/or Medicare.

     Medicare and Medicaid. The Health Insurance for Aged and Disabled Act, known as "Medicare," has made available to nearly every United States citizen 65 years of age and older a broad program of health insurance designed to help the nation's elderly meet hospital, hospice, home health and other health care costs. Health insurance coverage has been extended to certain persons under age 65 qualifying as disabled and those having end-stage renal disease. Medicare includes three related health insurance programs: (i) hospital insurance ("Part A"); (ii) supplementary medical insurance ("Part B"); and (iii) a managed care option for beneficiaries who are entitled to Part A and enrolled in Part B ("Medicare+Choice" or "Medicare Part C"). The Medicare program is currently administered by fiscal intermediaries (for Part A and some Part B services) and carriers (for Part B) under the direction of the Centers for Medicare and Medicaid Services ("CMS") (formerly the Health Care Finance Administration), a division of the Department of Health and Human Services ("HHS").

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     The following table sets forth the approximate average amounts of Medicare Part A revenues per patient per day recorded by the Company's long-term care facilities for the years indicated ended December 31:

Fiscal Year	Average Medicare Part A Revenue Per Patient, Per Day (2)
2001	$376.78   (3) (4)
2000	343.04
1999	322.52   (1)
1998	448.80   (1)
1997	472.90   (1)

(1)  Includes estimated adjustments for routine cost limit ("RCL") exception revenue.
(2)  The year-to-year comparisons are not on a same-store basis due to acquisitions and divestitures.
(3)  Includes a significant rate increase during 2001 of approximately 10.0%.
(4)  Excludes approximately $52.1 million of excess reserves reversed into net patient revenues
      due to the Settlement Agreement.  See "Item 3 - Legal Proceedings" for a description
      of the Settlement Agreement.

     Medicaid is a federal-state matching program, whereby the federal government, under a needs based formula, matches funds provided by the participating states for medical assistance to "medically indigent" persons. The programs are administered by designated state agencies under federal rules. Although Medicaid programs vary from state to state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates determined in accordance with each state's regulations. For skilled nursing facilities, most states pay prospectively determined rates, and have some form of acuity adjustment. In addition to facility-based services, most states cover an array of medical ancillary services, including those services provided by institutional pharmacies. Payment methodologies for these services vary based upon state law and regulations permitted under federal rules.

     The Company is subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against the Company if they assert that the Company has overcharged the programs or failed to comply with program requirements. These rights and remedies may include requiring the repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to the Company. Such programs may also impose fines, criminal penalties or program exclusions. Other third party payor sources also reserve rights to conduct audits and make monetary adjustments.

     Congress has enacted three major laws since 1997 that have significantly altered payment for nursing home and medical ancillary services. The Balanced Budget Act of 1997 (the "1997 Act"), signed into law on August 5, 1997, reduced federal spending on the Medicare and Medicaid programs. The Medicare Balanced Budget Refinement Act ("BBRA"), enacted in November 1999 addressed a number of the funding difficulties caused by the 1997 Act. The Benefits Improvement and Protection Act of 2000 ("BIPA"), was enacted on December 15, 2000, further modifying the law and restoring additional funding. The following provides a brief summary of these laws and an overview of the impact of these enactments on the Company's services.

     Under the 1997 Act, participating skilled nursing facilities are reimbursed under a prospective payment system ("PPS") for inpatient Medicare Part A covered services. The PPS system commenced with a facility's first cost reporting period beginning on or after July 1, 1998. Under PPS, nursing

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facilities are paid a predetermined amount per patient, per day ("per diem") based on the anticipated costs of treating patients. The per diem rate is determined by classifying each patient into one of forty-four resource utilization groups ("RUG") using the information gathered during a minimum data set assessment. There is a separate per diem rate for each of the RUG classifications. The per diem rate also covers rehabilitation and non-rehabilitation ancillary services. The law phased in PPS over a three-year period, during which the rate was based on a blend of the facility's adjusted historical 1995 costs and the federally established per diem rate. As of January 1, 2002, all of the Company's facilities are subject to 100% of the federal rate.

     In November 1999, the BBRA was passed in Congress. This enactment provided relief for certain reductions in Medicare reimbursement caused by the 1997 Act. For covered skilled nursing facility services furnished on or after April 1, 2000, the federal per diem rate was increased by 20.0% for 15 RUG payment categories. While this provision was initially expected to adjust payment rates for only six months, CMS withdrew proposed RUG refinement rules. These payment add-ons will continue until CMS completes certain mandated recalculations of current RUG weightings. For fiscal years 2001 and 2002, the BBRA mandated federal per diem rates for all RUG categories be increased by an additional 4% over the required market basket adjustment. The law provided that certain specific services (such as prostheses and chemotherapy drugs) would be reimbursed separately from, and in addition to, the federal per diem rate. A provision was included that provided for cost report years beginning on or after January 1, 2000, skilled nursing facilities could waive the PPS transition period and elect to receive 100% of the federal per diem rate. The enactment also lifted for two years a $1,500 cap on rehabilitation therapy services provided under Medicare Part B.

     On December 15, 2000, Congress passed BIPA, which increased the nursing component of Federal PPS rates by approximately 16.7% for the period from April 1, 2001 through September 30, 2002. The legislation also changed the 20.0% add-on to three of the 14 rehabilitation RUG categories to a 6.7% add-on to all 14 rehabilitation RUG categories beginning April 1, 2001. The Part B consolidated billing provision of BBRA was repealed except for Medicare Part B therapy services and the moratorium on the $1,500 therapy caps was extended through calendar year 2002. These changes have had a positive impact on operating results.

A number of provisions of the BBRA and BIPA enactments providing additional funding for Medicare participating skilled nursing facilities expire on September 30, 2002. Expiring provisions are estimated to, on average, reduce the Company's per beneficiary per diems by approximately $36.00 (as compared to $376.78 in 2001), although the reduction could be greater than anticipated. Moreover, the Centers for Medicare and Medicaid Services ("CMS") has indicated its desire to complete refinements to the case mix classification system as part of the Fiscal 2003 rule-making. Under the law, when these refinements are implemented, the add-on's authorized by the BBRA and BIPA will expire. As a result of the combination of these factors, the Medicare skilled nursing facility sector is faced with an estimated 10.4% reduction in the average median per diems. A 10.4% decline in the Company's current average Medicare rate per patient day, would result in an estimated annual reduction in Medicare revenues of approximately $35.0 million, which would have a material adverse effect on the Company's financial position, results of operations and cash flows. In addition, President Bush's fiscal year 2003 budget proposal assumes that CMS will refine the per diem system by October 2002 in order to reduce Medicare payments to skilled nursing facilities by $5.6 billion over the next five years. Taken together with the expiration of the additional funding provisions on September 30, 2002, the Company estimates that its average Medicare payments would decrease approximately $63.00 per patient per day, although the reduction could be greater than anticipated. If the refinements sought by President Bush are implemented, the loss of an estimated $60.4 million in revenues would have a material adverse effect on the Company's financial position, results of operations and cash flows. The expiration of additional

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funding provisions on September 30, 2002 or the implementation of the changes sought in the 2003 budget proposal would likely cause the Company to fail to meet financial covenants contained in its Loan Agreements if the Company's overall payor mix, case mix, and customer base are not sufficiently able to offset this impact.

     The 1997 Act contains provisions that have affected amounts paid to the Company's ancillary medical operations services. Reimbursement for certain products covered under Medicare Part B is limited to 95% of the "average wholesale price." The move to PPS under the 1997 Act has made pricing a more mportant consideration in the selection of pharmacy providers. Also, Congress included provisions in the 1997 Act that would require nursing facilities to submit all claims for Medicare-covered services that their residents receive, both Medicare Part A and Part B, even if such services are provided by outside suppliers, including but not limited to pharmacy and rehabilitation therapy providers, except for certain excluded services. The BIPA, enacted in December 2000, repealed this provision, except for therapy services.

     The 1997 Act included several provisions affecting Medicaid. The 1997 Act repealed the Boren Amendment federal payment standard for Medicaid payments to nursing facilities effective October 1, 1997. The Boren Amendment required that Medicaid payments to certain healthcare providers be reasonable and adequate in order to cover the costs of efficiently and economically operated healthcare facilities. Under the 1997 Act, states must now use a public notice and comment period in order to determine rates and provide interested parties a reasonable opportunity to comment on proposed rates and the justification for and the methodology used in calculating such rates. With the repeal of the federal payment standards, there can be no assurances that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to nursing facilities and pharmacies or that payments to nursing facilities and pharmacies will be made on a timely basis. The 1997 Act also grants greater flexibility to states to establish Medicaid managed care projects without the need to obtain a federal waiver. Although these projects generally exempt institutional care, including nursing facilities and institutional pharmacy services, no assurances can be given that these projects ultimately will not change the reimbursement methodology for nursing facility services or institutional pharmacy services from fee-for-service to managed care negotiated or capitated rates. The Company anticipates that federal and state governments will continue to review and assess alternative health care delivery systems and payment methodologies.

     The BIPA enactment mandates a phase out of intergovernmental transfer transactions by states. In states which have artificially inflated payments to certain public facilities to increase federal matching funds, this action may reduce federal support for a number of state Medicaid plans. The reduced federal payments may impact aggregate available funds requiring states to further limit payments to providers such as the Company.

     Recent data compiled by the National Conference of State Legislatures indicate that the recent economic downturn has had a detrimental affect on state revenues. Historically these budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, the Company expects continuing cost containment pressures on Medicaid outlays for nursing homes and pharmacy services in the states in which the Company operates. The reimbursement rates for pharmacy services under Medicaid are determined on a state-by-state basis subject to review by CMS and applicable federal law. In most states, pharmacy services are priced at the lower of "usual and customary" charges or cost (which generally is defined as a function of average wholesale price and may include a profit percentage) plus a dispensing fee. Certain states have "lowest charge legislation" or "most favored nation provisions" which require the Company's institutional pharmacy to charge Medicaid no more than its lowest charge to other consumers in the state.

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     Pharmacy coverage and cost containment are important policy debates at both the federal and state levels. Congress has considered proposals to expand Medicare coverage for outpatient pharmacy services. Enactment of such legislation could affect institutional pharmacy services. Likewise, a number of states have proposed cost containment initiatives pending. Changes in payment formulas and delivery requirements could impact SunScript. See "Certain Additional Business Risks."

     Federal and state governments continue to focus on efforts to curb spending on health care programs such as Medicare and Medicaid. Such efforts have not been limited to skilled nursing facilities, but include other services provided by the Company, such as pharmacy and therapy services. The Company cannot at this time predict the extent to which these proposals will be adopted or, if adopted and implemented, what effect, if any, such proposals will have on the Company. Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are expected to continue.

     Various cost containment measures adopted by governmental and private pay sources restrict the scope and amount of reimbursable healthcare expenses and limit increases in reimbursement rates for medical services. Any reductions in reimbursement levels under Medicaid, Medicare or private payor programs and any changes in applicable government regulations or interpretations of existing regulations could significantly and adversely affect the Company's profitability. Furthermore, government programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially affect the rate of payment to the Company's facilities and its therapy and pharmaceutical services businesses. There can be no assurance that payments under governmental or private payor programs will remain at levels comparable to present levels or will be adequate to cover the costs of providing services to patients eligible for assistance under such programs. Significant decreases in utilization and changes in reimbursement could have a material adverse effect on the Company's financial condition and results of operations, including the possible impairment of certain assets.

     Related Party Rule.  For periods prior to the effective date of PPS, certain Medicare regulations applied to transactions between related parties, such as between the Company's subsidiaries that operate skilled nursing facilities and subsidiaries that provide ancillary services. These regulations are relevant to the amount of reimbursement that the Company's skilled nursing facilities are entitled to receive for certain goods and services provided by the Company's ancillary subsidiaries. An exception to the related party regulations is available provided that, among other things, a substantial part of the services of the relevant subsidiary supplier be transacted with nonaffiliated entities. When that exception applies, the skilled nursing facility may receive reimbursement for goods and services provided by the Company's ancillary subsidiaries at the rates applicable to goods and services provided to nonaffiliated entities. The related party regulations do not indicate a specific level of services that must be provided to nonaffiliated entities in order to satisfy the "substantial part" requirement of this exception. In instances where this issue has been litigated by others, no consistent standard has emerged as to the appropriate threshold necessary to satisfy the "substantial part" requirement.

     The implementation of PPS and the corresponding fee schedules have significantly reduced the Medicare impact of the related party rule, but the related party rule continues to affect certain Medicaid cost reports for the Company's skilled nursing facilities and hospitals and will also affect Medicare cost reports for hospitals for cost reporting years ended December 31, 2001. The Company's net revenues from rehabilitation therapy services, including net revenues from temporary medical staffing services, provided to nonaffiliated facilities represented 58%, 56% and 56% of total rehabilitation services net revenues for the years ended December 31, 2001, 2000 and 1999, respectively. Respiratory therapy

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services provided to nonaffiliated facilities represented 84%, 67% and 55% of total respiratory therapy services net revenues for the years ended December 31, 2001, 2000 and 1999, respectively. Net revenues from pharmaceutical services billed to nonaffiliated facilities represented 80%, 79% and 76% of total pharmaceutical services revenues for the years ended December 31, 2001, 2000 and 1999, respectively. The Company uses certain variables such as percent of revenue derived from nonaffiliated parties and associated service charges to determine whether it has met the requirements. For cost reports filed for the year ended December 31, 1999, the Company met the appropriate thresholds to satisfy the "substantial part" requirement of the related party exception. Except for the Company's software division, the Company met the related party exception allowing for the reimbursement of their charges to the inpatient facilities division for cost reports filed for the years ended December 31, 2000 and December 31, 2001. The Company adjusted the 2000 cost reports by decreasing the charges the inpatient facilities received from the software division to the cost basis of those services, and is required to do the same for the 2001 cost reports. The Company has determined that the impact of these cost report adjustments in the Medicare revenues recorded for the years ended December 31, 2000 and December 31, 2001 is not significant. If the Company was deemed not to have satisfied these regulations, the reimbursement that the Company receives for goods and services provided to its own facilities could be significantly reduced, which could materially and adversely affect the Company's financial condition and results of operations. If, upon audit by federal or state reimbursement agencies, such agencies find that the exception has not been satisfied, and if, after appeal, such findings are sustained, the Company could be required to refund some or all of the difference between its cost of providing these services to any entity found to be subject to the related party regulations and the fair market value amount actually received.

Government Regulation

     Regulatory Requirements. The Company's subsidiaries that provide long-term care, rehabilitation therapy and pharmaceutical services are engaged in industries that are extensively regulated. As such, in the ordinary course of business, the operations of these subsidiaries are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which may be non-routine. In addition to being subject to the direct regulatory oversight of state and federal regulatory agencies, these industries are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is ever found by a court of competent jurisdiction to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek the suspension or exclusion of the provider or individuals from participation in their program. If a facility is decertified by CMS or a state as a Medicare or Medicaid provider, the facility will not thereafter be reimbursed by the federal government for caring for residents that are covered by Medicare and Medicaid, and the facility would be forced to care for such residents without being reimbursed or to transfer such residents.

     Long-term care facilities must comply with certain requirements to participate in Medicare or Medicaid. Regulations promulgated pursuant to the Omnibus Budget Reconciliation Act of 1987 obligate facilities to demonstrate compliance with requirements relating to resident rights, resident assessment, quality of care, quality of life, physician services, nursing services, infection control, physical environment and administration. Regulations governing survey, certification and enforcement procedures to be used by state and federal survey agencies to determine facilities' level of compliance with the participation requirements for Medicare and Medicaid were adopted in 1995. These regulations require that surveys focus on residents' outcomes of care and state that all deviations from participation requirements will be considered deficiencies. A facility may have deficiencies and still be in substantial compliance with the regulations. The regulations identify alternative remedies against facilities and

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specify the categories of deficiencies for which they will be applied. The alternative remedies include, but are not limited to: civil monetary penalties of up to $10,000 per day; facility closure and/or transfer of residents in emergencies; denial of payment for new or all admissions; directed plans of correction; and directed in-service training. Failure to comply with certain standards as a condition to participate in the Medicare and Medicaid programs may result in termination of the provider's Medicare and Medicaid provider agreements.

     Most states in which the Company operates have statutes which require that prior to the addition or construction of new nursing home beds, the addition of new services or certain capital expenditures in excess of defined levels, the Company first must obtain a Certificate of Need which certifies that the state has made a determination that a need exists for such new or additional beds, new services or capital expenditures. The certification process is intended to promote quality health care at the lowest possible cost and to avoid the unnecessary duplication of services, equipment and facilities.

     The Medicare and Medicaid anti-kickback statute prohibits the knowing and willful solicitation or receipt of any remuneration "in return for" referring an individual or for recommending or arranging for the purchase, lease or ordering of any item or service for which payment may be made under Medicare or a state healthcare program. In addition, the statute prohibits the offer or payment of remuneration "to induce" a person to refer an individual or to recommend or arrange for the purchase, lease or ordering of any item or service for which payment may be made under the Medicare or state healthcare programs.

     False claims are prohibited pursuant to criminal and civil statutes. Criminal provisions prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid or failing to refund overpayments or improper payments; violation of these provisions are felonies punishable by up to five years imprisonment and/or $25,000 fines. Civil provisions prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment; penalties for violations are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. Suits alleging false claims can be brought by individuals, including employees and competitors. Allegations have previously been made under the civil provisions of the statute in certain qui tam actions that the Company has filed false claims. The Company is not aware of any pending qui tam actions against the Company. See "Note 18 - Other Events" in the Company's consolidated financial statements.

     HIPAA. In December 2000, the federal government released the final privacy rules of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The rules provide for, among other things, (i) giving consumers the right and control over the release of their medical information, (ii) the establishment of boundaries for the use of medical information, and (iii) penalties for violation of an individual's privacy rights.

     These privacy regulations apply to "protected health information," which is defined generally as individually identifiable health information transmitted or maintained in any form or medium, excluding certain education records and student medical records. The privacy regulations seek to limit the use and disclosure of most paper, oral and electronic communications regarding an individual's past, present or future physical or mental health or condition, or relating to the provision of healthcare to the individual or payment for that healthcare, if the individual can or may be identified by such information. HIPAA provides for the imposition of civil or criminal penalties if protected health information is improperly disclosed. The Company is not required to comply with the HIPAA privacy rules until April 2003, but the Company will require substantial efforts and resources to prepare for meeting the compliance deadline and for continued compliance thereafter. No assurance can be given that the Company will meet the April 2003 deadline. See "Certain Additional Business Risks."

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     HIPAA's security regulations have not yet been finalized. The proposed security regulations specify administrative procedures, physical safeguards and technical services and mechanisms designed to ensure the privacy of protected health information. The Company will be required to comply with the security regulations 26 months after the regulations become final.

     In addition, HIPAA also mandates the adoption of regulations aimed at standardizing transaction formats and billing codes for documenting medical services, dealing with claims submissions and protecting the privacy and security of individually indentifiable health information. HIPAA regulations that standardize transactions and code sets became final in the fourth quarter of 2000. These regulations do not require healthcare providers to submit claims electronically, but require standard formatting for those that do. The Company currently submits some of its claims electronically to Medicare and Medicaid through its fiscal intermediary and will continue to do so. The Company will be required to comply with HIPAA transaction and code set standards by October 2003.

     Survey, Certification and Enforcement Activities Against the Company. The Company believes that its facilities and service providers materially comply with applicable regulatory requirements. From time to time, however, the Company receives notice of noncompliance with various requirements for Medicare/Medicaid participation or state licensure. The Company reviews such notices for factual correctness, and based on such reviews, either takes appropriate corrective action and/or challenges the stated basis for the allegation of noncompliance. In most cases, the Company and the reviewing agency will agree upon any measures to be taken to bring the facility or service provider into compliance. Under certain circumstances, however, such as repeat violations or the perceived severity of the violations, the federal and state agencies have the authority to take adverse actions against a facility or service provider, including the imposition of monetary fines, the decertification of a facility or provider from participation in the Medicare and/or Medicaid programs or licensure revocation. Challenging and appealing notices of noncompliance can require significant legal expenses and management attention.

     The Company believes that enforcement activities at both the federal and state levels and qui tam actions brought by private parties have increased since 1997. In addition, during the Company's bankruptcy proceedings, the Company experienced a further increase in regulatory oversight from both federal and state regulatory bodies. The Company may be required to expend substantial amounts to cooperate with any investigations and proceedings or to defend allegations arising therefrom. If it were found that any of the Company's practices failed to comply with any of the anti-fraud provisions, including those discussed in the paragraphs above, the Company could be materially and adversely affected.

     If a nursing facility is decertified from the Medicare and Medicaid programs, its Medicare and Medicaid reimbursement is interrupted pending recertification, a process that can take at least several months. In the interim, the facility may continue to provide care to its residents without Medicare and Medicaid reimbursement, or the government may relocate Medicare and Medicaid residents to other facilities. Terminations, bans on admission and civil monetary penalties can cause material adverse financial and operational effects on individual facilities. The federal government has, in the past, decertified some of the Company's facilities from the Medicare and Medicaid programs. From time to time federal and state survey agencies have also imposed bans on admissions and civil monetary penalties against the Company's facilities on the basis of alleged regulatory deficiencies. When appropriate, the Company vigorously contests such sanctions and in some cases has sought and obtained federal court injunctions against proposed sanctions. While the Company has been successful to date in preventing some Medicare and Medicaid decertifications that it has contested, such cases require significant legal expenses and management attention. There can be no assurance that the federal government will not attempt to decertify

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additional facilities of the Company from the Medicare and Medicaid programs, or that the Company will contest and be successful in contesting such decertifications.

Corporate Compliance Process

     The Company entered into a Corporate Integrity Agreement ("CIA") with the Office of the Inspector General ("OIG") of the Department of Health and Human Services ("HHS") effective February 28, 2002 to promote the Company's compliance with the requirements of Medicare, Medicaid, and all other federal healthcare programs. The CIA is patterned after OIG compliance guidance but sets specific requirements intended to demonstrate adherence to the compliance program elements. Under the CIA, the Company is implementing comprehensive internal quality improvement programs and a system of internal financial controls in the Company's nursing homes, hospitals, and ancillary entities. Furthermore, it requires external oversight and reporting requirements to validate compliance.

     The Company's compliance program, referred to as the "Compliance Process," was initiated in 1996. It has evolved as the requirements of federal and private healthcare programs have changed. Significant refinements were initiated in 2001 to parallel requirements of the OIG compliance guidelines and the CIA. There are seven principle elements to the Compliance Process.

Written Policies, Procedures and Standards of Conduct

     The Company's subsidiaries that provide patient care and products have extensive policies and procedures ("P&Ps") which are modeled after applicable laws, regulations, government manuals and industry practices and customs. The P&Ps govern the clinical and operational aspects of each regulated subsidiary. For instance, the Company's P&Ps require that a reasonable and prudent background investigation be completed on every new employee. To emphasize adherence to its P&Ps, the Company publishes and distributes a Code of Conduct and each subsidiary publishes and distributes an employee handbook.

Designated Compliance Officer and Compliance Committee

     In August 2000, the Company appointed a Corporate Compliance Officer. The responsibilities of the Corporate Compliance Officer include, among other things: (i) overseeing the Compliance Process; (ii) ensuring compliance with the CIA and functioning as the liaison with the external monitors and federal government on matters related to the Compliance Process and CIA; (iii) reporting to the Board of Directors and senior corporate managers on the status of the Compliance Process; and (iv) overseeing the coordination of a comprehensive education and training program which focuses on the elements of the Compliance Process.

     The Company also maintains a Corporate Compliance Committee which includes the Chief Executive Officer, Chief Financial Officer, General Counsel, the Senior Vice President of Ancillary Services, Senior Vice President of Human Resources, President of SunBridge and the Corporate Compliance Officer. This Committee meets regularly to discuss compliance-related issues. Compliance matters are also reported to the Compliance Committee of the Board of Directors on a quarterly basis.

Effective Training and Education

     The Company continues to develop and implement regular training and education programs for all employees. Training programs include the Compliance Process, the CIA, Code of Conduct, applicable provisions of the Medicare and Medicaid laws, including fraud and abuse laws and reimbursement P&Ps

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that reflect current legal and program standards.

Effective Lines of Communication

     During employee training, employees are encouraged to report issues of concern without fear of retaliation using a Four Step Reporting Process, which includes the toll-free "Sun Quality Line." The Four Step Reporting Process encourages employees to discuss clinical, ethical, or financial concerns with supervisors and local management since these individuals will be most familiar with the laws, regulations, and policies that impact their concern. The telephone number for the Sun Quality Line is posted prominently in places that are accessible to employees in all of the Company's facilities. Internal independent reviews of the Sun Quality Line ensure that proper follow-up is conducted.

Internal Monitoring and Auditing

     The Company employs a number of licensed professionals who monitor compliance with P&Ps, including registered nurses, dietitians and program analysts for the skilled nursing facility operations. For the Company's hospitals, each hospital employs a Quality Improvement Nurse who is responsible for monitoring the Company's clinical standards. The Company's rehabilitation therapy operations employ Compliance Directors, each of whom is a licensed therapist. Vice Presidents of Compliance are responsible for all compliance activity within the Company's pharmacy operations and home health, home pharmacy, and laboratory and radiology services operations.

Enforcement of Standards Through Well-Publicized Disciplinary Guidelines

     The Company's P&Ps, the Code of Conduct and the Employee Handbook as well as all associated training materials clearly indicate that violators of the Company's policies and procedures will be subjected to discipline. Sanctions include oral warnings, to suspensions, and termination of employment.

Responses to Detected Offenses and Development of Corrective Actions

     Correction of detected misconduct or a violation of a Company policy is the responsibility of every manager. As appropriate, a manager is expected to develop and implement corrective action plans and monitor whether such actions are likely to keep a similar violation from occurring in the future.

Competition

     The long-term care industry is highly competitive. The nature of competition varies by location. The Company's facilities generally operate in communities that are also served by similar facilities operated by others. Some competing facilities are located in buildings that are newer than those operated by the Company and provide services not offered by the Company, and some are operated by entities having greater financial and other resources and longer operating histories than the Company. In addition, some facilities are operated by nonprofit organizations or government agencies supported by endowments, charitable contributions, tax revenues and other resources not available to the Company. Some hospitals that either currently provide long-term and subacute care services or are converting their under-utilized facilities into long-term and subacute care facilities are also a potential source of competition to the Company. The Company competes with other facilities based on key competitive factors such as its reputation for the quality and comprehensiveness of care provided; the commitment and expertise of its staff; the innovativeness of its treatment programs; local physician and hospital support; marketing programs; charges for services; and the physical appearance, location and condition of its facilities. The range of specialized services, together with the price charged for services, are also competitive factors in

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attracting patients from large referral sources.

     The Company also competes with other companies in providing rehabilitation therapy services and pharmaceutical products and services to the long-term care industry and in employing and retaining qualified therapists and other medical personnel. Many of these competing companies have greater financial and other resources than the Company. There can be no assurance that Sun will not encounter increased competition in the future that would adversely affect its financial condition and results of operations.

Employees

     As of March 1, 2002, the Company had approximately 36,000 full-time and part-time employees. Of this total, there were approximately 28,000 employees in the Company's long-term and subacute care facilities, 3,000 employees in the rehabilitation therapy services, 1,000 employees in the pharmaceutical services operations, 1,000 employees in the temporary staffing business, 150 employees in the respiratory therapy business, 850 employees at the corporate and regional offices and 2,000 employees in other health care services.

     Certain of the Company's employees in Alabama, California, Connecticut, Georgia, Massachusetts, New Mexico, Ohio, Tennessee, Washington and West Virginia are covered by collective bargaining contracts. The unions representing certain of the Company's employees have from time to time gone on strike. There can be no assurance that the unions will not go on strike in the future or that such strikes will not have a material adverse effect on the Company's results of operations or financial condition.

Certain Additional Business Risks

     Information provided in this Form 10-K by the Company contains "forward-looking" information as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). All statements regarding the Company's expected future financial position, results of operations, cash flows, liquidity, financing plans, business strategy, budgets, projected costs and capital expenditures, competitive position, growth opportunities, plans and objectives of management for future operations and words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "may" and other similar expressions are forward-looking statements. The forward-looking statements are qualified in their entirety by these cautionary statements, which are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, those set forth below and elsewhere herein:

     The Company's borrowing capacity under its Loan Agreements may be insufficient to fund the Company's operations until it achieves positive cash flows or obtains additional financing. The Company's Revolving Loan Agreement provides for maximum borrowings by the Company of up to $150.0 million, but not to exceed a defined borrowing base, which was $111.0 million on March 1, 2002. The Company's Term Loan Agreement provides for maximum borrowings of $40.0 million. As of March 1, 2002, the Company had borrowed approximately $66.8 million and had issued approximately $44.3 million in letters of credit under the Loan Agreements, leaving approximately $39.9 million available to the Company for additional borrowing. The Company had cash flows provided by (used for) operating activities of $24.4 million, $(1.7) million and $7.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. Until the Company is able to consistently generate substantial positive cash flow

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from operations or obtain additional financing, the Company will be required to rely on its available borrowing capacity to fund its ongoing operations. There can be no assurance that the amount available to the Company under the Loan Agreements will be sufficient for these purposes. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

     The financial covenants in the Loan Agreements will be difficult to achieve and if not achieved could result in a lack of funding. The Company must achieve significant improvements in its results of operations in order to comply with the financial covenants contained in the Loan Agreements. If the Company's results of operations do not significantly improve, the Company would likely be in default under the Loan Agreements. If the Company fails to comply with the covenants in its Loan Agreements and is unable to obtain a waiver of any such covenant violation, then the Company would lose its ability to borrow under the Loan Agreements for its working capital needs and could lose access to a substantial portion of its operating cash until such time as the outstanding debt under the Loan Agreements is repaid. In such event, the Company would be unable to fund its ongoing operations without obtaining additional financing. Furthermore, upon a payment default of the Revolving Loan Agreement, the Term Loan Agreement lenders have the right to purchase the portion of the Revolving Loan Agreement debt relating to the Company's pharmacy operations and then sell these operations in a foreclosure sale. There can be no assurance that the Company will meet required financial and operating covenants under the Loan Agreements. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - - Liquidity and Capital Resources."

     The Company's Medicare reimbursements may materially and adversely decline after September 30, 2002. A number of provisions of the BBRA and BIPA enactments providing additional funding for Medicare participating skilled nursing facilities expire on September 30, 2002. Expiring provisions are estimated to, on average, reduce the Company's per beneficiary per diems by approximately $36.00 (as compared to $376.78 in 2001), although the reduction could be greater than anticipated. Moreover, the Centers for Medicare and Medicaid Services ("CMS") has indicated its desire to complete refinements to the case mix classification system as part of the Fiscal 2003 rule-making. Under the law, when these refinements are implemented, the add-on's authorized by the BBRA and BIPA will expire. As a result of the combination of these factors, the Medicare skilled nursing facility sector is faced with an estimated 10.4% reduction in the average median per diems. A 10.4% decline in the Company's current average Medicare rate per patient day would result in an estimated annual reduction in Medicare revenues of approximately $35.0 million, which would have a material adverse effect on the Company's financial position, results of operations and cash flows. In addition, President Bush's fiscal year 2003 budget proposal assumes that CMS will refine the per diem system by October 2002 in order to reduce Medicare payments to skilled nursing facilities by $5.6 billion over the next five years. Taken together with the expiration of the additional funding provisions on September 30, 2002, the Company estimates that its average Medicare payments would decrease approximately $63.00 per patient per day, although the reduction could be greater than anticipated. If the refinements sought by President Bush are implemented, the loss of an estimated $60.4 million in revenues would have a material adverse effect on the Company's financial position, results of operations and cash flows. The expiration of additional funding provisions on September 30, 2002 or the implementation of the changes sought in the 2003 budget proposal would likely cause the Company to fail to meet financial covenants contained in its Loan Agreements if the Company's overall payor mix, case mix, and customer base are not sufficiently able to offset this impact.

     The Company is continuously subject to federal and state regulatory scrutiny. The Company's subsidiaries are engaged in healthcare industries which are extensively regulated. As such, in the ordinary course of business, the operations of these subsidiaries are continuously subject to state and

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federal regulatory scrutiny, including inquiries, investigations, examinations, audits, site visits and surveys. If any of the Company's subsidiaries are ever found to have engaged in improper practices, it could be subjected to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek the suspension or exclusion of the subsidiary or individuals from participation in their program. The Department of Health and Human Services - Office of Inspector General and the Department of Justice periodically investigate matters that have come to their attention concerning the Company. The existence of regulatory investigations has previously hindered or prevented the Company from pursuing certain business opportunities. There can be no assurance that the outcome of any pending or future proceedings or investigations will not have a material adverse effect on the results of operations and financial condition of the Company. See "Note 18 - Other Events" in the Company's consolidated financial statements.

     The Company is subject to numerous lawsuits. In recent years, there has been a dramatic increase in the number and size of lawsuits filed against nursing home operators alleging negligence resulting in injury or death to residents of the homes. The Company currently has numerous patient care lawsuits pending against it, as well as other types of lawsuits. As a result, general and professional liability costs have increased and are expected to continue to increase. There can be no assurance that the outcome of any patient care lawsuits individually or in the aggregate will not have a material adverse effect on the Company's results of operations or financial condition.

     The Company's general and professional liability risk is generally self-funded. The Company's insurance carriers declined to renew the Company's general and professional liability insurance policies that expired on December 31, 1999. Several major insurance companies no longer provide this type of coverage to long-term care providers. Beginning in January 2000, the Company established a self-funded insurance program for general and professional liability claims up to a base amount of $1.0 million per claim, and $3.0 million aggregate per location, and obtained excess insurance for coverage above these levels. If the Company's self-funded insurance reserves are insufficient to fund any future judgments or settlements resulting from litigation against the Company, such deficiency could have a material adverse impact on the Company's financial condition and results of operations. In addition, in certain states in which the Company has significant operations, including California, insurance coverage for the risk of punitive damages arising from general and professional liability litigation is prohibited by state law. There can be no assurance that the Company will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is prohibited by law. See "Note 10 - Commitments and Contingencies" in the Company's consolidated financial statements.

     The Company could be required to return inpatient facility revenues as a result of retroactive adjustments. The Company derives a substantial percentage of its total revenues from Medicare, Medicaid and private insurance. Net revenues realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment by payors during the settlement process. Under cost-based reimbursement plans, payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable or because additional supporting documentation is necessary. The Company recognizes revenues from third-party payors and accrues estimated settlement amounts in the period in which the related services are provided. The Company estimates these settlement balances by making determinations based on its prior settlement experience and its understanding of the applicable reimbursement rules and regulations. The majority of Medicaid balances are settled two to three years following the provision of services although the Company has from time to time experienced delays in receiving final settlement and reimbursement. There can be no assurance that the Company will not be required to negatively adjust prior earnings as a result of future settlements with payors.

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     The inability to collect accounts receivable has in the past, and may in the future, have a material adverse effect on the Company. The Company's bad debt expense for the years ended December 31, 2001, 2000 and 1999 was $26.0 million, $33.5 million and $123.2 million, respectively. The Company's allowance for doubtful accounts at December 31, 2001 was $73.8 million. The Company believes that the implementation of PPS for certain customers of the Company's ancillary services operations negatively affected their cash flows and in many instances caused them to file for bankruptcy. If certain Medicare Part A enactments expire on September 30, 2002 (see above), or other healthcare reform proposals are adopted which decrease Medicare or Medicaid payments to skilled nursing facilities, then the Company's ancillary services operations would experience a significant increase in bad debts. The Company's financial condition and results of operation could be materially adversely affected by the inability to collect its accounts receivable.

     The Company may not be in compliance with the HIPAA privacy rules by April 2003. The HIPAA privacy regulations seek to limit the use and disclosure of most paper, oral and electronic communications regarding an individual's past, present or future physical or mental health or condition, if the individual can be identified by such information. HIPAA provides for the imposition of civil or criminal penalties if protected health information is improperly disclosed. There can be no assurance that the Company's business will not be materially adversely affected if it is unable to meet the compliance deadline of April 2003. See "Government Regulation."

     The Company has limited operational flexibility because it leases substantially all of its inpatient facilities. The Company leases 235 of the 247 inpatient facilities that it operates. These leases generally limit or restrict the Company's ability to assign the lease to another party. The Company's failure to comply with the terms of the leases could result in an event of default and subject the Company to material damages. Given these restrictions, the Company may be forced to continue operating non-profitable facilities to avoid defaults under the leases.

     If the Company fails to comply with its Corporate Integrity Agreement, it could be subject to severe sanctions. Under the Corporate Integrity Agreement, the Company must have a comprehensive internal quality improvement program and a system of internal financial controls in its nursing facilities, hospitals and regional and corporate offices. A breach of the Corporate Integrity Agreement could subject the Company to substantial monetary penalties and exclusion from participation in Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on the Company's financial condition and results of operations. See "Business - Corporate Compliance Process."

     Changes in pharmacy legislation and payment formulas could adversely impact the Company's pharmacy operations. Most states reimburse pharmacies for drug prescriptions using an average wholesale price ("AWP") less a percentage discount. The OIG has estimated that the pharmacies' actual acquisition costs for generic drugs averaged 65.9% below AWP. The OIG and CMS are working to develop a prescription drug reimbursement method that they believe is more accurate than using AWPs. Likewise, a number of states have either implemented or proposed cost containment initiatives. Changes in payment formulas and delivery requirements could materially adversely impact the SunScript pharmacy operations.

     Efforts of third party payors to control cost may adversely affect the Company's revenues and operating margins. The Company receives approximately 28% of its revenues from private insurance, long-term care facilities which utilize the Company's specialty medical services, self-pay facility residents, and other third party payors. These private third party payors are continuing their efforts to control healthcare costs through direct contracts with healthcare providers, increased utilization review and greater enrollment in managed care programs and preferred provider organizations. These private

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payors increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk.

     Further consolidation of managed care organizations and other third party payors may adversely affect the Company's operating results. Managed care organizations and other third party payors have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services. Consequently, the healthcare needs of a large percentage of the United States population is increasingly served by a smaller number of managed care organizations. These organizations generally enter into service agreements with a limited number of providers for needed services. To the extent such organizations terminate the Company as a preferred provider and/or engage its competitors as a preferred or exclusive provider, this source of revenues would be lost. In addition, private payors, including managed care payors, increasingly are demanding discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk through prepaid capitation arrangements.

     Future healthcare reform could adversely affect the Company's business. In recent years, a number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the healthcare system, either nationally or at the state level. Among the proposals that have been introduced are further changes in reimbursement by federal and state payors such as Medicare and Medicaid and health insurance reforms. It is not clear at this time when or whether any new proposals will be adopted, or if adopted, what effect, if any, such proposals would have on Sun's business.

     Changes in revenue sources could adversely affect the Company's business. Changes in the mix of patients among the Medicaid, Medicare Part A and private pay categories, and among different types of private pay sources, could significantly affect the revenues and results of operations. The Company's current payor or revenue mix could change. The Company's percentage of revenues attributable to private pay residents has decreased from 33.3% in 1999 to 28.1% in 2001. In addition, the Company cannot be certain that the facilities operated by Sun, or the provision of services and products by Sun, now or in the future, will initially meet or continue to meet the requirements for participation in the Medicare and Medicaid programs. A loss of Medicare or Medicaid certification or a change in Sun's reimbursement under Medicare or Medicaid could reduce the Company's revenues and adversely affect its results of operations.

     The Company expects that it will continue to experience a shortage of qualified personnel to staff its facilities and increasing labor costs. The Company and other providers in the long-term care industry have had and continue to have difficulties in retaining qualified personnel to staff its long-term care facilities, particularly nurses, and as a result the Company often uses temporary employment agencies to provide additional personnel. The labor costs are higher for temporary employees than for full-time employees. In addition, many states have increased minimum staffing standards and CMS is also studying whether minimum staffing standards should be imposed on skilled nursing facilities. As minimum staffing standards are increased, the Company may be required to retain additional staffing. In addition, in recent years Sun has experienced increases in its labor costs primarily due to higher wages and greater benefits required to attract and retain qualified personnel and to increase staffing levels in its long-term and subacute care facilities. Sun may not be able to continue to hire and retain a sufficient number of qualified personnel to operate its inpatient facilities.

     The Company's success is substantially dependent on the leadership and performance of its new management team. The Company's Chief Executive Officer, Chief Financial Officer, President of SunBridge Healthcare Corporation, Senior Vice President of Human Resources and its entire Board of

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Directors have all joined the Company since November 2001. As such, there will be a period of transition in which the new management team implements new business strategies, policies and practices.

In addition, there can be no assurance that the Company will be able to retain its executive officers and key employees. The loss of the services of any of the Company's executive officers or key employees could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 10 - Directors and Executive Officers of the Registrant."

     A substantial portion of the Company's outstanding common stock is held by a small group of shareholders, and these shareholders could reject mergers or other business combinations that other shareholders may believe are desirable.As a group, the four largestholders of Sun common stock will beneficially hold approximately 35% of the stock upon the completion of the stock distributions required under the Plan of Reorganization. If these shareholders were to act together, they would be able to significantly influence all matters that the shareholders vote upon, including the election of directors or the rejection of a merger or other business combinations that other shareholders may believe are desirable. See "Item 12 - Security Ownership of Certain Beneficial Owners and Management."

Item 2.  Properties

     Inpatient Facilities. The Company operated an aggregate of 247 long-term care, subacute care and assisted living facilities in the U.S. as of March 1, 2002, 235 of which were subject to long-term operating leases or subleases and 12 of which were owned. The Company considers its properties to be in good operating condition and suitable for the purposes for which they are being used. The Company's facilities that are leased are subject to long-term operating leases or subleases which require the Company, among other things, to fund all applicable capital expenditures, taxes, insurance and maintenance costs. The annual rent payable under most of the leases generally increases based on a fixed percentage or increases in the U.S. Consumer Price Index. Many of the leases contain renewal options to extend the term. Substantially all of the Company's leasehold interests serve as collateral for its obligations under its Credit Agreements.

     The Company calculated its aggregate occupancy percentages for all of its long-term care, subacute care and assisted living facilities on a same store basis as 89%, 90% and 91% in the U.S. for the years ended December 31, 2001, 2000 and 1999, respectively. However, the Company believes that occupancy percentages, either individually or in the aggregate, should not be relied upon alone to determine the performance of a facility. Other factors include, among other things, the sources of payment, terms of reimbursement and the acuity level for each of the patients in such facilities. The Company computes occupancy percentages by dividing the average daily number of beds occupied by the total number of available beds for use during the periods indicated.

     The following table sets forth certain information concerning the long-term care, subacute care and assisted living facilities leased or owned by the Company in the United States as of March 1, 2002. Included in the table are 247 facilities (229 skilled nursing facilities, nine assisted living facilities and nine hospitals) that are included in the inpatient services segment. Also, included in the table are 13 facilities with 1,764 licensed beds that the Company intends to divest during 2002.

22

State	Number of Licensed Beds (1)	Number of Facilities      Leased              Owned               Total
California	7,518	75	2	77
Massachusetts	4,255	30	2	32
Georgia	1,764	13	3	16
Connecticut	1,530	9	1	10
Tennessee	1,359	11	1	12
Washington	1,320	14	-	14
Texas	1,126	8	-	8
North Carolina	1,031	8	-	8
New Hampshire	1,010	9	-	9
Arizona	1,006	6	-	6
Alabama	783	7	-	7
West Virginia	739	7	-	7
Idaho	706	6	1	7
Florida	590	5	-	5
New Jersey	580	4	-	4
Ohio	575	4	1	5
Illinois	470	4	-	4
Maryland	343	2	-	2
Colorado	341	2	1	3
New Mexico	286	4	-	4
Kentucky	137	2	-	2
Oklahoma	135	2	-	2
Louisiana	131	1	-	1
Virginia	120	1	-	1
Indiana	99	1	-	1
Total	27,954	235	12	247
	=============	=========	=========	========

(1)  "Licensed Beds" refers to the number of beds for which a license has been issued, which may vary in some instances from licensed beds available for use.

     Rehabilitation Services. As of March 1, 2002, the Company leased office space in 22 locations in 16 states to operate its rehabilitation therapy business.

     Pharmaceutical Services. As of March 1, 2002, the Company operated 32 regional pharmacies, 11 in-house long-term care pharmacies and one pharmaceutical billing and consulting center, which together provided pharmaceutical products and services in 21 states. All of these locations were leased.

23

     Other Operations. As of March 1, 2002, the Company leased approximately 64 locations in 22 states to operate its other businesses, including temporary medical staffing (CareerStaff), home health care (SunPlus) and mobile radiology and medical laboratory (SunAlliance). The Company owns its corporate headquarters buildings in Albuquerque, New Mexico. In January 2002, the Company entered into an agreement to sell two of its headquarters buildings.  The sale is expected to be completed in April 2002, although no assurance can be given that the sale will be completed.

Item 3. Legal Proceedings

     In May and August 1999, former employees of two of the Company's subsidiaries, SunBridge Healthcare Corporation and SunDance Rehabilitation Corporation, filed proposed class action complaints in the Western District of Washington. The plaintiffs sought to represent certain current and former employees of SunBridge and SunDance who were allegedly not paid appropriate wages under federal and state law since May and August 1996, respectively. Plaintiffs filed claims in the chapter 11 cases in the amount of approximately $780.0 million in the SunDance action and $242.0 million in the SunBridge action. Although the Company disputed these claims, the parties executed a stipulation of settlement which was signed by the judge presiding over the chapter 11 cases in the United States Bankruptcy Court for the District of Delaware. The settlement provides a general unsecured claim in the chapter 11 cases of up to an aggregate $3.0 million for the claimants, the payment of claimants' attorney's fees up to $300,000, and the payment of up to $500,000 to cover the cost of notice to prospective claimants in the class and claims administration. The settlement terms remain subject to court approval.

     In March and April 1999, class action lawsuits were filed against the Company and three individuals who were at that time officers of the Company in the United States District Court for the District of New Mexico. These actions have been consolidated as In re Sun Healthcare Group, Inc. Securities and Litigation Master, File No. Civ. 99-269. The lawsuits allege, among other things, that the Company did not disclose material facts concerning the impact that PPS would have on the Company's results of operations. The lawsuits seek compensatory damages and other relief for stockholders who purchased the Company's common stock during the class-action period. Pursuant to an agreement among the parties, the Company was dismissed without prejudice in December 2000. On January 31, 2002, the District Court dismissed the lawsuit with prejudice and entered judgment in favor of the defendants. On February 14, 2002, the plaintiffs filed a Motion to Amend the Judgment and to File an Amended Complaint. The Company intends to vigorously defend the individual defendants in this matter, who are indemnified by the Company and covered by the Company's insurance.

      The United States Department of Health & Human Services ("HHS") and the United States Department of Justice ("DOJ") periodically investigate matters that come to their attention concerning the Company, including cost reporting matters. Several years ago, to expedite resolution of any outstanding investigations, the Company requested that HHS and DOJ inform it of any such investigations or outstanding concerns. In response, DOJ informed the Company of the existence of a number of outstanding inquiries, several of which were prompted by the filing of eleven qui tam lawsuits by private individuals ("Relators") pursuant to the False Claims Act. HHS had also asserted claims against the Company for overpayments in connection with Medicare reimbursement for services performed prior to the implementation of the Medicare prospective payment system, and HHS and DOJ also asserted claims for violations of the False Claims Act. The Company denied any violations and asserted claims against HHS for underpayments in connection with services performed for Medicare beneficiaries for the same periods which HHS disputes.

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     In February 2002, the Company, HHS, CMS, DOJ, the Tricare Management Activity Support Office ("TMA"), and the Relators in eight of the qui tam cases signed a comprehensive settlement agreement which resolved all the claims of the parties. The Bankruptcy Court has approved the settlement. The settlement agreement provided for, among other things, a release of pre-petition claims of HHS, DOJ, TMA and the Relators against the Company. The settlement agreement also provided for a release of substantially all the claims of the Company against HHS for the same period; the Company previously reserved all such claims due to the uncertainty of the Company recovering such amounts. The settlement agreement required the Company to pay $1,000,000 in cash and deliver a promissory note for $10,000,000. The Relators in the remaining three qui tam cases previously separately entered into settlement agreements with the Company resolving all of their claims against the Company.

     In contemplation of a settlement with HHS, the Company entered into a corporate integrity agreement with the HHS' Office of Inspector General in July 2001. The agreement officially took effect upon the Company's emergence from bankruptcy. Under the terms of this agreement, the Company implemented further internal controls with respect to its quality of care standards and its Medicare and Medicaid billing, reporting and claims submission processes. 

     The Company is a party to various other legal actions and administrative proceedings and is subject to various claims arising in the ordinary course of its business, including claims that its services have resulted in injury or death to the residents of its facilities. The Company has experienced an increasing trend in the number and severity of litigation claims asserted against the Company. The Company believes that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiff's lawyers of potentially large recoveries. In certain states in which the Company has significant operations, including California, insurance coverage for the risk of punitive damages arising from general and professional liability litigation is not available due to state law public policy prohibitions. There can be no assurance that the Company will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available. The Company also believes that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on the Company.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders during the fourth quarter of 2001.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

     The Company began issuing new common stock on February 28, 2002 as part of its Plan of Reorganization. The new common stock has CUSIP number 866933 40 1. The Company's old common stock which was issued and outstanding as of February 28, 2002 was cancelled as part of the Plan of Reorganization. The old common stock had CUSIP number 866933 10 4. See "Item 1. - Business - Reorganization."

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     The Company's new common stock has been given the symbol "SUHGV.OB" on the Over-the-Counter ("OTC") Bulletin Board.  However, as of March 28, 2002, there was no established trading market for the Company's common stock.

     There were approximately 50 holders of record of the Company's common stock as of March 18, 2002. The number of record holders and the number of shares outstanding will increase as the Company continues issuing its new common stock pursuant to the Plan of Reorganization. The Company has never paid nor declared any dividends on its common stock. The Company's Credit Agreements restrict the Company's ability to pay dividends.

Item 6. Selected Financial Data

     The following selected consolidated financial data for the years indicated have been derived from the Company's consolidated financial statements. The financial data set forth below should be read in connection with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Company's consolidated financial statements and related notes thereto (in thousands, except per share data):

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	Years Ended December 31,
	2001(1)		2000(2)		1999(3)		1998(4)		1997(5)
Total net revenues	$           2,075,234		$            2,458,928		$          2,529,039		$            3,088,460		$            2,010,820
(Losses) income before income taxes,   extraordinary loss and cumulative effect   of change in accounting principle	(69,116	)	(545,455	)	(1,076,481	)	(689,842	)	95,882
(Losses) income before extraordinary loss   and cumulative effect of change in   accounting principle	(69,437	)	(545,711	)	(1,076,642	)	(743,419	)	54,729
Extraordinary loss	-		-		-		(10,274	)	(19,928	)
Cumulative effect of change in accounting   principle	-		-		(12,816	)	-		-
Net (losses) income	$              (69,437	)	$             (545,711	)	$        (1,089,458	)	$             (753,693	)	$                 34,801
	========		========		========		========		========
Net (losses) income per common and   common equivalent share:
Net (losses) income before   Extraordinary loss and cumulative effect   of change in accounting principle:
Basic	$                  (1.14	)	$                   (9.04	)	$                (18.40	)	$                  (14.29	)	$                     1.18
	========		========		=========		========		========
Diluted	$                  (1.14	)	$                   (9.04	)	$                (18.40	)	$                  (14.29	)	$                     1.06
	========		========		=========		========		========
Net (losses) income:
Basic	$                  (1.14	)	$                   (9.04	)	$                (18.62	)	$                  (14.49	)	$                     0.75
	========		========		=========		========		========
Diluted	$                  (1.14	)	$                   (9.04	)	$                (18.62	)	$                  (14.49	)	$                     0.67
	========		========		=========		========		========
Weighted Average number of common and     common equivalent shares:
Basic	61,096		60,347		58,504		52,008		46,329
	========		========		=========		========		========
Diluted	61,096		60,347		58,504		52,008		51,851
	========		========		=========		========		========
Working Capital (Deficit)	$              (13,259	)	$             (138,901	)	$              (17,282	)	$              (539,636	)	$               307,025
	========		========		=========		========		========
Total Assets	$              649,804		$               849,988		$          1,438,488		$            2,468,038		$            2,579,236
	========		========		=========		========		========
Liabilities subject to compromise	$           1,549,139		$            1,529,928		$          1,558,518		$                           -		$                           -
	========		========		=========		========		========
Long-term debt	$                97,184		$              157,227		$             145,541		$            1,518,274		$            1,545,678
	========		========		=========		========		========
Stockholders' (deficit) equity	$         (1,602,290	)	$          (1,545,338	)	$         (1,023,000	)	$                 33,759		$               617,053
	========		========		=========		========		========

(1)	Results for the year ended December 31, 2001 exclude approximately $52.1 million of excess reserves reversed into net patient revenues due to the Settlement Agreement and include a non-cash charge of $18.8 million representing a reduction in the Company's estimate of goodwill and other long-lived assets impairment (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements), a net non-cash gain on sale of assets of $0.8 million due to the prepetition termination of certain facility lease agreements, the sale of 27 certain other facilities, and reduction of the carrying amount of certain assets that the Company had determined are not integral to its core business operations (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements) and a $42.9 million charge for reorganization items due to the Company's chapter 11 filings (see "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" in the Company's consolidated financial statements).
(2)	Results for the year ended December 31, 2000 include a non-cash charge of $191.3 million representing a reduction in the Company's estimate of goodwill and other long-lived assets impairment (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements), a net non-cash gain on sale of assets of $21.4 million due to the prepetition termination of certain facility lease agreements, the sale of certain other facilities, and reduction of the carrying amount of certain assets that the Company had determined are not integral to its core business operations (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements), a $1.1 million non-cash recovery of previously recorded cost for corporate and financial restructuring (see "Note 4 - Restructuring Costs" in the Company's consolidated financial statements), a $2.5 million charge for legal and regulatory charges due to the Company's chapter 11 filings (see "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" in the Company's consolidated financial statements) and a $335.9 million charge for reorganization items due to the Company's chapter 11 filings (see "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" in the Company's consolidated financial statements).
(3)	Results for the year ended December 31, 1999 include a non-cash charge of $457.4 million representing a reduction in the Company's estimate of goodwill and other long-lived asset impairment (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements), a net non-cash charge of $78.7 million due to the prepetition termination of certain facility lease agreements, the sale of certain other facilities and to reduce the carrying amount of certain assets that the Company had determined are not integral to its core business operations (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements), a $27.4 million charge for corporate and financial restructuring (see "Note 4 - Restructuring Costs" in the Company's consolidated financial statements), a $2.5 million loss on the termination of the interest rate swaps (see "Note 9 - Long-Term Debt" in the Company's consolidated financial statements) and a $48.1 million charge for reorganization items due to the Company's chapter 11 filings (see "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" in the Company's consolidated financial statements).
(4)	Results for the year ended December 31, 1998 include a non-cash charge of $397.5 million representing a reduction in the Company's estimate of goodwill and other asset impairment (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements), a non-cash charge of $206.2 million due to the termination of certain facility lease agreements, the sale of certain other facilities and to reduce the carrying amount of certain assets that the Company had determined are not integral to its core business operations (see "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements), a $22.5 million charge for legal and regulatory matters, a $4.6 million charge for restructuring costs in order to more closely align the Company's inpatient, rehabilitation and respiratory therapy, and pharmaceutical and medical supplies segments (see "Note 4 - Restructuring Costs" in the Company's consolidated financial statements), and an extraordinary loss of $10.3 million, net of income tax benefit of $3.7 million, to permanently pay-down $300 million of the term loan portion of the Company's senior credit facility in addition to the $3.7 million 28 to retire $5.0 million of the Contour Medical, Inc. convertible debentures purchased by the Company.
(5)	Results for the year ended December 31, 1997 include a charge of $7.0 million recognized by the Company in order to reduce the carrying value of its Canadian operations to fair value based on revised estimates of selling value and of costs to sell. In addition, in 1997, the Company recorded an extraordinary charge of $19.9 million, net of the related tax benefit, in connection with the Company's purchase of Regency's 12.25% Junior Subordinated Notes due 2003 and of Regency Health Services, Inc.'s 9.875% Senior Subordinated Notes due 2002 and an extraordinary charge of $2.1 million, net of the related tax benefit, related to the refinancing of the Company's senior credit facility.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

     The Company is one of the largest providers of long-term, subacute and related specialty healthcare services in the United States. The Company operates through three principal business segments: inpatient services, rehabilitation therapy services and pharmaceutical services.

     Inpatient Services: This segment provides, among other services, inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. The Company provides 24-hour nursing care in these facilities by registered nurses, licensed practical nurses and certified nursing assistants. As of December 31, 2001, the Company operated 247 inpatient facilities with 27,954 licensed beds compared to 303 facilities with 33,363 licensed beds as of December 31, 2000. Included in the December 31, 2001 amounts are seven skilled nursing facilities with 1,021 licensed beds that the Company intends to divest through foreclosure sales, lease terminations through mutual agreements with the lessors or by transferring operations to successor operators. As of March 1, 2002, the Company has identified a total of 13 skilled nursing facilities with 1,764 licensed beds for disposal. See "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the accompanying consolidated financial statements.

     Rehabilitation Therapy Services: This segment provides, among other things, physical, occupational and speech therapy services to affiliated and nonaffiliated skilled nursing facilities. As of December 31, 2001, the Company's rehabilitation therapy services segment provided services to 859 facilities in 42 states, of which 622 were operated by nonaffiliated parties compared to 942 facilities in 41 states as of December 31, 2000, of which 652 were operated by nonaffiliated parties.

     Pharmaceutical Services: This segment provides pharmaceutical products primarily to long-term and subacute care facilities for such purposes as infusion therapy, pain management, antibiotic therapy and parenteral nutrition. Additional services include providing consultant pharmacists and assistance in preparation of billing documentation. The pharmaceutical subsidiary provided pharmaceutical products and services to 654 long-term and subacute care facilities, including 439 nonaffiliated facilities, as of December 31, 2001. As of December 31, 2000, pharmaceutical products and services were provided to approximately 1,506 facilities, including 1,217 nonaffiliated facilities.

     Other Operations: From 1999 through 2001, the Company's other operations included temporary medical staffing services, home health, software development and other ancillary services.

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     Divested Operations: The Company divested its respiratory therapy operations in March 2002. These operations were previously included with the rehabilitation therapy services segment.

     The Company divested its medical supplies operations in January 2001. These operations were previously included within the pharmaceutical services segment.

     In February 2001, the Company sold its operations in the United Kingdom. In April 2001, the Company sold its operations in Germany. In July 2001, the Company's Australian operations were sold. Prior to the divestitures of its international operations, the Company reported them as a fourth business segment. See "Item 1 - Business - Reorganization" and "Note 7 - Impairment of Long-lived Assets and Assets Held for Sale" in the Company's consolidated financial statements.

     The Company divested its hospice operations in the fourth quarter of 1999 and most of its assisted living operations in the fourth quarter of 1999 and the first half of 2000. These operations were previously reported under "Other Operations."

Emergence from Chapter 11 Bankruptcy Proceedings

     On October 14, 1999 (the "Filing Date"), Sun Healthcare Group, Inc. and substantially all of its U.S. operating subsidiaries filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code ("chapter 11"). On February 6, 2002, the Bankruptcy Court approved the Company's joint plan of reorganization (the "Plan") and on February 28, 2002 the Company consummated the Plan. See "Item 1 - Business - Reorganization."

Factors That Will Affect the Company's Future Financial Condition and Results of Operations

     The Company's future financial condition and operating results will be affected by a number of factors, including but not limited to the following, each of which is more fully described under "Item 1 - Business - Certain Additional Business Risks:"

- the Company's ability to continue borrowing under the Company's Loan Agreements,

- exposure to liabilities in excess of the Company's self-funded liability risk and insured risk,

- the Company's ability to retain a sufficient level of staff for the Company's inpatient facilities,

- the Company's ability to comply with government regulations and the costs of such compliance, including the costs to comply with HIPAA, and

- the Company's ability to generate positive cash flow from operations.

Critical Accounting Policies

     The Company's discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgments that affect the reported amounts and related disclosures of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from these estimates. The Company believes the following critical accounting policies, among others,

30

affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.

     The consolidated financial statements of the Company have been presented in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7: "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") and have been prepared in accordance with the Company's accounting principles generally accepted in the United States applicable to a going concern, which principles, except as otherwise disclosed, assume that the Company's assets will be realized and the Company's liabilities will be discharged in the normal course of business.

     Under chapter 11, certain claims against the Company in existence prior to the Filing Date were stayed while the Company continued its operations as a debtor-in-possession. These claims are reflected in the December 31, 2001 and 2000 balance sheets as "liabilities subject to compromise." Since October 14, 1999, the payment of certain prepetition claims (principally employee wages and benefits and payments to critical vendors and utilities) that were approved by the Bankruptcy Court have reduced "liabilities subject to compromise." As part of the Company's emergence from chapter 11 proceedings, all of the "liabilities subject to compromise" have been discharged, reinstated or repaid.

     The Company has determined that, generally, the fair market value of the collateral was less than the principal amount of its secured prepetition debt obligations; accordingly, the Company discontinued accruing interest on many of these obligations as of the Filing Date.

(a)  Net Revenues

     Net revenues consist of long-term and subacute care revenues, temporary medical staffing services revenues, pharmaceutical services revenues and other ancillary services revenues. Net revenues are recognized as services are provided. Revenues are recorded net of provisions for discount arrangements with commercial payors and contractual allowances with third-party payors, primarily Medicare and Medicaid. Net revenues realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment. Estimated third-party payor settlements are recorded in the period the related services are rendered. The methods of making such estimates are reviewed periodically, and differences between the net amounts accrued and subsequent settlements or estimates of expected settlements are reflected in current results of operations.

     In February 2002, the Company, HHS, CMS, DOJ, the Tricare Management Activity Support Office ("TMA"), and the Relators in eight qui tam cases, entered into a comprehensive settlement agreement (the "Settlement Agreement"). Under the Settlement Agreement, the Company and the above mentioned parties agreed to mutually release each other from substantially all prepetition claims. The Settlement Agreement requires the Company to pay $1.0 million in cash and deliver a promissory note for $10.0 million, plus interest to CMS over the next five years.

     Since 1999, the Company recorded various reserves due to the uncertainty of the reimbursement adjustments that might have been required to settle the matters raised by the parties of the Settlement Agreement, including a reserve of approximately $31.0 million recorded in 1999 for routine cost limit exception payments previously paid to the Company. Such amounts totaled a net reserve of $52.1 million. As a result of the Settlement Agreement, the Company reversed the $52.1 million of net excess reserved exposures and reflected it as a component of net patient revenue in the 2001 consolidated statement of operations.

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(b)  Accounts Receivable

     The Company's accounts receivable relate to services provided by its various operating divisions to a variety of payors and customers. The primary payors for services provided in long-term and subacute care facilities that the Company operates in the United States are the Medicare program and the various state Medicaid programs. The rehabilitation and respiratory therapy service operations in the United States provide services to patients in unaffiliated long-term, rehabilitation and acute care facilities. The billings for those services are submitted to the unaffiliated facilities. Many of the unaffiliated long-term care facilities receive a large majority of their revenues from the Medicare program and the state Medicaid programs.

     Estimated provisions for doubtful accounts are recorded each period as an expense to the income statement. In evaluating the collectibility of accounts receivable, the Company considers a number of factors, including the age of the accounts, changes in collection patterns, the financial condition of the Company's customers, the composition of patient accounts by payor type, the status of ongoing disputes with third-party payors and general industry conditions. Any changes in these factors or in the actual collections of accounts receivable in subsequent periods may require changes in the estimated provision for loss. Changes in these estimates are charged or credited to the results of operations in the period of the change.

(c)  Impairment of Long-Lived Assets

     The Company evaluates the carrying value of long-lived assets, including goodwill, in relation to the future projected undiscounted cash flows of the underlying businesses to assess recoverability in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). Those projected future undiscounted cash flows require significant assumptions about future operations, such as reimbursement rates for Medicaid and Medicare patients, occupancy rates, wage rates, workers compensation costs and professional liability costs. Under SFAS 121, an impairment loss is recognized if the sum of the future net expected cash flows is less than the carrying amount of the long-lived assets being evaluated. The difference between the carrying amount of the long-lived assets being evaluated and the estimated fair market value of the assets represents the impairment loss. The Company determines estimated fair value for the long-lived assets that it intends to retain based on anticipated future cash flows discounted at rates commensurate with the risks involved.

(d)  Accrued Self-Insurance Obligations

     It is the Company' s policy to self-insure for certain insurable risks, including general and professional liability and workers' compensation liability through the use of self-insurance or retrospective and high deductible insurance policies and other hybrid policies, which vary among the states in which the Company operates. Provisions for estimated settlements, including incurred but not reported losses, are provided in the period of the related coverage. These provisions are based on internal evaluations of the merits of individual claims and the reserves assigned by the Company's independent insurance carriers. The methods of making such estimates and establishing the resulting accrued liabilities are reviewed periodically, and any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, which generally range from one to five years. Future payments may be different than the estimated expense. Accrued liabilities for future claims are not discounted.

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Recent Accounting Pronouncements

     In October 2001 the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lives Assets to be Disposed of." SFAS 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. This new pronouncement will become effective January 1, 2002. The Company has not determined the impact that the adoption of this accounting standard will have on its consolidated financial statements.

     In June 2001 the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") which provides that all business combinations should be accounted for using the purchase method of accounting and establishes criteria for the initial recognition and measurement of goodwill and other intangible assets recorded in connection with a business combination. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for by the purchase method that are completed after June 30, 2001.

     In addition, in June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") which establishes the accounting for goodwill and other intangible assets following their recognition. SFAS 142 applies to all goodwill and other intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 also applies to goodwill recognized in accordance with SOP 90-7. The new pronouncement provides that goodwill should not be amortized but should be tested for impairment annually using a fair-value based approach. In addition, SFAS 142 provides that intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with existing guidelines. SFAS 142 will become effective for the Company beginning on January 1, 2002. The Company's application of fresh-start accounting, in connection with the Company's emergence from bankruptcy is expected to result in goodwill, however, the amount of goodwill has not currently been determined. See "Note 23 - Subsequent Events" in the accompanying consolidated financial statements. The Company has not determined the impact that the adoption of this accounting standard will have on its consolidated financial statements.

     In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). This statement requires costs of start-up activities and organization costs to be expensed as incurred. The statement was effective for financial statements for fiscal years beginning after December 15, 1998. During the first quarter of 1999, the Company adopted the provisions of SOP 98-5, which resulted in a cumulative effect of a change in accounting principle charge of approximately $12.8 million.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). Under SFAS 133, all derivatives are required to be recognized in the balance sheet at fair value. Gains or losses from changes in fair value would be recognized in earnings in the period of change unless the derivative is designated as a hedging instrument. In June 1999, the FASB issued SFAS No. 137, which amended SFAS 133, delaying its effective date to fiscal years beginning after June 15, 2000. The Company does not currently hold any derivative instruments nor does it engage in hedging activities.

33

Results of Operations

     The following tables set forth the amount and percentage of certain elements of total net revenues for the years ended December 31 (in thousands):

	2001				2000				1999
Inpatient Services	$    1,609,388		77.6	%	$    1,718,178		69.9	%	$    1,704,436		67.4	%
Rehabilitation and Respiratory Therapy Services	175,159		8.4	%	204,367		8.3	%	234,054		9.3	%
Pharmaceutical and Medical Supply Services	257,579		12.4	%	311,276		12.6	%	316,880		12.5	%
International Operations	23,887		1.1	%	265,501		10.8	%	296,906		11.7	%
Other Operations	178,065		8.6	%	171,430		7.0	%	196,760		7.8	%
Corporate	1,393		0.1	%	1,381		0.1	%	2,574		0.1	%
Intersegment eliminations	(170,237	)	(8.2	)%	(213,205	)	(8.7	)%	(222,571	)	(8.8	)%
Total Net Revenues	$    2,075,234		100.0	%	$  2,458,928		100.0	%	$  2,529,039		100.0	%
	======		===		======		===		======		===

Same Store (1)	2001				2000				1999
Inpatient Services	$    1,528,988		73.6	%	$    1,407,024		57.2	%	$    1,254,326		49.6	%
Rehabilitation and Respiratory Therapy Services	167,659		8.1	%	97,834		4.0	%	111,378		4.4	%
Pharmaceutical and Medical Supply Services	246,517		11.9	%	235,802		9.6	%	232,907		9.2	%
Other Operations	169,442		8.2	%	150,266		6.1	%	136,357		5.4	%
Corporate	1,393		0.1	%	1,381		0.1	%	2,574		0.1	%
Intersegment eliminations	(170,237	)	(8.2	)%	(213,205	)	(8.7	)%	(222,571	)	(8.8	)%
Discontinued Operations	131,472		6.3	%	779,826		31.7	%	1,014,068		40.1	%
Total Net Revenues	$    2,075,234		100.0	%	$  2,458,928		100.0	%	$  2,529,039		100.0	%
	======		===		======		===		======		===

(1)
A same store basis includes only facilities operated for the full 12 months of each year in the comparison of the operations activity. The table above shows the results of each segment for 2001, 2000 and 1999 for facilities that existed as of January 1, 1999 and were operated continuously through December 31, 2001.

     Inpatient facilities revenues for long-term care, subacute care and assisted living services include revenues billed to patients for therapy and pharmaceutical services and medical supplies provided by the Company's affiliated operations. Revenues for rehabilitation and respiratory therapy services provided to domestic affiliated facilities were approximately $99.5 million, $113.3 million and $126.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Revenues for pharmaceutical and medical supply services provided to domestic affiliated facilities were approximately $62.2 million, $88.3 million and $80.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Revenues for services provided by other non-reportable segments to affiliated facilities were approximately $9.0 million, $10.7 million and $10.0 million for the years ended December 31, 2001, 2000 and 1999, respectively.

     The following tables set forth the amount of net segment income/(loss) for the years ended December 31 (in thousands):

34

	2001			2000		1999
Inpatient Services	$         (20,006	)		$       (29,339	)	$      (240,201	)
Rehabilitation and Respiratory Therapy Services	12,691			16,391		(44,125	)
Pharmaceutical and Medical Supply Services	4,235			(4,789	)	(30,310	)
International Operations	(249	)		(21,521	)	(41,878	)
Other Operations	(9,469	)		(15,341	)	(53,301	)
Net segment loss before Corporate	(12,798	)		(54,599	)	(409,815	)
Corporate	16,663			16,325		(52,533	)
Net segment income/(loss)	$            3,865		$      (38,274)			$      (462,348	)
	========		========			========

Same Store (1)	2001			2000		1999
Inpatient Services	$            1,884			$          3,637		$      (169,366	)
Rehabilitation and Respiratory Therapy Services	20,953			(10,621	)	(68,961	)
Pharmaceutical and Medical Supply Services	18,300			11,151		(3,016	)
Other Operations	(3,617	)		(10,334	)	(28,409	)
Net segment (loss) income before Corporate and   Discontinued Operations	37,520			(6,167	)	(269,752	)
Corporate	16,663			16,213		(49,882	)
Discontinued Operations	(50,318	)		(48,320	)	(142,714	)
Net segment income/(loss)	$            3,865		$      (38,274)			$      (462,348	)
	========		=======			========

(1)
A same store basis includes only facilities operated for the full 12 months of each year in the comparison of the operations activity. The table above shows the results of each segment for 2001, 2000 and 1999 for facilities that existed as of January 1, 1999 and were operated continuously through December 31, 2001.

     The net segment income/(loss) amounts detailed above do not include the following items: legal and regulatory matters, net; gain (loss) on sale of assets, net; loss on termination of interest rate swaps; impairment loss; restructuring costs; reorganization costs, net; income taxes; and cumulative effect of a change in accounting principle.

     The Company's subsidiaries which operate inpatient facilities have historically used and continue to use pharmaceutical and rehabilitation services that are provided by separate subsidiaries of the Company, SunScript and SunDance, respectively. Effective on January 1, 2002, the rates charged by SunScript and SunDance to the Company's inpatient facilities were adjusted to more accurately reflect competitive, national market rates. While the change in these rates will not impact the Company's consolidated results, the Company expects that on a segment basis the pharmaceutical services and rehabilitation therapy services segments' net income in 2002 will decrease by approximately $7.6 million and $3.5 million, respectively, and the inpatient ancillary services expenses to decrease by approximately $11.1 million in 2002.

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     In accordance with SOP 90-7, items of expense or income that are incurred or realized by the Company because it was in reorganization are classified as reorganization costs in the Company's consolidated statements of losses. As a result, net segment income/(losses) do not include interest earned subsequent to the Filing Date on cash accumulated because the Company is not paying its prepetition obligations. Interest earned prior to the Filing Date is included in net segment income/(losses).  Debt discounts and deferred issuance costs that were written-off after the Filing Date in accordance with SOP 90-7 are not included in the net segment income/(losses).  The amortization of debt discounts and deferred issuance costs prior to the Filing Date are included in net segment income/(losses). Losses on sales of assets and professional fees related to the reorganization incurred subsequent to the Filing Date are excluded from net segment income/(losses) which is consistent with their treatment prior to the Filing Date.

     Corporate expenses include amounts for interest and corporate general and overhead expenses including those related to managing the Company's subsidiaries. The Company allocates these to its segments through management fees and intersegment interest charges. Management fees are assessed based on segment net revenues. Interest is charged based upon average net asset balances at rates determined by management.

     The following discussions of the "Year Ended December 31, 2001 compared to the Year Ended December 31, 2000" and the "Year Ended December 31, 2000 compared to the Year Ended December 31, 1999" are based on the financial information presented in "Note 21 - Segment Information" in the Company's consolidated financial statements.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Inpatient Services

     Due to the number of Inpatient Service facilities being divested during the time periods being compared, a "same store" basis is also included for comparison purposes.

     Net revenues, which includes revenues from therapy and pharmaceutical services provided at the Inpatient Services facilities, decreased approximately $108.8 million from $1,718.2 million for the year ended December 31, 2000 to $1,609.4 million for the year ended December 31, 2001. On a same store basis, net revenues increased approximately $122.0 million from $1,407.0 million for the year ended December 31, 2000 to $1,529.0 million for the year ended December 31, 2001, an 8.7% increase. This increase was primarily the result of increased Medicaid and Medicare reimbursement rates during 2001.

     Operating expenses, which include rent expense of approximately $181.0 million and $149.3 million for the years ended December 31, 2000 and December 31, 2001, respectively, decreased $83.0 million, or 5.2%, from $1,594.8 million for the year ended December 31, 2000 to $1,511.8 million for the year ended December 31, 2001. The decrease resulted primarily from the divestiture of facilities during 2001. On a same store basis, operating expenses, which include rent expense of $142.4 million and $143.4 million for the years ended December 31, 2000 and 2001, respectively, increased 11.1% from $1,276.6 million for the year ended December 31, 2000 to $1,418.2 million for the year ended December 31, 2001. On a same store basis, operating expenses as a percentage of net revenues increased from 90.7% for the year ended December 31, 2000 to 92.8% for the year ended December 31, 2001. The increase in operating expenses as a percentage of revenue was primarily due to increased labor costs as a result of the competition for staff and contract personnel within the industry and the subsequent pressure on labor rates. Various federal, state and local regulations impose, depending upon the services provided, a variety

36

of regulatory standards for the quality and level of personnel required to provide care or services. These requirements have an impact on staffing level and mix which therefore impact costs and expenses.

     Corporate general and administrative expenses, which include regional costs related to the supervision of operations, were $39.8 million and $34.2 million for the years ended December 31, 2000 and December 31, 2001, respectively. The decrease was primarily due to head count reduction following divestitures of inpatient facilities during 2001. On a same store basis, as a percentage of net revenues, corporate general and administrative expenses were 2.8% and 2.2% for the years ended December 31, 2000 and December 31, 2001, respectively.

     Depreciation and amortization decreased approximately $7.6 million from $20.2 million for the year ended December 31, 2000 to $12.6 million for the year ended December 31, 2001. On a same store basis, depreciation and amortization decreased 30.3% from $17.8 million for the year ended December 31, 2000 to $12.4 million for the year ended December 31, 2001. On a same store basis, as a percentage of net revenues, depreciation and amortization expense decreased from 1.3% for the year ended December 31, 2000 to 0.8% for the year ended December 31, 2001. The decreases are primarily the result of the determination that certain of the Company's long-lived assets were impaired, which resulted in write-downs during 2000 of certain long-lived assets pursuant to the Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). These write-downs reduced the depreciable basis of the long-lived assets which caused depreciation and amortization expenses to be reduced in 2001.

     The provision for losses on accounts receivable increased 1.9% from approximately $15.4 million for the year ended December 31, 2000 to approximately $15.7 million for the year ended December 31, 2001. On a same store basis, provision for losses on accounts receivable increased 34.3% from $10.8 million for the year ended December 31, 2000 to $14.5 million for the year ended December 31, 2001. On a same store basis, as a percentage of net revenues, provision for losses on accounts receivable increased from 0.8% for the year ended December 31, 2000 to 0.9% for the year ended December 31, 2001. The increases were primarily due to the aging of receivables which require a higher level of reserves against them.

     Net interest expense decreased approximately $7.8 million from $10.6 million for the year ended December 31, 2000 to $2.8 million for the year ended December 31, 2001. On a same store basis, net interest expense decreased 68.2% from $8.8 million for the year ended December 31, 2000 to $2.8 million for the year ended December 31, 2001. The decreases were primarily due to the determination in 2001 that certain debt obligations which existed prior to the Company's bankruptcy filing were subject to compromise; as a result, the Company stopped recording interest expense in 2001.

Rehabilitation and Respiratory Therapy Services

     Net revenues from rehabilitation and respiratory therapy services decreased $29.2 million, or 14.3%, from $204.4 million for the year ended December 31, 2000 to $175.2 million for the year ended December 31, 2001. Revenues from services provided to affiliated facilities decreased $13.8 million, or 12.2%, from $113.3 million for the year ended December 31, 2000 to $99.5 million for the year ended December 31, 2001. Revenues from services provided to nonaffiliated facilities decreased approximately $15.5 million, or 17.0%, from $91.1 million for the year ended December 31, 2000 to $75.6 million for the year ended December 31, 2001. These decreases were primarily the result of the Company's termination of certain nonaffiliated contracts based on issues related to customers' credit-worthiness and contract profitability. In addition, certain nonaffiliated contracts were terminated in the ordinary course

37

of business. The Company's divestitures of inpatient facilities in 2000 and 2001 also contributed to the decrease in affiliated revenues.

     In March 2002, the Company sold its respiratory therapy operations. The net revenues and the segment loss for these operations for the year ended December 31, 2001 were $14.8 million and $2.3 million, respectively.

     Operating expenses decreased $15.3 million, or 9.6%, from $159.8 million for the year ended December 31, 2000 to $144.5 million for the year ended December 31, 2001. The decrease resulted primarily from the decline in the demand for the Company's therapy services resulting in a reduction in the number of therapists employed by the Company's therapy services subsidiary. Operating expenses as a percentage of net revenues increased from 78.2% for the year ended December 31, 2000 to 82.5% for the year ended December 31, 2001. This increase was attributable to the decline in average revenue per therapy service while salaries and wage costs per service decreased by a smaller percentage.

     Depreciation and amortization decreased 40.0% from $3.0 million for the year ended December 31, 2000, to $1.8 million for the year ended December 31, 2001. As a percentage of net revenues, depreciation and amortization expense decreased from 1.5% for the year ended December 31, 2000 to 1.0% for the year ended December 31, 2001, respectively. The decrease was a result of the Company's classification of its respiratory therapy business as an asset held for sale in 2000. As an asset held for sale, the respiratory therapy supplies business no longer recorded depreciation or amortization.

     Provision for losses on accounts receivable decreased $5.3 million, or 79.1%, from $6.7 million for the year ended December 31, 2000 to $1.4 million for the year ended December 31, 2001. As a percentage of net revenues, provision for losses on accounts receivable decreased from 3.3% for the year ended December 31, 2000 to 0.8% for the year ended December 31, 2001. The decrease was primarily due to a change in estimate for the allowance for doubtful accounts related to the rehabilitation therapy business. Through improved management of customer accounts during 2001, the business was able to reduce reserve allowances required.  The decrease was partially offset by the reduction in revenues for the segment as discussed previously.

Pharmaceutical and Medical Supply Operations

     Net revenues from pharmaceutical and medical supply services decreased $53.7 million, or 17.3%, from $311.3 million for the year ended December 31, 2000 to $257.6 million for the year ended December 31, 2001. Pharmaceutical services' net revenues from nonaffiliated parties increased approximately $1.2 million, or 0.6%, while net revenues from affiliated parties increased approximately $5.7 million, or 10.4%. The increase in pharmaceutical services' affiliated revenues was primarily due to emphasis within the business to market its services to the Company's inpatient services business. Medical supply services' net revenues decreased approximately $60.6 million, or 85.1%. The decrease was primarily due to the discontinuation of revenue from the Company's medical supply service business, which was sold in January 2001.

     Operating expenses decreased $53.6 million, or 19.1%, from $279.9 million for the year ended December 31, 2000 to $226.3 million for the year ended December 31, 2001. As a percentage of net revenues, operating expenses decreased from 89.9% for the year ended December 31, 2000 to 87.8% for the year ended December 31, 2001. Pharmaceutical services' operating expenses increased approximately $5.6 million, or 2.6%. The increase in the pharmaceutical services' operating expenses was primarily attributed to increases in labor, benefit and insurance costs along with an increase in cost of goods sold based on an increase in sales. Medical supply services' operating expenses decreased 89.2% from $66.4

38

million for the year ended December 31, 2000 to $7.2 million for the year ended December 31, 2001. The decrease in medical supply services' cost of goods sold was a result of the decrease in sales.

     Corporate general and administrative expenses, which include regional costs related to the supervision of operations, decreased 25.0% from $5.2 million for the year ended December 31, 2000 to $3.9 million for the year ended December 31, 2001. The decrease was primarily a result of the sale in January 2001 of the Company's medical supplies services business. As a percentage of net revenues, corporate general and administrative expenses decreased from 1.7% for the year ended December 31, 2000 to 1.5% for the year ended December 31, 2001.

     Depreciation and amortization decreased 37.7% from $6.9 million for the year ended December 31, 2000 to $4.3 million for the year ended December 31, 2001. As a percentage of net revenues, depreciation and amortization expense was approximately 2.2% and 1.7% for the years ended December 31, 2000 and 2001, respectively. The decrease was primarily a result of the sale in January 2001 of the medical supplies services business for which depreciation ceased.

     Provision for losses on accounts receivable decreased 39.3% from $6.1 million for the year ended December 31, 2000 to $3.7 million for the year ended December 31, 2001. As a percentage of net revenues, the provision for losses on accounts receivable decreased from 2.0% for the year ended December 31, 2000 to 1.4% for the year ended December 31, 2001. The decrease was primarily a result of the improved collection trend within the pharmaceutical services business which allows for a decrease in the reserve. Additionally, the Company's medical supplies service business was sold in January 2001 and the provision for that business ceased.

International Operations

     Revenues from international operations decreased $241.6 million from $265.5 million for the year ended December 31, 2000 to $23.9 million for the year ended December 31, 2001. The decrease was due to the sale of the United Kingdom operations in January 2001 and the divestitures of its operations in Germany in April 2001 and in Australia in July 2001.

     Operating expenses which include rent expense of $40.5 million and $4.6 million for the years ended December 31, 2000 and December 31, 2001, respectively, decreased approximately 91.5% from $248.8 million for the year ended December 31, 2000 to $21.2 million for the year ended December 31, 2001. This decrease was a result of the same factors which led to a decrease in revenue as discussed above. As a percentage of revenues, operating expenses decreased from 93.7% for the year ended December 31, 2000 to 88.7% for the year ended December 31, 2001.

     Corporate general and administrative expenses were $13.0 million and $1.7 million for the years ended December 31, 2000 and December 31, 2001, respectively. The decrease was a result of the same factors which led to a decrease in revenue as discussed above.

     Depreciation and amortization for international operations was $2.5 million for the year ended December 31, 2000. International operations were classified as an asset held for sale in the first quarter of 2000 which requires that depreciation and amortization cease on the operations.

     Net interest expenses were $13.0 million and $1.2 million for the years ended December 31, 2000 and December 31, 2001, respectively. The decrease in expense was a result of the same factors which led to a decrease in revenue as discussed above.

39

     The Company sold its remaining international operations in Germany in April 2001 and in Australia in July 2001. The Company recorded a charge of approximately $141.1 million in the first quarter of 2000 to reduce the carrying value of its international operations to its estimate of selling value less costs to sell. The charge was recorded in reorganization costs in the Company's consolidated statements of losses. At December 31, 2001, the Company had no operations outside of the United States. See "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements.

Other NonReportable Segments and Corporate General and Administrative Departments

     Nonreportable segments include temporary therapy and nursing staffing, home health, assisted living, software development and other ancillary services. Revenues from other nonreportable segments increased 3.9% from $172.8 million for the year ended December 31, 2000 to $179.5 million for the year ended December 31, 2001. The Company's temporary therapy staffing business' revenue increased $10.9 million from $62.5 million for the year ended December 31, 2000 to $73.4 million for the year ended December 31, 2001. The increase was primarily due to continuing growth in demand for labor across the industry. The Company's laboratory business' revenue increased $5.3 million from $28.3 million for the year ended December 31, 2000 to $33.6 million for the year ended December 31, 2001. The increase was primarily due to an additional revenue stream for mobile radiology developed within the business coupled with efforts by new management personnel within the organization to realize opportunities for growth. The assisted living revenue for the year ended December 31, 2000 was $7.2 million. During 2000, the Company divested 20 assisted living facilities. The Company transferred its two remaining assisted living facilities from its other operations segment to its Inpatient Services segment during 2000. Total revenues and operating expenses for nonreportable segments represents less than 10% of the consolidated Company's results.

     The Company's temporary therapy staffing business' operating expense increased $10.3 million from $53.6 million for the year ended December 31, 2000 to $63.9 million for the year ended December 31, 2001. The increase was primarily due to the increase in revenue which resulted in an increase in labor and other staffing costs to support the business. The Company's laboratory business' operating expenses increased $4.3 million from $24.0 million for the year ended December 31, 2000 to $28.3 million for the year ended December 31, 2001. The increase was primarily due to the increase in revenue which was supported partially with an increase in labor and associated costs.

     The Company's assisted living operating expenses decreased $6.5 million from $6.6 million for the year ended December 31, 2000 to $0.1 million for the year ended December 31, 2001. The decrease in expense is a result of the same factors which led to a decrease in revenue as discussed above. The Company's software development business' operating expenses decreased $4.9 million from $16.6 million for the year ended December 31, 2000 to $11.7 million for the year ended December 31, 2001. The decrease is primarily due to restructuring efforts during 2001 which reduced operating structures and staff within the business. Operating expenses for the Company's corporate segment decreased $4.7 million from $0.7 million for the year ended December 31, 2000 to $(4.0) million for the year ended December 31, 2001. The decrease was primarily due to infrastructure reorganization charges made while under bankruptcy protection that streamlined overhead.

     Corporate general and administrative costs not directly attributed to segments decreased 34.0% from $90.9 million for the year ended December 31, 2000 to $60.0 million at December 31, 2001. As a percentage of consolidated net revenues of $2,458.9 million and $2,075.2 million for the years ended December 31, 2000 and 2001, respectively, corporate general and administrative expenses not directly attributed to segments decreased from 3.7% to 2.9%, respectively. The decrease was primarily the result of

40

the reorganization changes made within the corporate division to streamline overhead and contain costs.  This effort reduced the number of employees in the division which correlated to a reduction in administrative and salary and benefit costs.

     Depreciation and amortization expense not directly attributed to segments increased 5.2% or $0.7 million from $13.4 million for the year ended December 31, 2000 to $14.1 million for the year ended December 31, 2001. The increase was primarily due to an increase in property and equipment within the temporary therapy staffing business to which depreciation was charged.

     Net interest expense not directly attributed to segments decreased 17.1% or $1.8 million from $10.5 million for the year ended December 31, 2000 to $8.7 million for the year ended December 31, 2001. As a percentage of consolidated net revenues, interest expense was 0.4% for the year ended December 31, 2000 and 2001. The decrease was primarily due to the determination in 2001 that certain debt obligations which existed prior to the Company's bankruptcy filing were subject to compromise; as a result, the Company stopped recording interest expense in 2001. For the year ended December 31, 2001, the Company did not pay or accrue approximately $142.8 million of interest expense in accordance with SOP 90-7.

     The corporate segment management fee increased 40.0% or $24.3 million from $60.8 million for the year ended December 31, 2000 to $85.1 million for the year ended December 31, 2001. The increase was primarily attributable to the assessment of additional management fees as specified in the settlement provision of the management agreement between the corporate division and the operating divisions.

Dividends on Convertible Preferred Stock

     In May 1998, a statutory business trust, all of whose common securities are owned by the Company, issued $345.0 million of 7.0% CTIPS with a liquidation amount of $25.00 per CTIP. Each CTIP is convertible into 1.2419 shares of the Company's common stock (equivalent to a conversion price of $20.13 per share). CTIPS holders were entitled to receive cumulative cash distributions at an annual rate of 7.0%, payable quarterly. Payment of the cash distributions and principal are irrevocably guaranteed by the Company. The Company may defer cash distribution for up to 20 consecutive quarters. Beginning with the interest payment due on May 1, 1999, the Company exercised its right to defer cash distributions. As cash distributions are deferred, dividends on the CTIPS continue to accrue.

     During 2000, approximately $26.9 million of CTIPS were converted into approximately 1.3 million shares of common stock. During 1999, $22.0 million of CTIPS were converted into approximately 1.1 million shares of common stock. See "Note 14 - Convertible Trust Issued Preferred Securities" in the Company's consolidated financial statements.

Other Special and Non-Recurring Charges

Restructuring Cost

     During 2001, the Company recorded restructuring costs of $1.1 million in its software development division. The restructuring plan included reductions of staff and other overhead expenses and a streamlining of the management structure.

Impairment of Goodwill and Other Long-Lived Assets

41

     The Company periodically evaluates the carrying value of goodwill and any other related long-lived assets in relation to the future projected cash flows of the underlying business segments. The assets are considered to be impaired when the expected future cash flows of the inpatient facilities or other business segment divisions do not exceed the carrying balances of the goodwill or other long-lived assets.

     During 2001, the Company recorded a non-cash impairment charge of approximately $18.8 million. The impairment was primarily due to the decrease of revenues as compared with profitability projections for each facility. This charge included approximately $14.5 million to its inpatient facilities segment and $4.3 million related to the Company's software development business.

Other Long-Lived Assets

     During 2000, a net non-cash charge of approximately $310.1 million was recorded to reduce the carrying amount of the medical supply operations and certain domestic inpatient facilities which were classified as assets held for sale in the Company's consolidated 2000 balance sheet. Additionally, a charge of $26.6 million was recorded to reduce the carrying amount of the corporate headquarters building. The building was classified as an asset held for sale at December 31, 2000 and 2001. The charges are recorded in reorganization costs, net, in the Company's consolidated statements of losses. See "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements.

Gain on Sale of Assets

     During the year ended December 31, 2001, the Company recorded a net gain on the sale of assets of approximately $0.8 million due primarily to decisions of the Company during 2001 to keep inpatient facilities previously classified as assets held for sale.

     During the year ended December 31, 2000, the Company recorded gains on the sale of assets of approximately $25.1 million. Approximately $21.4 million and $3.7 million was recorded in gain on sale of assets and reorganization costs, net, respectively in the Company's consolidated statements of losses. See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" and "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements.

Legal and Regulatory

     In August 2000, the Bankruptcy Court approved an agreement entered into between the Company and the U.S. Departments of Justice and Health and Human Services pursuant to which the Company paid the U.S. government approximately $1.2 million. The payment was in consideration of the government's agreement to allow the Company to transfer certain of its facilities to new operators without pursuing the new operators for alleged claims against the Company's facilities for pre-transfer overpayment liabilities, and for the release and waiver of certain pre-transfer claims against the Company related to the facilities to be transferred to new operators. The Company recorded approximately $2.5 million in expenses during 2000 related to the transfer of certain of its facilities to new operators, which includes the $1.2 million payment described above.

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Reorganization Costs

     The Company recorded net reorganization costs of $335.9 million and $42.9 million for the years ended December 31, 2000 and 2001, respectively. See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" in the Company's consolidated financial statements.

Consolidated Results of Operations

     The net loss for the year ended December 31, 2000 was $545.7 million compared to a net loss of $69.4 million for the year ended December 31, 2001. The loss before considering impairment loss, legal and regulatory matters, net, restructuring costs, gain (loss) on sale of assets, net, reorganization costs, net, and income taxes was $38.3 million for the year ended December 31, 2000 compared to earnings of $3.9 million for the year ended December 31, 2001. The net loss during the year ended December 31, 2000 is primarily due to the implementation of PPS and the continuing adverse impact on the demand for the Company's ancillary services. The net earnings for the year ended December 31, 2001 were primarily due to the Company's efforts while under bankruptcy protection to divest under-performing facilities, mainly in the inpatient services business, and to manage the business to maximize revenue opportunities while controlling costs and expenses.

     In accordance with SOP 90-7, no interest was paid or accrued on prepetition debt, classified as liabilities subject to compromise in the Company's consolidated balance sheets, and on the CTIPS since the Filing Date. These claims were discharged as part of the Company's emergence from bankruptcy in February 2002. Contractual interest expense not paid or accrued was $146.4 million and $142.8 million for the years ended December 31, 2000 and December 31, 2001, respectively.

     Income tax expense was $0.3 million for each of the years ended December 31, 2000 and 2001. For the year ended December 31, 2000, the Company increased its valuation allowance for the deferred tax assets resulting from its net operating losses which may not be realizable depending upon whether the Company generates future taxable income.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Inpatient Services

     Due to the number of Inpatient Service facilities being divested during the time periods being compared, a "same store" basis is also included for comparison purposes.

     Net revenues, which include revenues generated from therapy and pharmaceutical services provided at the Inpatient Services facilities, increased approximately $13.8 million from $1,704.4 million for the year ended December 31, 1999, to $1,718.2 million for the year ended December 31, 2000, a 0.8% increase. On a same store basis, net revenues increased approximately $152.7 million from $1,254.3 million for the year ended December 31, 1999 to $1,407.0 million for the year ended December 31, 2000, a 12.2% increase. Net revenues for 1999 include negative revenue adjustments of approximately $105.0 million related to reserves established for cost reports which, after audit, may require adjustments to revenues. Excluding the negative revenue adjustments for 1999, on a same store basis, net revenues increased $47.7 million or 3.5% for the year ended December 31, 2000. This increase was primarily the result of improved Medicaid rates during 2000.

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     On a same store basis, operating expenses, which include rent expense of $146.1 million and $142.4 million for the years ended December 31, 1999 and 2000, respectively, increased 1.8% from $1,254.0 million for the year ended December 31, 1999 to $1,276.6 million for the year ended December 31, 2000. Operating expenses as a percentage of net revenues, excluding the negative revenue adjustments for 1999, decreased from 92.3% for the year ended December 31, 1999 to 90.7% for the year ended December 31, 2000. The decrease in operating expenses as a percentage of revenue was primarily due to an increase in revenues combined with decreases in administrative costs associated with the divestitures of skilled nursing facilities during 2000.

     On a same store basis, corporate general and administrative expenses, which include regional costs for the supervision of operations, increased 38.7% from $28.7 million for the year ended December 31, 1999, to $39.8 million for the year ended December 31, 2000. Excluding the effect of the negative revenue adjustments, corporate general and administrative expenses were 2.1% and 2.8% of the net revenues for the years ended December 31, 1999 and 2000, respectively. The change was primarily due to an increase in the corporate overhead allocation partially offset by a reduction in regional overhead to skilled nursing facility divestitures.

     On a same store basis, depreciation and amortization decreased 19.5% from $22.1 million for the year ended December 31, 1999 to $17.8 million for the year ended December 31, 2000. Excluding the effect of the negative revenue adjustments for 1999, as a percentage of net revenues, depreciation and amortization expense decreased from 1.6% for the year ended December 31, 1999 to 1.3% for the year ended December 31, 2000. The decreases were primarily the result of the determination that certain of the Company's long-lived assets were impaired, which resulted in write-downs of certain long-lived assets pursuant to the Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121").

     On a same store basis, provision for losses on accounts receivable decreased 71.2% from $37.5 million for the year ended December 31, 1999, to $10.8 million for the year ended December 31, 2000. Excluding the effect of the negative revenue adjustments for 1999 as a percentage of net revenues, provision for losses on accounts receivable decreased from 2.8% for the year ended December 31, 1999, to 0.8% for the year ended December 31, 2000. During 1999 the Company increased its provision for losses on accounts receivable in response to deterioration in the aging of the accounts receivable. An equivalent increase was not necessary in 2000.

     On a same store basis, net interest increased 33.3% from $6.6 million for the year ended December 31, 1999 to $8.8 million for the year ended December 31, 2000. The increase was primarily due to interest charges incurred related to the late filing of certain Medicare cost reports.

Rehabilitation and Respiratory Therapy Services

     The Company's rehabilitation therapy services division experienced a high level of management turnover in late 2000. Historically, the disruption of management can negatively affect the stability of maintaining existing contracts as well as obtaining additional contracts. In November 2000 a new management team was put in place within the rehabilitation therapy services division and the structure and management of the sales team were overhauled. New models for facility revenue proformas, pricing strategies and floor pricing were established.

     Net revenues from rehabilitation and respiratory therapy services decreased 12.7% from $234.1 million for the year ended December 31, 1999 to $204.4 million for the year ended December 31, 2000. Revenues from services provided to affiliated facilities decreased from $126.9 million for the year ended December 31, 1999 to $113.3 million for the year ended

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December 31, 2000, a decrease of 10.7%. Revenues from services provided to nonaffiliated facilities decreased approximately $16.1 million, or 15.0%, from $107.2 million for the year ended December 31, 1999 to $91.1 million for the year ended December 31, 2000. These decreases are a result of the industry's transition to PPS. PPS resulted in a reduction of therapy provided (volume) and downward pressure on market rates as contract therapy companies lowered prices in an effort to remain competitive with other methods of therapy provision. Specifically, many facilities moved away from the use of contract therapy companies in favor of "in-house" rehabilitation and respiratory models in an effort to better control costs under a fixed reimbursement system. This was especially existent within respiratory therapy as this service was not covered under the ancillary component of the new PPS rate structure. The decline in net revenues has continued, with a significant reduction in contracts from 1999 to 2000. Specifically, there were 1,153 affiliated and nonaffiliated contracts as of December 31, 1999 compared to 942 affiliated and nonaffiliated contracts as of December 31, 2000. During 2000, the Company terminated certain nonaffiliated contracts based on issues related to customers' credit worthiness and contract profitability. In addition, certain nonaffiliated contracts were terminated in the ordinary course of business. The Company's divestitures of inpatient facilities in 1999 and 2000 also contributed to the decrease in affiliated revenues.

     Operating expenses decreased $54.3 million, or 25.4%, from $214.1 million for the year ended December 31, 1999 to $159.8 million for the year ended December 31, 2000. The decrease resulted primarily from the decline in the demand for the Company's therapy services resulting in a reduction in the number of therapists employed by the Company's therapy services subsidiary. Operating expenses as a percentage of net revenues decreased from 91.5% for the year ended December 31, 1999 to 78.2% for the year ended December 31, 2000. This decrease was attributable to reductions in cost structure. The Company's rehabilitation subsidiary went through a significant restructuring in the first quarter of 1999 which continued to dramatically reduce its cost structure during 2000 by reducing overhead costs through the reduction of regional offices. In addition, new operating models were put in place to improve the productivity of the therapists. Equipment rental costs decreased approximately $11.4 million from 1999 to 2000 primarily due to the Company shutting down its therapy equipment manufacturing operations.

     Corporate general and administrative expenses, which include regional costs related to the supervision of operations, were approximately $4.3 million for the year ended December 31, 2000. Corporate general and administrative expenses as a percentage of net revenues were 2.1% for the year ended December 31, 2000. The Company did not allocate corporate general and administrative expenses to the Rehabilitation and Respiratory Therapy Services segment during the year ended December 31, 1999. The Company began allocating costs directly attributable to the segment in January 2000.

     Depreciation and amortization decreased 58.3% from $7.2 million for the year ended December 31, 1999, to $3.0 million for the year ended December 31, 2000. As a percentage of net revenues, depreciation and amortization expense decreased from 3.1% for the year ended December 31, 1999 to 1.5% for the year ended December 31, 2000, respectively. The decrease was primarily a result of the write-downs during 1999 of goodwill and certain other long-lived assets pursuant to SFAS 121.

     Provision for losses on accounts receivable decreased $27.4 million, or 80.4%, from $34.1 million for the year ended December 31, 1999 to $6.7 million for the year ended December 31, 2000. As a percentage of net revenues, provision for losses on accounts receivable decreased from 14.6% for the year ended December 31, 1999 to 3.3% for the year ended December 31, 2000. During the fourth quarter of 1999, the Company increased its reserves due to the impact of PPS, which for certain nonaffiliated customers had negatively affected cash flows adversely affecting the collectibility of amounts due the Company. An equivalent increase in reserves for year ended December 31, 2000 was not necessary.

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Pharmaceutical and Medical Supply Operations

     Net revenues from pharmaceutical and medical supply services decreased $5.6 million, or 1.8%, from $316.9 million for the year ended December 31, 1999 to $311.3 million for the year ended December 31, 2000. Pharmaceutical services' net revenues decreased approximately $0.1 million from $240.2 million for the year ended December 31, 1999 to $240.1 million for the year ended December 31, 2000. Medical supply services' net revenues from nonaffiliated parties decreased approximately $14.4 million, or 27.5%, while net revenues from affiliated parties increased approximately $8.9 million, or 36.5%. The Company experienced a loss in nonaffiliated contracts when sales personnel left the Company and certain of their customers ceased doing business with the Company. The increase in affiliated revenues was a result of an increase in sales to the Company's Inpatient Services segment.

     Operating expenses decreased $4.1 million, or 1.4%, from $284.0 million for the year ended December 31, 1999 to $279.9 million for the year ended December 31, 2000. As a percentage of net revenues, operating expenses increased from 89.6% for the year ended December 31, 1999 to 89.9% for the year ended December 31, 2000. Pharmaceutical services' operating expenses increased approximately $1.2 million, or 0.6%. The increase in the pharmaceutical services' operating expenses was primarily attributed to increases in labor, benefit and insurance costs along with an increase in cost of goods sold based on an increase in sales. Medical supply services' operating expenses decreased 7.4% from $71.7 million for the year ended December 31, 1999 to $66.4 million for the year ended December 31, 2000. The decrease in medical supply services' cost of goods sold was a result of the decrease in sales.

     Corporate general and administrative expenses, which include regional costs related to the supervision of operations, were approximately $5.2 million for the year ended December 31, 2000. Corporate general and administrative expenses as a percentage of net revenues were 1.7% for the year ended December 31, 2000. The Company did not allocate corporate general and administrative expenses to the Pharmaceutical and Medical Supply Services segment during the year ended December 31, 1999. The Company began allocating costs directly attributable to the segment in January 2000.

     Depreciation and amortization decreased 16.9% from $8.3 million for the year ended December 31, 1999 to $6.9 million for the year ended December 31, 2000. As a percentage of net revenues, depreciation and amortization expense was approximately 2.6% and 2.2% for the years ended December 31, 1999 and 2000, respectively. The decrease was primarily a result of the write-downs of certain long-lived assets during 1999 in accordance with SFAS 121.

     Provision for losses on accounts receivable decreased 78.6% from $28.5 million for the year ended December 31, 1999 to $6.1 million for the year ended December 31, 2000. As a percentage of net revenues, the provision for losses on accounts receivable decreased from 9.0% for the year ended December 31, 1999 to 2.0% for the year ended December 31, 2000. During 1999, the Company increased its reserves due to a deterioration in the aging of certain accounts receivable. An equivalent increase was not necessary in 2000.

International Operations

     Revenues from international operations decreased $31.4 million from $296.9 million for the year ended December 31, 1999 to $265.5 million for the year ended December 31, 2000. The decrease was primarily due to the fact that the Australian subsidiaries were placed in receivorship during the third quarter of 2000 and no revenue was recorded subsequently. Additionally, 18 pharmacies operating in the

46

United Kingdom were divested in June 2000 and the operating division in Spain was sold in October 2000.

     Operating expenses which include rent expense of $41.1 million and $40.5 million for the years ended December 31, 1999 and December 31, 2000, respectively, decreased approximately 9.8% from $275.9 million for the year ended December 31, 1999 to $248.8 million for the year ended December 31, 2000. This decrease was a result of the same factors which led to a decrease in revenue as discussed above. As a percentage of revenues, operating expenses increased from 92.9% for the year ended December 31, 1999 to 93.7% for the year ended December 31, 2000.

     Corporate general and administrative expenses were $14.4 million and $13.0 million for the years ended December 31, 1999 and December 31, 2000, respectively. As a percentage of revenues, corporate, general and administrative expenses were 4.9% for the years ended December 31, 1999 and 2000.

     Depreciation and amortization for international operations was $12.8 million and $2.5 million for the year ended December 31, 1999 and 2000, respectively. In accordance with SFAS 121, depreciation and amortization were no longer recognized after operations were placed for sale. Therefore, depreciation and amortization was significantly reduced in 2000.

     Net interest expense was $13.2 million for the year ended December 31, 1999 and $13.0 million for the year ended December 31, 2000. Net interest expense as a percentage of revenues increased from 4.4% for the year ended December 31, 1999 to 4.9% for the year ended December 31, 2000.

Other Non-reportable Segments and Corporate General Administrative Departments

     Non-reportable segments include temporary therapy and nursing staffing, home health, assisted living, software development and other ancillary services. Revenues from other non-reportable segments decreased 13.3% from $199.3 million for the year ended December 31, 1999, to $172.8 million for the year ended December 31, 2000. Operating expenses decreased 23.2% from $208.9 million for the year ended December 31, 1999, to $160.4 million for the year ended December 31, 2000. Operating expenses as a percentage of revenues were 104.8% and 92.8% for the years ended December 31, 1999 and 2000, respectively. Total revenues and operating expenses for non-reportable segments represent less than 10% of the consolidated Company's results. The decrease in revenues and operating expenses was primarily a result of the sale of 20 assisted living facilities during 2000. Additionally, the hospice operations were divested during the fourth quarter of 1999. Operating results were also negatively impacted by expenses related to software development costs incurred by the Company's majority owned subsidiary, Shared Healthcare Systems, Inc. These costs were being expensed in accordance with Statement of Financial Accounting Standards No. 86: Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Development of the Company's software products were not expected to reach the stage under which capitalization is permitted until sometime in 2002.

     Corporate general and administrative costs not directly attributed to segments decreased 22.0% from $116.5 million for the year ended December 31, 1999, to $90.9 million for the year ended December 31, 2000. As a percentage of consolidated net revenues of $2,529.0 million and $2,458.9 million for the years ended December 31, 1999 and 2000, respectively, corporate general and administrative expenses not directly attributed to segments decreased from 4.6% in 1999 to 3.7% in 2000.

     Net interest expense not directly attributed to segments decreased 90.0% from $105.5 million for the year ended December 31, 1999 to $10.5 million for the year ended December 31, 2000. As a percentage of consolidated net revenues, interest expense decreased from 4.2% for the year ended December 31,

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1999 to 0.4% for the year ended December 31, 2000. Sun discontinued charging Mediplex for interest during 2000 due to the Company's chapter 11 filing.

Dividends on Convertible Preferred Stock

     In May 1998, a statutory business trust, all of whose common securities are owned by the Company, issued $345.0 million of 7.0% CTIPS with a liquidation amount of $25.00 per CTIP. Each CTIP is convertible into 1.2419 shares of the Company's common stock (equivalent to a conversion price of $20.13 per share). CTIPS holders were entitled to receive cumulative cash distributions at an annual rate of 7.0%, payable quarterly. During 2000, approximately $26.9 million of CTIPS were converted into approximately 1.3 million shares of common stock. During 1999, $22.0 million of CTIPS were converted into approximately 1.1 million shares of common stock. See "Note 14 - Convertible Trust Issued Preferred Securities" in the Company's consolidated financial statements.

Other Special and Non-Recurring Charges

Financial Restructuring

     During 1999, the Company recorded financial restructuring costs of $16.0 million, primarily professional fees, related to the Company's activities in preparation for its filing for protection under chapter 11 of the U. S. Bankruptcy Code. During 2000, the Company reversed a non-cash reserve of $1.1 million previously recorded in restructuring costs during 1999.

Impairment of Goodwill and Other Long-Lived Assets

     The Company periodically evaluates the carrying value of goodwill and any other related long-lived assets in relation to the future projected cash flows of the underlying business segments. The assets are considered to be impaired when the expected future cash flows of the inpatient facilities or other business segment divisions do not exceed the carrying balances of the goodwill or other long-lived assets.

     During 2000, the Company recorded a non-cash impairment charge of approximately $191.3 million related to the Company's estimate of goodwill and other long-lived assets. This charge included approximately $189.3 million related to 141 of its inpatient facilities segment and $2.0 million to its pharmaceutical and other operations segments.

     During 2001, the Company recorded a non-cash impairment charge of approximately $18.8 million related to the Company's estimate of goodwill and other long-lived assets.  This charge included approximately $14.5 million to its inpatient facilities segment and $4.3 million related to the Company's software development business.

Other Long-Lived Assets

Gain on Sale of Assets

     During the year ended December 31, 2000, the Company recorded gains on the sale of assets of approximately $25.1 million. Approximately $21.4 million and $3.7 million is recorded in gain on sale of assets and reorganization costs, net, respectively in the Company's consolidated statements of losses. See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" and "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements.

Loss on Sale of Assets

     During 1999, the Company recorded a net non-cash charge of approximately $85.7 million due to the anticipated and/or completed termination of certain facility lease agreements and to further reduce the carrying amount of certain assets that the Company determined were not integral to its core business

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operations. See "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale" in the Company's consolidated financial statements.

     During 2000, a net non-cash charge of approximately $310.1 million was recorded to reduce the carrying amount of the medical supply operations and certain domestic inpatient facilities which are classified as assets held for sale in the Company's consolidated balance sheets. Additionally, a charge of $26.6 million was recorded to reduce the carrying amount of the corporate headquarters building. The building is classified as an asset held for sale at December 31, 2001. The charges were recorded in reorganization costs, net, in the Company's consolidated statements of losses. See "Note 7 - Impairment of Long-Lived Assets and Assets Held for Sale".

Legal and Regulatory

In August 2000, the Bankruptcy Court approved an agreement entered into between the Company and the U.S. Departments of Justice and Health and Human Services pursuant to which the Company paid the U.S. government approximately $1.2 million. The payment was in consideration of the government's agreement to allow the Company to transfer certain of its facilities to new operators without pursuing the new operators for alleged claims against the Company for pre-transfer overpayment liabilities, and for the release and waiver of certain pre-transfer claims against the Company related to the facilities to be transferred to new operators. The Company recorded approximately $2.5 million of expense during 2000 related to the transfer of certain of its facilities to new operators.

Reorganization Costs

     The Company recorded net reorganization costs of $48.1 million and $335.9 million for the years ended December 31, 1999 and 2000, respectively. See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" in the Company's consolidated financial statements.

Consolidated Results of Operations

     The net loss for the year ended December 31, 1999 was $1,089.5 million compared to a net loss of $545.7 million for the year ended December 31, 2000. The loss before considering impairment loss, gain or loss on sale of assets, net, reorganization costs, net, restructuring costs, loss on termination of interest rate swaps, cumulative effect of change in accounting principle and income taxes was $462.4 million for the year ended December 31, 1999 compared to a loss of $40.8 million for the year ended December 31, 2000. The net loss during the years ended December 31, 1999 and 2000 was primarily due to the implementation of PPS and the continuing adverse impact on the demand for the Company's ancillary services.

     In accordance with SOP 90-7, no interest was paid or accrued on prepetition debt, classified as liabilities subject to compromise in the Company's consolidated balance sheets and the CTIPS since the Filing Date. Contractual interest expense not paid or accrued was $30.5 million and $146.4 million for the years ended December 31, 1999 and December 31, 2000, respectively.

     Income tax expense for the year ended December 31, 1999 and for the year ended December 31, 2000 was $0.2 million and $0.3 million, respectively. For the year ended December 31, 1999, the Company increased its valuation allowance for the deferred tax assets resulting from its net operating losses which may not be realizable, depending upon whether the Company generates future taxable income.

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Liquidity and Capital Resources

     New Loan Agreements. On February 28, 2002, the Company entered into (i) a Loan and Security Agreement with certain lenders, led by Heller Healthcare Finance, Inc. as collateral agent, and Citicorp USA, Inc., as administrative agent (the "Revolving Loan Agreement") and (ii) a Term Loan and Note Purchase Agreement with certain lenders, led by U.S. Bank National Association as administrative and collateral agent (the "Term Loan Agreement"), and together with the Revolving Loan Agreement, (the "Loan Agreements"). The Revolving Loan Agreement is a $150.0 million three-year revolving line of credit that is secured by the Company's accounts receivable, inventory, equipment and other assets, a first priority pledge of the stock of the Company's subsidiaries other than those subsidiaries providing pharmaceutical services, and a second priority pledge of the stock of the Company's pharmaceutical services subsidiaries. The Company's borrowing availability under the Revolving Loan Agreement is limited to up to 85% of the Company's net eligible accounts receivable and up to 50% of the Company's net eligible inventory, but not to exceed $150.0 million. Under the Revolving Loan Agreement, dependingupon the type of loan made and provided that an event of default has not occurred, the Company will pay interest at either (i) prime (or, if higher, the  federal funds rate plus 0.50%) plus 2.75% (subject to certain adjustments) or (ii) the London Interbank Offered Rate plus 3.75% (subject to certain adjustments).

     The Term Loan Agreement is comprised of a three-year $20.0 million term loan (the "Term Loan") and a three-year $23.7 million original issue discount note (the "Discount Note" and together with the Term Loan, the "Term Debt"). The Term Debt is secured primarily by a first priority pledge of the stock of the Company's subsidiaries that provide pharmaceutical services and a second priority security interest in substantially all of the Company's other assets. Under the Discount Note, the Company's borrowing availability is approximately $20.0 million. Provided that an event of Default has not occurred, interest accrues on the Term Loan at the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) plus 4.00% and (ii) 9.00%. The Company will pay interest on the Discount Note for base rate borrowings at a rate of interest equal to the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) and (ii) 2.65% and for Eurodollar borrowings a rate of interest equal to the Adjusted Eurodollar Rate (as defined in the Term Loan Agreement) plus 0.50%.

     As of March 1, 2002, the Company's gross borrowing availability under the Loan Agreements was approximately $111.0 million. As of March 1, 2002, the Company had borrowed approximately $66.8 million and had issued approximately $44.3 million in letters of credit under the Loan Agreements, leaving a net amount of approximately $39.9 million for additional borrowing. In addition to the available funds under the Loan Agreements, the Company had cash and cash equivalents book balances at March 1, 2002 of approximately $73.6 million. The combination of the Company's cash balances and available borrowing capacity was $113.5 million and $54.6 million as of March 1, 2002 and December 31, 2001, respectively.

     In February 2002, the Company developed a restructuring plan to reduce overhead expenses across all businesses during 2002. The Company estimates annual savings of approximately $25.0 million as a result of the restructuring primarily related to salaries and benefits, although the savings could be less than anticipated. The Company recorded approximately $5.1 million as a restructuring reserve primarily for severance benefits under a severance program that the Company has implemented in conjunction with the plan. This is a "forward looking statement" within the meaning of the Private Securities Litigation Reform Act of 1995 and is subject to a number of factors, including but not limited to the Company's ability to operate its business consistent with the plan and other factors set forth in "Item 1 - Business - Certain Additional Business Risks."

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     The Company's revenues will be adversely affected if enactments providing for additional funding expire as currently scheduled. A number of provisions of the BBRA and BIPA enactments providing additional funding for Medicare participating skilled nursing facilities expire on September 30, 2002. In addition, President Bush's fiscal year 2003 budget proposal assumes that CMS will refine the per diem system by October 2002 in order to reduce Medicare payments to skilled nursing facilities. For a discussion regarding the effects of the expiration of the enactment and the proposed 2003 budget, see "Item 1 - Business - Certain Additional Business Risks - The Company's Medicare reimbursements may materially and adversely decline after September 30, 2002."

     The Company believes that it will have sufficient liquidity to meet its operational needs for the next 12 months assuming that (i) the Company maintains its ability to borrow under its Loan Agreements, (ii) the Company achieves its 2002 budgeted results of operations, (iii) the Company does not experience any material and adverse decrease in its results of operations and (iv) Medicare and Medicaid reimbursement rates do not decrease. This is a "forward-looking statement" within the meaning of the Private Securities Litigation Reform Act of 1995 and is subject to a number of factors, including, but not limited to, the Company's ability to divest unprofitable facilities, operate its business consistent with plan, comply with the covenants of the Credit Agreement, and other risks described elsewhere. See "Item 1 - Business - Certain Additional Business Risks".

     For the year ended December 31, 2001, net cash provided by operating activities was approximately $24.4 million compared to net cash used for operating activities for the year ended December 31, 2000 of approximately $1.7 million. The increase in net cash provided by operating activities for the year ended December 31, 2001 was primarily from the improved collection of accounts receivable.

     The Company incurred approximately $30.3 million, $55.4 million and $102.5 million in capital expenditures during the years ended December 31, 2001, 2000 and 1999, respectively The significant decreases were primarily due to divestitures during 1999 and 2000. In 2001, expenditures related primarily to improvements at existing facilities and routine capital expenditures. The Company had construction commitments of approximately $0.7 million as of December 31, 2001 under various contracts to improve existing facilities. The decrease from 2000 to 2001 was primarily related to the Company reaching a stage of construction completion for the corporate headquarters.

     The Company recorded net reorganization costs of $42.9 million for the year ended December 31, 2001. Included in these charges at December 31, 2001 are approximately $15.3 million for loss on sale of assets related to the divestiture of under-performing assets and approximately $25.8 million for professional fees relating to the legal consideration of the bankruptcy filing. See "Note 2 - Emergence from Chapter 11 Bankruptcy Proceedings" in the Company's consolidated financial statements.

     In January 2000, the Company established a self-funded insurance program for general and professional liability claims up to a base amount of $1.0 million per claim, and $3.0 million aggregate per location, and obtained excess insurance coverage for exposure above these levels. The Company's insurance carriers declined to renew the Company's general and professional liability insurance policies that expired on December 31, 1999. Several major insurance companies no longer provide this type of coverage to long-term care providers due to general underwriting issues with the long-term care industry. Prior to January 2000, the Company's insurance companies paid substantially more to third parties under its policies than the Company paid in insurance premiums and deductibles. There can be no assurance that this self-funded insurance program and any excess insurance coverage will be sufficient to fund any future judgements or settlement resulting from litigation against the Company.   The provision recorded in the Company's statements of losses for the years ended December 31, 2001, 2000 and 1999 were approximately $58.1 million, $35.3 million and $23.9 million, respectively. During 2000, the Company

51

pre-funded $22.2 million for general and professional liability claims into a cash collateral trust account held by the Company's insurance carrier.  The Company funded an additional $5.0 million into the trust account in 2001.  The combined pre-funding will be used to pay claims for policy years 2000 through 2002.  Claims paid from the trust account were immaterial in 2000 and were $5.8 million for the year ended December 31, 2001.

     For the year ended December 31, 1999, the workers' compensation insurance was a guaranteed cost program, and thus, after payment of the premium, risk was fully transferred to the third party insurance carrier. Subsequent to December 31, 1999, the Company purchased workers' compensation insurance for all states, except Washington, Ohio, and West Virginia where the Company is required to subscribe to those state and/or self-insured programs. The 2001 and 2000 policies provide coverage above $250,000 per claim. An acturial analysis prepared in the current year determined the undiscounted expected losses and costs under this retention level to be approximately $35.5 million as of December 31, 2001 and $36.0 million as of December 31, 2000. The Company has pre-funded cash collateral trust accounts with its insurance carrier in the amount of $26.8 million and $32.4 million as of December 31, 2001 for the 2001 and 2000 policy years, respectively. Claims paid from the 2001 policy year trust account were $4.7 million, and claims paid from the 2000 policy year trust account were $12.5 million and $5.7 million as of December 31, 2001 and 2000, respectively. The accounts were established to fund the Company's ultimate estimated exposure and will be adjusted retrospectively based on revisions to the estimates. For years prior to 1998 in which the Company carried various forms of workers' compensation insurance, aggregate losses are provided on a fully developed basis, including any incurred but not reported claims. The reserve for such workers' compensation risks was approximately $29.5 million and $14.2 million as of December 31, 2001 and 2000, respectively. Provisions for such risks totaled approximately $54.9 million, $27.4 million and $30.9 million for the years ended December 31, 2001, 2000 and 1999, respectively, and were included in operating expenses and corporate general and administrative expenses.

     On June 30, 1998, a wholly owned subsidiary of the Company merged with Retirement Care Associates, Inc. ("RCA"), an operator of skilled nursing and assisted living facilities in eight states principally in the southeastern United States (the "RCA Merger"). In connection with the RCA Merger, the Company recorded purchase liabilities including $24.7 million for severance and related costs and $1.4 million for costs associated with the shutdown of certain administrative facilities. As of December 31, 2001 and December 31, 2000, the Company's purchase liabilities reserve balance was approximately $7.0 million and $12.0 million, respectively.

Effects of Inflation

     Healthcare costs have been rising and are expected to continue to rise at a rate higher than that anticipated for consumer goods as a whole. The Company's operations could be adversely affected if it experiences significant delays in receiving reimbursement rate increases from Medicaid and Medicare sources for its labor and other costs.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The Company's long-term debt that was outstanding as of December 31, 2001 was generally either canceled as part of its Plan of Reorganization or paid off on February 28, 2002. The Company's Revolving Loan Agreement and Term Loan Agreement entered into on February 28, 2002, are sensitive to changes in interest rates.

     The Revolving Loan Agreement is a $150.0 million three-year revolving line of credit. The Company's borrowing availability under the Revolving Loan Agreement is limited to up to 85% of the

52

Company's net eligible accounts receivable and up to 50% of the Company's net eligible inventory, but not to exceed $150 million. Under the Revolving Loan Agreement, depending upon the type of loan made and provided that an event of default has not occurred, the Company will pay interest at either (i) prime (or, if higher, the federal funds rate plus 0.50%) plus 2.75% (subject to certain adjustments) or (ii) the London Interbank Offered Rate plus 3.75% (subject to certain adjustments). For each additional percentage point increase in the LIBOR, assuming an outstanding balance of $100.0 million, the Company will incur additional interest expense of approximately $1.0 million annually.

     The Term Loan Agreement is comprised of a three-year $20.0 million term loan (the "Term Loan") and a three-year $23.7 million original issue discount note (the "Discount Note") and together with the Term Loan, the "Term Debt"). Under the Discount Note, the Company's borrowing availability is approximately $20.0 million. Provided an event of Default has not occurred, interest accrues on the Term Loan at the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) plus 4.00% and (ii) 9.00%. The Company will pay interest on the Discount Note for base rate borrowings a rate of interest equal to the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) and (ii) 2.65% and for Eurodollar borrowings a rate of interest equal to the Adjusted Eurodollar Rate (as defined in the Term Loan Agreement) plus 0.50%. Under the Term Loan Agreement, interest accrues at the greater of (i) prime plus 4.00% and (ii) 9.00%. For each additional percentage point increase in the prime rate, assuming an outstanding balance of $40.0 million, the Company will incur additional interest expense of approximately $400,000 annually. See "Note 23 - Subsequent Events" in the Company's consolidated financial statements.

Item 8. Financial Statements and Supplementary Data

     Information with respect to Item 8 is contained in the Company's consolidated financial statements and financial statement schedules and are set forth herein beginning on Page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

The directors and executive officers of Sun as of March 1, 2002 were:

Name	Position with Sun
Richard K. Matros	Chairman of the Board and Chief Executive Officer
Kevin W. Pendergest	Executive Vice President and Chief Financial Officer
Wallace E. Boston, Jr.	Principal Financial Officer
William A. Mathies	President of SunBridge Healthcare Corporation
Warren C. Schelling	Senior Vice President of Ancillary Services
Heidi J. Fisher	Senior Vice President of Human Resources
Robert F. Murphy	General Counsel and Secretary
Chauncey J. Hunker	Corporate Compliance Officer
Robert K. Schneider	Vice President and Treasurer
Jennifer L. Botter	Vice President and Corporate Controller
John W. Adams	Director
Gregory S. Anderson	Director
Charles W. McQueary	Director
John F. Nickoll	Director
Sanjay H. Patel	Director
Bruce C. Vladeck	Director
Steven L. Volla	Director
Milton J. Walters	Director

     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., 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.

     Kevin W. Pendergest, age 48, has been an Executive Vice President and the Chief Financial Officer of the Company since March 1, 2002. Mr. Pendergest was the President and owner of Strategic Alliance Network, a healthcare services advisory firm, from 1995 to February 2002. From 1990 to 1995 he was Executive Vice President and Chief Financial Officer of GranCare, Inc., a publicly held long-term care company. From 1981 to 1989, Mr. Pendergest held various positions with Deloitte Haskins & Sells, most recently as Partner in Charge of Healthcare Consulting for the Western Region of the United States.

     Wallace E. Boston, Jr., age 47, has been the Principal Financial Officer of the Company since March 1, 2002. Mr. Boston was the Chief Financial Officer of the Company from August 2001 until March 2002. 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 Senior Vice President-Acquisitions & Development from 1996 to 1998 and as Vice

54

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.

     William A. Mathies, age 42, has been President of SunBridge Healthcare Corporation, an inpatient services subsidiary of the Company, since March 1, 2002. From 1995 to March 2002, Mr. Mathies served as Executive Vice President of Beverly Enterprises, Inc., a long-term care company. Most recently, he was the Executive Vice President of Innovation/Services for Beverly. He previously served Beverly as President of Beverly's Health and Rehabilitation Services, (the LTC subsidiary of Beverly) from 1995 to 2000, Vice President of Operations for California from 1988 to 1995, as a Regional Manager from 1986 to 1988 and as a facility administrator from 1981 to 1986.

     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. Mr. Schelling was an executive officer of the Company when it commenced its chapter 11 bankruptcy proceeding in October 1999.

     Heidi J. Fisher, age 45, has been Senior Vice President of Human Resources of the Company since February 2002. From 1998 to 2002, Ms. Fisher was Vice President Human Resources of Bright Now! Dental, a dental practice management company. From 1997 to 1998, she was Corporate director of Human Resources at Covenant Care, Inc., a long-term care company. From 1994 to 1997, Ms. Fisher was with Regency Health Services, Inc., a long-term care company, most recently with the title Senior Director of Human Resources. From 1987 to 1994, Ms. Fisher was Senior Manager of Human Resources with Volt Delta Resources, 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. Mr. Murphy was an executive officer of the Company when it commenced its chapter 11 bankruptcy proceeding in October 1999.

     Chauncey J. 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

55

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.

     John W. Adams, age 58, has served as a Director of the Company since February 28, 2002. Mr. Adams has served as President of Smith Management, LLC, a private investment firm, since 1984. From 1972 to 1983 he was a partner at the law firm of Dillon, Bitar & Luther. Mr. Adams currently serves as Chairman of the Board of Hawaiian Airlines, a publicly held airline.

     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.

     Charles W. McQueary, age 49, has served as a Director of the Company since February 28, 2002. Mr. McQueary served ProMedCo, Inc., a national medical practice management company, as Chief Executive Officer from February 2001 to December 2001 and as Senior Vice President - Operations from May 1997 to February 2001. Mr. McQueary previously served as Regional Vice President of Med Partners, Inc. from 1995 to 1997 and as Chief Operating Officer and Chief Financial Officer of Asthma & Allergy CareAmerica, Inc. from 1993 to 1995. Prior to that, he held offices with other health care companies and various positions with independent accounting firms.

     John F. Nickoll, age 67, has served as a Director of the Company since February 28, 2002. Mr. Nickoll has served as President, Chairman and Chief Executive Officer of the Foothill Group, Inc., a subsidiary of Wells Fargo, since 1970. Mr. Nickoll is also Managing General Partner of Foothill Partners, L.P., Foothill Partners II, L.P., Foothill Partners III, L.P. and Foothill Income Trust II, L.P., each of which invest in senior bank debt and other types of debt issues. Mr. Nickoll currently serves as a director of the Foothill Group, Inc. and CIM High Yield Securities, a closed end high yield bond fund.

     Sanjay H. Patel, age 41, has served as a Director of the Company since February 28, 2002. Mr. Patel has served as Co-President of GSC Partners, a private equity firm, since 1998. Mr. Patel served Goldman, Sachs & Co. as Managing Director in the Principal Investment Area from 1992 to 1998, in the Leveraged Buyout Department from 1987 to 1992 and in the Mergers and Acquisitions Department from 1983 to 1985. Mr. Patel currently serves on the Board of Directors of Project Time & Cost, Inc., ETEC Ventures, Ltd. (Mauritus), ForcesGroup, Ltd., Waddington North America, Inc., Tracmail (Bermuda) Ltd., Atlantic Express Transportation Group and GSCP Recovery, Inc.

     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

56

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 President; 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.

     Pursuant to the Company's Joint Plan of Reorganization, the Company's Board of Directors consists of nine members. The holders of the senior lender claims selected eight of the members: Messrs. Adams, Anderson, McQueary, Nickoll, Patel, Vladeck, Volla and Walters to serve on the Board for a one-year term. The Plan provides that the ninth member is the Company's Chief Executive Officer, Mr. Matros. After the initial year, the holders of Sun's common stock will elect new members to the Board.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Exchange Act and the rules promulgated thereunder require the Company's directors and executive officers and persons who own more than ten percent of the Company's Common Stock to report their ownership and changes in their ownership of Common Stock to the Securities and Exchange Commission (the "Commission"). Copies of the reports must also be furnished to the Company. Specific due dates for the reports have been established by the Commission and the Company is required to report any failure of its directors, executive officers and more than ten percent stockholders to file by these dates.

     Based solely on a review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that during 2001 all Section 16(a) filing requirements applicable to its directors, executive officers and greater than ten percent beneficial owners were met.

57

Item 11. Executive Compensation

Summary Compensation Table

     The following table provides information concerning employment compensation for services to the Company and its subsidiaries for the fiscal years shown for those persons (the "Named Executive Officers") who were, during the year ended December 31, 2001, (i) the individuals who served as chief executive officer, (ii) the other four most highly compensated executive officers of the Company and (iii) a former officer who would have been one of the most highly compensated officers but who was not with the Company on December 31, 2001.

Name and     Principal Position	Year	Annual Compensation                       Salary                      Bonus		Long-Term Compensation            Awards              Securities Underlying        Options (#)	All Other Compensation
Richard K. Matros (1)   Chairman of the Board   and Chief Executive   Officer	2001 2000 1999	$       85,000 - -	$                  - - -	-         -         -	$                - - -
Warren C. Schelling   Senior Vice   President Ancillary   Services	2001 2000 1999	340,808 320,008 320,008	200,000 150,000 -	-         -         13,600   (2)	1,082 780 1,587	(3)
Robert F. Murphy   General Counsel and   Secretary	2001 2000 1999	313,905 285,012 285,012	113,359 - -	-        -        11,200   (2)	1,187 1,097 2,458	(4)
Chauncey J. Hunker   Corporate Compliance   Officer	2001 2000 1999	234,790 182,288 133,500	29,700 28,100 9,938	-        -        3,160   (2)	1,774 1,532 1,390	(5)
Mark G. Wimer (6)   Former Chief   Executive Officer and   President	2001 2000 1999	691,875 596,255 450,008	389,424 - -	-        -        16,960  (2)	899,007 2,092 3,313	(7)
Robert D. Woltil (8)   Former Chief   Financial Officer	2001 2000 1999	291,963 425,022 425,022	169,038 - -	-        -        14,000   (2)	456,426 1,797 1,810	(9)
Jack Tindal   Chief Administrative   Officer	2001 2000 1999	183,343 206,373 154,508	78,179 - -	-        -        2,960   (2)	1,923 1,745 1,550	(10)

                ______________________

(1)	Mr. Matros was appointed Chief Executive Officer of the Company on November 7, 2001.
(2)	Represents options issued by the Company in exchange for the cancellation of previously granted stock options in May 1999. The new options were later cancelled upon the Company's emergence from chapter 11 bankruptcy proceedings on February 28, 2002.
(3)	Consists of the value of life insurance premiums paid on his behalf by the Company. 58
(4)	Consists of $744 of matching contributions under the Company's 401(k) Plan and the value of $443 of life insurance premiums paid on his behalf by the Company.
(5)	Consists of $1,275 of matching contributions under the Company's 401(k) Plan and the value of $499 of life insurance premiums paid on his behalf by the Company.
(6)	Mr. Wimer resigned from the Company on November 6, 2001.
(7)	Consists of $892,882 paid to Mr. Wimer in severance payments, $1,000 of matching contributions under the Company's 401(k) Plan and the value $5,125 of life insurance premiums paid on his behalf by the Company.
(8)	Mr. Woltil's services to the Company terminated in July 2001.
(9)	Consists of $454,750 paid to Mr. Woltil in severance payments, $1,275 of matching contributions under the Company's 401(k) Plan and the value $401 of life insurance premiums paid on his behalf by the Company.
(10)	Consists of $1,275 of matching contributions under the Company's 401(k) Plan and the value of $648 of life insurance premiums paid on his behalf by the Company.

Fiscal Year-End Option Values

     Set forth in the table below is information concerning the value of stock options held as of December 31, 2001 by each of the Named Executive Officers. None of the Named Executive Officers exercised any stock options during the year ended December 31, 2001. Sun's outstanding common stock and stock options, including those set forth in the table below, were cancelled upon the Company's emergence from chapter 11 bankruptcy proceedings on February 28, 2002 without any recoveries to the holders of common stock or stock options.

	Number of Securities Underlying Unexercised      Options-at-Year-End (#)		Value of Unexercised In-the-Money Options          At-Year-End ($)(1)
Name	Exercisable	Unexercisable	Exercisable	Unexercisable
Richard K. Matros	-	-	$                   -	$                      -
Warren C. Schelling	9,067	4,533	-	-
Robert F. Murphy	7,467	3,733	-	-
Chauncey J. Hunker	2,107	1,053	-	-
Mark G. Wimer	-	-	-	-
Robert D. Woltil	-	-	-	-
Jack Tindal	1,974	986	-	-

__________________

(1)  The last reported sales price of the Common Stock, as reported on the Over-The-Counter Bulletin
       Board at December 31, 2001 was less than the exercise price of all stock options.

Compensation of Directors

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     Non-employee directors of the Company, other than the Chairman of the Board, are entitled to receive: (i) an annual fee of $24,000, which is payable in four equal quarterly installments, (ii) $1,750 for each Board of Directors meeting attended in person, (iii) an additional $500 for each subsequent meeting attended that same day, and (iv) $500 for any meetings attended by telephone. In addition, each Chairperson of a committee of the Board of Directors is entitled to receive an additional annual fee of $4,000, payable in four equal quarterly installments. Each of the non-employee directors is reimbursed for out-of-pocket expenses for attendance at Board and committee meetings.

Employment Agreement

     The Company entered into an Employment Agreement with Richard K. Matros on February 28, 2002. The agreement terminates on November 6, 2005, although the term is automatically extended for an additional year on November 6, 2004, and on each anniversary thereafter, unless the Company or Mr. Matros provides notice of non-extension. Pursuant to the agreement, Mr. Matros will receive an annual base salary of $650,000 that is subject to annual merit increases as determined by the Board of Directors. In addition to the base salary, Mr. Matros is entitled to an annual bonus for each fiscal year in which the Company achieves or exceeds certain financial performance targets. If the targets are achieved, the bonus could be 50%, 75% or 100% of base salary, depending upon how much the targets are exceeded. Mr. Matros was also awarded 150,000 shares of restricted common stock and an option to purchase 150,000 shares of common stock on February 28, 2002. The restricted stock will vest as to 60,000 shares on February 28, 2003 and 30,000 shares on each of February 28, 2004, 2005 and 2006.

     Mr. Matros' Employment Agreement provides that in the event of his termination of employment by the Company without Good Cause, by Mr. Matros for Good Reason (each as defined in the Employment Agreement), or upon the expiration of the term of the agreement following the Company's notice of non-extension, then Mr. Matros would 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 of the agreement, or (ii) two year's base salary or, in the event such termination occurs on or within two years following the date of a change of control (as defined in the Employment Agreement), then three year's base salary.

     The Company is currently in the process of documenting employment agreements with Kevin W. Pendergest, William A. Mathies and Heidi J. Fisher.

Severance Agreements

     The Company has entered into Severance Agreements with Mr. Schelling and Mr. Murphy pursuant to which they would receive severance payments in the event of their Involuntary Termination of employment (as defined in the Agreements). The severance payments would be equal to 24 months of their then-current salary. In addition to the severance payments, they would have the right to participate for a defined period of time in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to them immediately prior to termination. Severance payments would be made in a lump sum or over a period of time at the discretion of the Company. If so elected, the Company could make the severance payments over time, which would release the executive from existing non-compete restrictions. Under this option, if the executive finds employment during the severance period, his severance payment will be reduced by the amount of the salary earned by him, up to a maximum of 50% of the aggregate severance payments. Otherwise, the payments could be made in a lump sum and the executive would remain subject to certain competitive prohibitions.

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The Company has entered into a Severance Agreement with Mr. Hunker pursuant to which he would receive severance payments in the event of his Involuntary Termination of employment (as defined in the Agreement). The severance payment would be equal to 12 months of his then-current salary, except that if the termination is the result of a Change of Control (as defined in the Agreement), the severance payments would equal 24 months of salary. In addition to the severance payment, he would have the right to participate for a defined period of time in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to him immediately prior to termination. His severance payment would be made in a lump sum.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The following table and footnotes set forth certain information regarding the beneficial ownership of Common Stock as of March 18, 2002 by (i) each director, (ii) the Named Executive Officers (as defined above) and (iii) all directors and executive officers of the Company as a group.

Name of Beneficial Owner	Shares Beneficially Owned(1)		Percent of    Class(1)
John W. Adams	-		-
Gregory S. Anderson	-		-
Chauncey J. Hunker	-		-
Richard K. Matros	180,000	(2)	2.0%	(3)
Charles W. McQueary	-		-
Robert F. Murphy	-		-
John F. Nickoll	873,239	(4)	9.8%	(3)
Sanjay H. Patel	1,156,762	(5)	12.9%	(3)
Warren C. Schelling	-		-
Jack Tindal	-		-
Bruce C. Vladeck	-		-
Steven L. Volla	-		-
Milton J. Walters	-		-
Mark G. Wimer	-		-
Robert D. Woltil	-		-
All directors and executive officers as a group (18 persons, including those named above)	2,250,001	(4)(5)(6)	24.9%	(3)

_____________________

*        Less than 1.0%

(1)	Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Options exercisable within 60 days of March 18, 2002 are deemed to be currently exercisable. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned.
(2)	Includes (i) 150,000 restricted shares awarded under the Company's 2002 Management Equity Incentive Plan which may be subject to a substantial risk of forfeiture and (ii) 30,000 shares which could be purchased pursuant to stock options.
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(3)	As of March 18, 2002, only 8,949,977 shares of common stock had been issued under the Company's Plan of Reorganization, which provides for the issuance of approximately 10,150,000 shares in total. Upon issuance of the remaining shares, the beneficial ownership percentages would be as follows: Mr. Matros, 1.8%; Mr. Nickoll, 8.6%; Mr. Patel, 11.4%; and all directors and officers, 22.0%.
(4)	Consists of shares held by The Foothill Group, Inc. and its affiliates, of which Mr. Nickoll is an executive officer. The shares are subject to shared voting and investment power. See table below.
(5)	Consists of shares held by GSC Partners, and its affiliates. The shares may be subject to shared voting and dispositive power. Mr. Patel disclaims beneficial ownership of these securities. See table below.
(6)	Includes (i) 150,000 restricted shares awarded under the Company's 2002 Management Equity Incentive Plan and (ii) 70,000 shares which could be purchased pursuant to stock options.

     The following table and footnotes set forth certain information regarding the beneficial ownership of Common Stock as of March 18, 2002 by each person believed by the Company to be the beneficial owner of more than five percent of Common stock of the Company.

Name and Address of Beneficial Owner	Shares Beneficially Owned(1)	Percent of Class(1)
The Foothill Group, Inc.    2450 Colorado Avenue    Suite 3000    Santa Monica, CA 90404	873,239   (2)	9.8%  (3)
Goldman Sachs & Co.    85 Broad Street    6th Floor    New York, NY 10004	805,614   (4)	9.0%  (3)
GSC Partners    500 Campus Drive    Suite 220    Florham Park, NJ 07932	1,156,762  (5)	12.9%  (3)
JP Morgan Chase Bank    1 Chase Manhattan Plaza    8th Floor    New York, NY 10081	702,602  (6)	7.8%  (3)

(1)	Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have shared voting and investment power with respect to all shares of Common Stock beneficially owned. 62
(2)	Based on information included in Schedule 13G filed with the Commission on March 12, 2002. Consists of shares beneficially held by The Foothill Group, Inc., Foothills Partners III, L.P., Stearns Family Trust 2001, Dennis R. Ascher, Jeffrey T. Nikora Family Trust, John F. Nickoll Living Trust, Foothill Income Trust, L.P., FIT GP, LLC, Foothill Partners IV, L.P., and FP IV GP, LLC.
(3)	As of March 18, 2002, only 8,949,977 shares of common stock have been issued pursuant to the Company's Plan of Reorganization, which provides for the issuance of approximately 10,150,000 shares in total. Upon issuance of the remaining shares, the beneficial ownership percentages would be as follows: Foothill Partners, 8.6%; Goldman Sachs, 7.9%; GSCP Recovery, 11.4%; and JP Morgan, 6.9%.
(4)	Based on information provided to the Company by a representative of Goldman Sachs & Co. on March 26, 2002.
(5)	Based on information included in Schedule 13D filed with the Commission on March 13, 2002. Consists of shares beneficially held by Greenwich Street Capital Partners II, L.P., GSCP (NJ), L.P., GSCP (NJ), Inc., Greenwich Street Investments II, L.L.C., GSC Recovery II, L.P., GSC Recovery II GP, L.P., GSC Recovery, Inc., GSC Recovery IIA, L.P. and GSC Recovery IIA GP, L.P.
(6)	Based on the number of shares issued to J.P. Morgan Chase Bank on February 28, 2002.

Item 13. Certain Relationships and Related Transactions

     As of December 31, 2001, SunBridge was a lessee or assignee of five facilities from partnerships in which Mr. John Bingaman, a former director of the Company, has an equity interest of greater than ten percent. The aggregate lease payments, including base rents, contingent rents and other miscellaneous payments in connection with these leases, totaled approximately $2.0 million in 2001.

     Prior to Mr. Pendergest joining the Company as Executive Vice President and Chief Financial Officer in March 2002, he served as a court appointed examiner of the Company during its chapter 11 bankruptcy proceedings. Mr. Pendergest provided these services as an independent contractor of Crossroads, LLC, of which he had no ownership interest. All of the payments made to Mr. Pendergest in his capacity as the examiner were approved by the bankruptcy court. The Company paid Crossroads a total of approximately $1,509,000 for services rendered, plus expenses, and Crossroads paid Mr. Pendergest a total of approximately $215,000 for his services, plus expenses. In addition to Mr. Pendergest, Crossroads provided other professionals and consultants to assist with the Company.

     Prior to Mr. Schneider joining the Company as Vice President and Treasurer in July 2001, he provided certain consulting services to the Company during its chapter 11 bankruptcy proceedings related to the renegotiation of various facility leases. During the year ended December 31, 2001, the Company paid Mr. Schneider an aggregate of approximately $142,000 for his consulting services, plus expenses. All of the payments to Mr. Schneider were approved by the bankruptcy court. Mr. Schneider did not provide any consulting services to the Company after he became Vice President and Treasurer.

    Sanjay H. Patel is a member of the Company's Board of Directors and the Co-President of GSC Partners. Through its affiliates, GSC Partners beneficially holds more than 5% of the Company's

63

common stock. See "Item 10 - Directors and Executive Officers of the Registrant" and "Item 12 - Security Ownership of Certain Beneficial Owners and Management." An affiliate of GSC Partners, GSC Partners CDO Fund III, is a party to the Company's Term Loan Agreement and as of March 28, 2002 the Company was indebted to GSC Partners CDO Fund III under that agreement for approximately $11.0 million.

     John F. Nickoll is a member of the Company's Board of Directors and the President, Chairman and Chief Executive Officer of The Foothill Group, Inc. and the Managing Member of FIT GP, LLC, the General Partner of Foothill Income Trust, L.P. Through its affiliates, The Foothill Group, Inc. beneficially holds more than 5% of the Company's common stock. See "Item 10 - Directors and Executive Officers of the Registrant" and "Item 12 - Security Ownership of Certain Beneficial Owners and Management." Foothill Income Trust L.P. is a party to the Company's Revolving Loan Agreement and Term Loan Agreement and as of March 28, 2002 the Company was indebted to Foothill Income Trust L.P. under those agreements for approximately $7.9 million.

64

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  Financial Statements and Financial Statement Schedules

     (i)  Financial Statements:

Report of Independent Public Accountants

Consolidated Balance Sheets for the years ended December 31, 2001 and 2000

Consolidated Statements of Losses for the years ended December 31, 2001, 2000 and 1999

          Consolidated Statements of Stockholders' Deficit for the years ended December 31
                2001, 2000 and 1999

           Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and
                1999

           Notes to Consolidated Financial Statements

    (ii)   Financial Statement Schedules:

           Report of Independent Public Accountants

           Schedule II Valuation and Qualifying Accounts for the years ended December 31,
                2001, 2000 and 1999

(All other financial statement schedules required by Rule 5-04 of Regulation S-X are not applicable or not required).

(b)  Reports on Form 8-K

      Form 8-K dated November 7, 2001 reporting the filing of the Company's Joint Plan of
      Reorganization in the U.S. Bankruptcy Court for the District of Delaware.

(c)  Exhibits

65

Exhibit Number	Description of Exhibits
3.1(1)	Amended and Restated Certificate of Incorporation of the Company
3.2(1)	Amended and Restated Bylaws of the Company
4.1*	Form of Registration Rights Agreement among the Company and the parties named therein dated as of February 28, 2002
4.2(1)	Warrant Agreement dated February 28, 2002 between the Company and American Stock Transfer & Trust Company
4.3(1)	Sample Common Stock Certificate of Sun Healthcare Group, Inc.
10.1*	Loan and Security Agreement dated February 28, 2002 among the Company and certain of its subsidiaries as Borrowers, Heller Healthcare Finance, Inc., as Collateral Agent and Lender, Citicorp, USA, Inc., as Administrative Agent and Lender and certain other lending institutions
10.2*	Term Loan and Note Purchase Agreement dated February 28, 2002 among the Company and certain of its subsidiaries as Borrowers, U.S. Bank as Administrative Agent and certain other lending institutions
10.3*	The Company's 2002 Management Equity Incentive Plan
10.4*	Form of Expense Indemnification Agreement between the Company and certain former and current directors and officers
10.5*	Form of Severance Agreements entered into between the Company and Robert F. Murphy and Warren C. Schelling
10.6*	Form of Severance Agreement entered into between the Company and Chauncey J. Hunker
10.7(2)	Joint Plan of Reorganization dated December 18, 2001
10.7.1(2)	Amendments to Joint Plan of Reorganization
10.8(2)	Disclosure Statement dated December 18, 2001
10.9*	Employment Agreement dated February 28, 2002 between the Company and Richard K. Matros
10.10*	Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and the Company dated July 12, 2001
21*	Subsidiaries of the Registrant
99.1*	Confirmation of Receipt of Assurances from Arthur Andersen LLP

66

_______________

*       Filed herewith.

(1)  Incorporated by reference from exhibits to the Company's Form 8-A filed on March 6, 2002.

(2)  Incorporated by reference from exhibits to the Company's Form 8-K dated February 28, 2002, as amended on Form 8-K/A.

67

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

SUN HEALTHCARE GROUP, INC.

By:  /s/ Richard K. Matros                  

       Richard K. Matros

       Chairman of the Board and Chief

         Executive Officer

March 29, 2002

68

POWER OF ATTORNEY

     Each person whose signature appears below hereby appoints each of Richard K. Matros and Robert F. Murphy as his attorney-in-fact, to sign this Report on his or her behalf, individually and in the capacity stated below, and to file all supplements and amendments to this Report and any and all instruments or documents filed as a part of or in connection with this Report or any amendment or supplement thereto, and any such attorney-in-fact may make such changes and additions to this Report as such attorney-in-fact may deem necessary or appropriate.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant on March 29, 2002 in the capacities indicated.

Signatures	Title
/s/ Richard K. Matros            Richard K. Matros	Chairman of the Board, Chief Executive Officer (Principle Executive Officer)
/s/ Wallace E. Boston, Jr.      Wallace E. Boston, Jr.	Principal Financial Officer (Principal Financial Officer)
/s/ Jennifer L. Botter             Jennifer L. Botter	Vice President and Corporate Controller (Principal Accounting Officer)
/s/ John W. Adams             John W. Adams	Director
/s/ Gregory S. Anderson     Gregory S. Anderson	Director
/s/ Charles W. McQueary    Charles W. McQueary	Director
/s/ John F. Nickoll               John F. Nickoll	Director
/s/ Sanjay H. Patel               Sanjay H. Patel	Director
/s/ Bruce C. Vladek              Bruce C. Vladek	Director
69
/s/ Steven L. Volla               Steven L. Volla	Director
/s/ Milton J. Walters             Milton J. Walters	Director

70

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

Index to Consolidated Financial Statements

December 31, 2001

	Page
Report of Independent Public Accountants	F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000	F-3
Consolidated Statements of Losses for the years ended December 31, 2001, 2000    and 1999	F-5
Consolidated Statements of Stockholders' Deficit for the years ended    December 31, 2001, 2000 and 1999	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2001,    2000 and 1999	F-7
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Sun Healthcare Group, Inc.:

We have audited the accompanying consolidated balance sheets of Sun Healthcare Group, Inc. (Debtor-in-Possession) (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of losses, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sun Healthcare Group, Inc. (Debtor-in-Possession) and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

/s/ Arthur Andersen LLP         

ARTHUR ANDERSEN LLP

Albuquerque, New Mexico
March 18, 2002

F-2

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

CONSOLIDATED BALANCE SHEETS

As of December 31, 2001 and 2000
(in thousands)

	2001		2000
ASSETS
Current assets:
Cash and cash equivalents	$         50,649	$          37,589
Accounts receivable, net of allowance for doubtful accounts of $73,819 and $128,106     at December 31, 2001 and 2000, respectively	204,733	195,362
Inventory, net	20,415	22,676
Other receivables, net of allowance of $2,566 and $1,351 at December 31, 2001 and     2000, respectively	9,556	6,896
Prepaids and other assets	5,653	4,693
Total current assets	291,006	267,216
Property and equipment, net	133,216	180,285
Assets held for sale	18,158	156,342
Notes receivable, net of allowance of $3,650 and $628 at December 31, 2001 and 2000,   respectively	4,895	14,554
Goodwill, net	177,202	188,005
Other assets, net	25,327	43,586
Total assets	$       649,804	$        849,988
	========	========

The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.

F-3

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

CONSOLIDATED BALANCE SHEETS (Continued)

As of December 31, 2001 and 2000
(in thousands except share data)

LIABILITIES AND STOCKHOLDERS' DEFICIT

	2001		2000
Current liabilities:
Current portion of long-term debt	$            54,975		$          86,039
Accounts payable	30,335		37,526
Accrued compensation and benefits	79,328		101,977
Accrued self-insurance obligations	47,097		28,018
Income taxes payable	12,430		13,328
Other accrued liabilities	80,100		139,229
Total current liabilities	304,265		406,117
Liabilities subject to compromise (see Note 2)	1,549,139		1,529,928
Accrued self-insurance obligations, net of current portion	51,380		22,719
Long-term debt, net of current portion	23,260		54,211
Obligations under capital leases, net of current portion	-		53,553
Other long-term liabilities	22,544		26,737
Total liabilities	1,950,588		2,093,265
Commitments and contingencies (see Note 10)
Minority interest	5,405		5,960
Company-obligated mandatorily redeemable convertible preferred securities of a   subsidiary trust holding solely 7% convertible junior subordinated debentures of the   Company	296,101		296,101
Stockholders' deficit:
Common stock of $.01 par value, authorized 155,000,000 shares, 65,209,188 and     65,230,853 shares issued and outstanding as of December 31, 2001 and 2000,     respectively	652		652
Additional paid-in capital	825,099		825,147
Accumulated deficit	(2,400,655	)	(2,331,218	)
Accumulated other comprehensive loss	-		(12,483	)
	(1,574,904	)	(1,517,902	)
Less:
Common stock held in treasury, at cost, 2,213,537 shares as of December 31, 2001       and 2000	(27,376	)	(27,376	)
Grantor stock trust, at market, 1,915,935 shares as of December 31, 2001 and 2000	(10	)	(60	)
Total stockholders' deficit	(1,602,290	)	(1,545,338	)
Total liabilities and stockholders' deficit	$          649,804		$        849,988
	=========		========

The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets.

F-4

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

CONSOLIDATED STATEMENTS OF LOSSES

For the Years Ended December 31, 2001, 2000 and 1999
(in thousands except per share data)

	2001		2000		1999
Total net revenues	$       2,075,234		$       2,458,928		$       2,529,039
Costs and expenses:
Operating costs	1,895,662		2,230,423		2,477,713
Corporate general and administrative	104,315		153,133		159,671
Depreciation and amortization	32,785		45,881		81,325
Provision for losses on accounts receivable	25,972		33,496		123,217
Loss on impairment	18,825		191,316		457,449
Interest, net (contractual interest expense of $142,800, $146,406 and     $30,546 for 2001, 2000 and 1999, respectively)	12,635		34,269		129,054
Legal and regulatory matters, net	11,000		2,480		38
Restructuring costs	1,064		(1,090	)	27,353
(Gain) loss on sale of assets, net	(825	)	(21,400	)	78,673
Loss on termination of interest rate swaps	-		-		2,488
Total costs and expenses before reorganization items	2,101,433		2,668,508		3,536,981
Dividends on convertible preferred securities of subsidiary	-		-		20,407
Losses before reorganization costs, income taxes and cumulative effect   of change in accounting principle	(26,199	)	(209,580	)	(1,028,349	)
Reorganization costs, net	42,917		335,875		48,132
Losses before income taxes and cumulative effect of change in accounting   principle	(69,116	)	(545,455	)	(1,076,481	)
Income tax provision	321		256		161
Losses before cumulative effect of change in accounting principle	(69,437	)	(545,711	)	(1,076,642	)
Cumulative effect of change in accounting principle	-		-		(12,816	)
Net losses	$          (69,437	)	$         (545,711	)	$      (1,089,458	)
	=======		========		=======
Net losses per common and common equivalent share:
Losses before cumulative effect of change in accounting principle
Basic and diluted	$               (1.14	)	$               (9.04	)	$             (18.40	)
	=======		========		=======
Net losses:
Basic and diluted	$               (1.14	)	$               (9.04	)	$          (18.62	)
	=======		========		=======
Weighted average number of common and common equivalent shares   outstanding:
Basic and diluted	61,096		60,347		58,504
	=======		========		=======

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-5

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)

	2001				2000				1999
	Shares		Amount		Shares		Amount		Shares		Amount
Common Stock
Issued and outstanding at beginning of year	65,231		$              652		63,937		$           639		61,930		$         619
Conversion of 6-1/2% Convertible Subordinated Debentures due 2003	-		-		-		-		774		8
Conversion of 7% Convertible Trust Issued Preferred Securities	-		-		1,335		13		1,094		11
Cancellation of Restricted Stock Awards	(22	)	-		(41	)	-		(18	)	-
Employee Stock Purchase and other	-		-		-		-		157		1
Common Stock Issued and outstanding at   end of year	65,209		652		65,231		652		63,937		639
	=====				====				=====		=====
Additional Paid-in Capital
Balance at beginning of year			825,147				798,305				774,860
Conversion of 6-1/2% Convertible Subordinated   Debentures due 2003			-				-				12,626
Conversion of 7% Convertible Trust Issued   Preferred Securities			-				26,860				22,011
Adjustment to market value of common stock   held by the Grantor Stock Trust			(50	)			(18	)			(12,512	)
Conversion of Mediplex convertible debt			-				-				1,579
Cancellation of Restricted Stock Awards			2				-				(259	)
Additional paid-in capital at end of year			825,099				825,147				798,305
Retained Deficit
Balance at beginning of year			(2,331,218	)			(1,785,507	)			(696,049	)
Net losses			(69,437	)			(545,711	)			(1,089,458	)
Retained deficit at end of year			(2,400,655	)			(2,331,218	)			(1,785,507	)
Accumulated Other Comprehensive Income
Balance at beginning of year			(12,483	)			(5,017	)			2,902
Foreign currency translation adjustment, net of   tax			12,483				(7,466	)			(7,919	)
Accumulated other comprehensive income   (loss) at end of year			-				(12,483	)			(5,017	)
Total			(1,574,904	)			(1,517,902	)			(991,580	)
Unearned Compensation
Balance at beginning of year			-				(3,966	)			(8,552	)
Cancellation of Restricted Stock Awards			-				3,966				260
Amortization of stock issued under restricted stock option plan			-				-				4,326
Unearned compensation at end of year			-				-				(3,966	)
Common Stock in Treasury
Balance at beginning of year	2,213		(27,376	)	2,213		(27,376	)	2,125		(26,967	)
Acquired at cost	-		-		-		-		88		(409	)
Common stock in treasury at end of year	2,213		(27,376	)	2,213		(27,376	)	2,213		(27,376	)
	=====				====				=====
Grantor Stock Trust
Balance at beginning of year	1,916		(60	)	1,916		(78	)	1,989		(13,054	)
Issuance of common stock from the Grantor Stock Trust	-		-		-		-		-		464
Adjustment to market value of common stock   held by the Grantor Stock Trust	-		50		-		18		(73	)	12,512
Grantor stock trust at end of year	1,916		(10	)	1,916		(60	)	1,916		(78	)
	=====				====				=====
Total stockholders' deficit			$   (1,602,290	)			$(1,545,338	)			$(1,023,000	)
			=======				=======				======

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-6

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
(in thousands)

	2001		2000		1999
Cash flows from operating activities:
Net losses	$                 (69,437	)	$           (545,711	)	$      (1,089,458	)
Adjustments to reconcile net losses to net cash provided by (used for)    operating activities:
(Gain) loss on sale of assets, net	(825	)	(21,400	)	78,673
Loss on impairment	18,825		191,316		457,449
Cumulative effect of change in accounting principle	-		-		12,816
Reorganization costs, net	42,917		335,875		48,132
Depreciation and amortization	32,785		45,881		81,325
Provision for losses on accounts receivable	25,972		33,496		123,217
Legal and regulatory costs	11,000		1,245		-
Other, net	9,596		(20,186	)	18,055
Changes in operating assets and liabilities:
Accounts receivable	(36,914	)	(18,720	)	160,864
Other current assets	945		11,029		8,412
Other current liabilities	8,021		859		72,607
Income taxes payable	1,067		2,115		35,430
Net cash provided by operating activities before reorganization costs	43,952		15,799		7,522
Net cash paid for reorganization costs	(19,583	)	(17,520	)	(269	)
Net cash provided by (used for) provided by operating activities	24,369		(1,721	)	7,253
Cash flows from investing activities:
Capital expenditures	(30,330	)	(55,366	)	(102,453	)
Acquisitions, net of cash acquired	-		(974	)	(5,731	)
Proceeds from sale of assets	18,164		24,980		8,735
Proceeds from redemption of strategic investment	10,115		-		-
Repayment (issuance) of long-term notes receivable	885		(6,088	)	15,857
Decrease in other assets	2,626		5,536		45,179
Proceeds from sale and leaseback of property and equipment	-		-		38,600
Net cash provided by (used for) investing activities	1,460		(31,912	)	187
Cash flows from financing activities:
(Payments) borrowings under Revolving Credit Agreement      (postpetition), net	(12,441	)	54,901		12,125
Long-term debt borrowings	3,842		9,667		126,062
Long-term debt repayments (prepetition)	(82	)	(14,663	)	(92,502	)
Principal payments on prepetition debt authorized by Bankruptcy      Court	(3,017	)	(3,406	)	(36,118	)
Conversion of Mediplex 6.5% Convertible Subordinated Debentures due      2003	-		-		(6,649	)
Net proceeds from issuance of common stock	-		-		1,784
Purchases of treasury stock	-		-		(409	)
Other financing activities	(1	)	(4	)	(14,480	)
Net cash (used for) provided by financing activities	(11,699	)	46,495		(10,187	)
Effect of exchange rate on cash and cash equivalents	(1,070	)	(320	)	290
Net increase (decrease) in cash and cash equivalents	13,060		12,542		(2,457	)
Cash and cash equivalents at beginning of year	37,589		25,047		27,504
Cash and cash equivalents at end of year	$                   50,649		$               37,589		$             25,047
	=========		=======		=======

The accompanying notes to consolidated financial statements are an integral part of these statements.

F-7

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001

(1)  Nature of Business

     Sun Healthcare Group, Inc., a Delaware corporation, through its direct and indirect subsidiaries (hereinafter collectively referred to as "Sun" or the "Company"), is a provider of long-term, subacute and related specialty healthcare services, including rehabilitation therapy services and pharmaceutical services. Long-term and subacute care, outpatient therapy and pharmaceutical services are provided through Company-operated facilities. Rehabilitative therapy services are provided both in Company-operated and other nonaffiliated facilities located in the United States.

(2)  Emergence from Chapter 11 Bankruptcy Proceedings

     On October 14, 1999 (the "Filing Date"), Sun Healthcare Group, Inc. and substantially all of its U.S. operating subsidiaries filed voluntary petitions for reorganization under chapter 11 of the U.S. Bankruptcy Code ("chapter 11"). On February 6, 2002, the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") confirmed the Company's joint plan of reorganization ("Plan of Reorganization") and on February 28, 2002 the Company consummated the Plan. See "Note 23 - Subsequent Events." The consolidated financial statements of the Company have been presented in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7") and have been prepared in accordance with accounting principles generally accepted in the United States applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business.

     Under chapter 11, certain claims against the Company in existence prior to the Filing Date were stayed while the Company continued its operations as a debtor-in-possession. These claims are reflected in the December 31, 2001 and 2000 balance sheets as "liabilities subject to compromise." Since October 14, 1999, the payment of certain prepetition claims (principally employee wages and benefits and payments to critical vendors and utilities) that were approved by the Bankruptcy Court have reduced "liabilities subject to compromise." As part of the Company's emergence from chapter 11 proceedings, all of the "liabilities subject to compromise" have been discharged, reinstated or repaid.

     The Company determined that, generally, the fair market value of the collateral was less than the principal amount of its secured prepetition debt obligations; accordingly, the Company discontinued accruing interest on substantially all of these obligations as of the Filing Date. The Company received approval from the Bankruptcy Court to pay or otherwise honor certain of its prepetition obligations, including employee wages and benefits.

     The principal categories and the balances of chapter 11 claims reclassified in the accompanying consolidated balance sheets and included in "liabilities subject to compromise" are identified below. These amounts may be subject to future adjustments depending upon Bankruptcy Court actions, further developments with respect to disputed claims, whether or not such claims are secured, and the value of any security interests securing such claims or other events.

F-8

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

Liabilities Subject to Compromise

	December 31, 2001	December 31, 2000
	(in thousands)	(in thousands)
Revolving Credit Facility	$     437,066	$    433,319
Credit Facility Term Loans	358,981	358,981
Senior Subordinated Notes due 2007	250,000	250,000
Senior Subordinated Notes due 2008	150,000	150,000
Interest payable	101,856	102,094
Convertible Subordinated Debentures due 2004	83,300	83,300
Prepetition trade and other miscellaneous claims	88,171	65,834
Mortgage notes payable due at various dates through 2005	46,023	46,214
Other long-term debt	14,377	15,984
Industrial Revenue Bonds	8,365	8,620
Senior Subordinated Notes due 2002	6,161	6,161
Capital Leases	3,457	8,039
Convertible Subordinated Debentures due 2003	1,382	1,382
Total liabilities subject to compromise	$  1,549,139	$ 1,529,928
	=======	=======

     During 2001 the Company identified approximately $16.5 million of additional self-insurance obligations which is included in the prepetition trade and other miscellaneous claims as of December 31, 2001.     

     Since October 14, 1999, the payment of certain prepetition claims (principally employee wages and benefits and payments to critical vendors and utilities) that were approved by the Bankruptcy Court have reduced "liabilities subject to compromise."

     Under the Bankruptcy Code, the Company could elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts and other unexpired executory prepetition contracts, subject to Bankruptcy Court approval. The Bankruptcy Code generally accords priority to claims and expenses in the following order. First, distributions are made to secured creditors to the extent of their interest in collateral. Unencumbered assets, or the value thereof, are distributed in the following order: to holders of super-priority claims, such as the lenders under the debtor-in-possession financing (the "DIP Financing Agreement"), holders of administrative expense claims, holders of claims for wages and salaries, holders of claims with respect to contributions to employee benefit plans, holders of certain tax claims, holders of unsecured claims and holders of equity interests. See "Note 8 - Debtor-in-Possession Financing" and "Note 23 - Subsequent Events."

     At December 31, 2001, the Company was in default with respect to substantially all of its prepetition borrowings. The Company's prepetition bank debt was collateralized by (i) a pledge of stock in the Company's U.S. subsidiaries, (ii) a pledge of approximately 66 percent of the stock in certain of the Company's direct foreign subsidiaries, (iii) a security interest in intersegment debt owed by subsidiaries to the Company and (iv) a pledge of certain notes held by the Company.

F-9

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

Reorganization Costs

     Reorganization costs under chapter 11 are items of expense or income that are incurred or realized by the Company because it is in reorganization. These include, but are not limited to, professional fees and similar types of expenditures incurred directly relating to the chapter 11 proceeding, loss accruals or realized gains or losses resulting from activities of the reorganization process and interest earned on cash accumulated by the Company because it is not paying its prepetition liabilities.

     For the period from the Filing Date through December 31, 2001, reorganization costs, net, were a total of $426.9 million. Reorganization costs for the years ended December 31 consisted of the following (in thousands):

	2001		2000		1999
Professional fees	$   25,779		$   27,756		$    4,115
Loss on sale of assets	15,267		313,781		7,085
Other	3,795		866		-
Write-off of debt discounts and deferred    issuance costs	-		-		37,614
Less interest earned on accumulated cash	(1,924	)	(2,807	)	(682	)
Gain on sale of assets	-		(3,721	)	-
Total	$   42,917		$  335,875		$  48,132
	======		=======		======

(3)  Summary of Significant Accounting and Financial Reporting Policies

(a)  Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its greater than 50% owned subsidiaries. Investments in affiliates in which the Company owns 20% to 50% are carried on the equity method. Investments in companies owned less than 20% are carried at cost. All significant intersegment accounts and transactions have been eliminated in consolidation. As a consequence of the bankruptcy filings in 1999, the non-filing subsidiaries of the Company fully reserved for their intersegment receivables from the filing subsidiaries. These amounts were not material.

(b)  Cash and Cash Equivalents

     The Company considers all highly liquid, unrestricted investments with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.

(c)  Net Revenues

     Net revenues consist of long-term and subacute care revenues, temporary medical staffing services revenues, pharmaceutical services revenues and other ancillary services revenues. Net revenues are

F-10

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

recognized as services are provided. Revenues are recorded net of provisions for discount arrangements with commercial payors and contractual allowances with third-party payors, primarily Medicare and Medicaid. Net revenues realizable under third-party payor agreements are subject to change due to examination and retroactive adjustment. Estimated third-party payor settlements are recorded in the period the related services are rendered. The methods of making such estimates are reviewed periodically, and differences between the net amounts accrued and subsequent settlements or estimates of expected settlements are reflected in current results of operations.

     In February 2002, the Company, the United States Department of Health and Human Services ("HHS"), the United States Department of Justice (" DOJ"), the Center for Medicare and Medicaid Services ("CMS"), the Tricare Management Activity Support Office ("TMA"), and the Relators in eight qui tam cases, entered into a comprehensive settlement agreement (the "Settlement Agreement"). Under the Settlement Agreement, the Company and the above mentioned parties agreed to mutually release each other from substantially all prepetition claims. The Settlement Agreement requires the Company to pay $1.0 million in cash and deliver a promissory note for $10.0 million, plus interest to CMS over the next five years.

     Since 1999, the Company recorded various reserves due to the uncertainty of the reimbursement adjustments that might have been required to settle the matters raised by the parties of the Settlement Agreement, including a reserve of approximately $31.0 million recorded in 1999 for routine cost limit exception payments previously paid to the Company. Such amounts totaled a net reserve of $52.1 million. As a result of the Settlement Agreement, the Company reversed the $52.1 million of net excess reserved exposures and reflected it as a component of net patient revenue in the 2001 consolidated statement of operations.

(d)  Accounts Receivable

     The Company's accounts receivable relate to services provided by its various operating divisions to a variety of payors and customers. The primary payors for services provided in long-term and subacute care facilities that the Company operates are the Medicare program and the various state Medicaid programs. The rehabilitation and respiratory therapy service operations provide services to patients in Company-operated and unaffiliated long-term, rehabilitation and acute care facilities. The billings for services to unaffiliated facilities are submitted to those facilities. Many of the unaffiliated long-term care facilities receive a large majority of their revenues from the Medicare program and the state Medicaid programs.

(e)  Inventories

     The Company's inventories relate to the long-term and subacute care operations and pharmaceutical services operations. The long-term and subacute care operations inventories are stated at the lower of cost or market. The pharmaceutical services operations inventories are stated at cost.

(f)  Property and Equipment

     Property and equipment is stated at cost. Property and equipment held under capital lease is stated at

F-11

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

the net present value of future minimum lease payments. Major renewals or improvements are capitalized whereas ordinary maintenance and repairs are expensed as incurred. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows: buildings and improvements - 5 to 40 years; leasehold improvements-the shorter of the estimated useful lives of the assets or the life of the lease including renewal options; and equipment - 3 to 20 years. The Company capitalizes interest directly related to the development and construction of new facilities as a cost of the related asset.

(g)  Goodwill

     The excess of the purchase price over the fair value of the net assets of the businesses acquired by the Company, to the extent not subsequently impaired, is amortized using the straight-line method over periods ranging from 20 to 40 years. Accumulated amortization of such costs was approximately $101.1 million and $242.7 million as of December 31, 2001 and 2000, respectively.

(h)  Impairment of Long-Lived Assets

     The Company periodically evaluates the carrying value of goodwill along with other related long-lived assets in relation to the future undiscounted cash flows of the underlying businesses to assess recoverability in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). Under SFAS 121, an impairment loss is recognized if the sum of the expected cash flows is less than the carrying amount of the goodwill and other long-lived assets being evaluated. The difference between the carrying amount of the goodwill and other long-lived assets being evaluated and the estimated fair market value of the assets represents the impairment loss. The Company determines estimated fair value for the long-lived assets based on anticipated future cash flows discounted at rates commensurate with the risks involved.

(i)  Accrued Self-Insurance Obligations

     It is the Company' s policy to self-insure for certain insurable risks, including general and professional liability and workers' compensation liability through the use of self-insurance or retrospective and high deductible insurance policies and other hybrid policies, which vary by the states in which the Company operates. Provisions for estimated settlements, including incurred but not reported losses, are provided in the period of the related coverage. These provisions are based on internal evaluations of the merits of individual claims and the reserves assigned by the Company's independent insurance carriers. The methods of making such estimates and establishing the resulting accrued liabilities are reviewed periodically, and any adjustments resulting therefrom are reflected in current earnings. Claims are paid over varying periods, which generally range from one to five years. Future payments may be different than the estimated expense. Accrued liabilities for future claims are not discounted.

(j)  Software Development Costs

     The Company, through an indirect, majority owned subsidiary, is internally developing software that it plans to use in its operations and to market to unaffiliated long-term care providers. All costs incurred

F-12

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

related to the development of the software have been expensed. Once the Company concludes that technological feasibility is established, all subsequent development costs will be capitalized and reported at the lower of unamortized cost or net realizable value. Software development costs are included in operating expenses in the accompanying consolidated statements of losses.

(k)  Income Taxes

     Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. A valuation allowance is recognized if it is anticipated that some or all of a deferred tax asset may not be realized.

(l)  Foreign Currency Translation Adjustment

     The financial position and results of operations of the Company's foreign subsidiaries were measured using local currency as the functional currency. Assets and liabilities of these subsidiaries were translated at the exchange rate in effect at each year end. Statements of losses accounts were translated at the average rate of exchange prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included in accumulated other comprehensive income in the consolidated statements of stockholders' deficit. All foreign operations were divested as of December 31, 2001.

(m)  Stock-Based Compensation

     The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued in 1995, and the Company has adopted the disclosure requirements of SFAS 123 (see "Note 15 - Capital Stock").

(n)  Net Losses Per Share

     Diluted net losses per share is based upon the weighted average number of common shares outstanding during the period. The Company's convertible securities are described in "Note 14 - Convertible Trust Issued Preferred Securities". These securities were not dilutive for the years ended December 31, 2001, 2000 and 1999. See "Note 16 - Earnings Per Share" for calculation of losses per share data for the years ended December 31, 2001, 2000 and 1999.

(o)  Adoption of New Accounting Pronouncements

     In October 2001 the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lives Assets to be Disposed of." SFAS 144 requires that

F-13

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. This new pronouncement will become effective January 1, 2002. The Company has not determined the impact that the adoption of this accounting standard will have on its consolidated financial statements.

     In June 2001 the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141") which provides that all business combinations should be accounted for using the purchase method of accounting and establishes criteria for the initial recognition and measurement of goodwill and other intangible assets recorded in connection with a business combination. The provisions of SFAS 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for by the purchase method that are completed after June 30, 2001.

     In addition, in June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes the accounting for goodwill and other intangible assets following their recognition. SFAS 142 applies to all goodwill and other intangible assets whether acquired singly, as part of a group, or in a business combination. SFAS 142 also applies to goodwill recognized in accordance with SOP 90-7. The new pronouncement provides that goodwill should not be amortized but should be tested for impairment annually using a fair-value based approach. In addition, SFAS 142 provides that intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with existing guidelines. SFAS 142 will become effective for the Company beginning on January 1, 2002. The Company's application of fresh-start accounting, in connection with the Company's emergence from bankruptcy is expected to result in goodwill, however, the amount of goodwill has not currently been determined. See "Note 23 - Subsequent Events" in the accompanying consolidated financial statements. The Company has not determined the impact that the adoption of this accounting standard will have on its consolidated financial statements.

     In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). This statement requires costs of start-up activities and organization costs to be expensed as incurred. The statement was effective for financial statements for fiscal years beginning after December 15, 1998. During the first quarter of 1999, the Company adopted the provisions of SOP 98-5, which resulted in a cumulative effect of a change in accounting principle charge of approximately $12.8 million.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). Under SFAS 133, all derivatives are required to be recognized in the balance sheet at fair value. Gains or losses from changes in fair value would be recognized in earnings in the period of change unless the derivative is designated as a hedging instrument. In June 1999, the FASB issued SFAS No. 137, which amended SFAS 133, delaying its effective date to fiscal years beginning after June 15, 2000. The Company does not currently hold any derivative instruments nor does it engage in hedging activities.

F-14

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

(p)  Financial Statement Preparation and Presentation

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include determination of third-party payor settlements, allowances for doubtful accounts, self-insurance obligations and loss accruals. Actual results could differ from those estimates. Certain amounts in the 2000 and 1999 consolidated financial statements and notes thereto have been reclassified to conform to the 2001 presentation, however, there was no impact to the previous reported net loss or stockholders' deficit amounts.

(4)  Restructuring Costs

     During 2001, the Company recorded restructuring costs of $1.1 million in its software development division. The restructuring plan included reductions of staff and other overhead expenses and a streamlining of the management structure.

     In the first quarter of 1999, the Company initiated a corporate restructuring plan focused on reducing the operating expenses of its United States operations. The restructuring plan included the termination of approximately 3,000 employees, primarily in its rehabilitation and respiratory therapy services operations, and the closure of approximately 23 divisional and regional offices. Relocation of the management of the Company's medical supply subsidiary and temporary medical staffing services subsidiary to the Company's corporate headquarters in Albuquerque, New Mexico was also included. The restructuring charge consisted of approximately $9.1 million related to employee terminations, approximately $1.4 million related to lease termination costs and $0.9 million related to asset disposals or write-offs. As of December 31, 1999, the restructuring plan was complete. During 2000, the Company reversed approximately $1.1 million of reserves related to the restructuring plan because the reserves were considered no longer necessary.

     During 1999, the Company recorded financial restructuring costs of approximately $16.0 million, primarily professional fees, related to the Company's activities in response to the defaults under the Senior Credit Facility, the 9-3/8% Subordinated Notes and the 9-1/2% Subordinated Notes and in preparation for its filing for protection under chapter 11 of the U.S. Bankruptcy Code.

(5)  Acquisitions

     The effects of the Company's acquisitions during 2001, 2000 and 1999, individually and in the aggregate, are immaterial to the operating results of the Company, and therefore, pro forma information is not provided.

F-15

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     (6)  Property and Equipment

     The Company recorded an impairment of property and equipment of approximately $11.0 million during the fourth quarter of 2001 and a write-down of approximately $26.6 million during 2001 of the two buildings on the corporate campus which are now held for sale.  The change in the net value of the property and equipment is represented by the table below.

Property and equipment at December 31 consisted of the following (in thousands):

	2001		2000
Land	$                       16,153		$                      17,841
Buildings and improvements	21,433		56,046
Equipment	94,904		113,050
Leasehold improvements	22,496		33,233
Construction in progress	6,329		19,341
Total	161,315		239,511
Less accumulated depreciation	(28,099	)	(59,226	)
Property and equipment, net	$                     133,216		$                    180,285
	============		============

(7)  Impairment of Long-Lived Assets and Assets Held for Sale

(a)  Impairment of Long-Lived Assets

     The Balanced Budget Act of 1997 established, among other things, a new Medicare PPS for skilled nursing facilities. PPS became effective for approximately 25% of the Company's facilities on July 1, 1998, and for the Company's remaining facilities on January 1, 1999. The Company's revenues from its Inpatient Services Division, Rehabilitation and Respiratory Therapy Services Division and Pharmaceutical and Medical Supply Services Division were significantly and adversely impacted by the reduction of the federally established reimbursement rates. In the first quarter of 1999, the Company became aware that these reductions were expected to have a material adverse impact on net revenues in 1999 and the decline was other than temporary. This analysis served as an indication to the Company that the carrying values of the long-lived assets of its Inpatient Services Division, Rehabilitation and Respiratory Therapy Services Division and its Pharmaceutical and Medical Supply Services Division were impaired.

     During the second quarter of 1999, the Company revised its projections of future cash flows for its various business units due to the fact that actual operating results were below expectations. The significant write-down of goodwill and other long-lived assets is the result of lower cash flows experienced by the Company due to the continued adverse impact of PPS on the level of Medicare reimbursement and occupancy and the demand for the Company's rehabilitation and respiratory therapy and pharmaceutical and medical supply services. Additionally, certain of the United Kingdom facilities had not achieved profitability targets established upon their acquisition.

F-16

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

    As events warrant, the Company evaluates its facilities for impairment through the review of historical results, creation of future projected cash flows and awareness of the future reimbursement and regulatory environment in which the Company operates. During the fourth quarter of 2000, the Company identified several factors that adversely impacted the future projections of net operating income (loss) and net cash flows for certain facilities, primarily in the Inpatient Services division of the Company. These factors were: (i) the continuation of the tight labor market that increased the Company's use of contract and temporary staffing, (ii) additional regulatory pressures within the healthcare industry, as a whole, including new laws in California that specify the labor dollars spent on patient care and increased the operating costs at a significant number of the Company's facilities, and (iii) additional staffing and other overhead within the Company's long-term care division to respond to survey results. During 2000, the Inpatient Services Division, which operates long-term care facilities, recognized an impairment of $189.3 million related to 141 of the 303 facilities it operated in the United States. The impairment was primarily due to the decrease of revenues as compared with profitability projections for each facility.

     During the fourth quarter of 2001, the Company reviewed its projections for the future earnings of its businesses as actual results were below initial forecasts. In connection with the review, the Company recorded an impairment charge of approximately $18.8 million to reduce to estimated fair value its investment in goodwill and certain other long-lived assets within the inpatient services and software development divisions. The write-down of $14.5 to the inpatient services business was primarily the result of decreased future projections of net operating income (loss) and net cash flows due to lower revenue projections. The write down of $4.3 million to the software development division relates to the business' longer than expected time-to-market of certain of its products which adversely impacted the division's cash flow projections.

F-17

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     The following is a summary of the impairment loss by segment for the years ended December 31 (in thousands):

	Goodwill	Property and   Equipment	Other    Assets	Total
2001:
Inpatient Services	$          7,797	$            6,685	$                   -	$         14,482
Other Operations	-	4,343	-	4,343
Total	$          7,797	$          11,028	$                   -	$         18,825
	======	=======	=======	=======
	Goodwill	Property and   Equipment	Other    Assets	Total
2000:
Inpatient Services	$      130,148	$          58,712	$               448	$       189,308
Pharmaceuticals and Medical Supply Services	-	42	-	42
Other Operations	1,000	953	13	1,966
Total	$      131,148	$          59,707	$               461	$       191,316
	======	=======	=======	=======
	Goodwill	Property and   Equipment	Other    Assets	Total
1999:
Inpatient Services	$      192,459	$          88,852	$         13,701	$       295,012
Rehabilitation and Respiratory Therapy	49,529	11,005	11	60,545
Pharmaceuticals and Medical Supply Services	29,133	2,417	-	31,550
International Operations	29,322	31,959	-	61,281
Other Operations	5,327	1,794	1,940	9,061
Total	$      305,770	$        136,027	$         15,652	$       457,449
	=======	=======	=======	=======

(b)  Assets Held for Sale

     SFAS 121 requires that long-lived assets held for disposal be carried at the lower of carrying value or fair value less costs of disposal, once management has committed to a plan of disposal.

Inpatient Facilities

     During the year ended December 31, 2001, the Company divested 43 skilled nursing facilities. The net revenues and net operating losses for the year ended December 31, 2001 for these 43 facilities were approximately $85.3 million and $7.5 million, respectively. The aggregate net loss on disposal during the year ended December 31, 2001 for these divestitures was approximately $1.4 million recorded in (gain) loss on sale of assets, net, and $23.6 million which was included in reorganization costs, net, in the Company's 2001 consolidated statements of losses.

     As of December 31, 2001, the Company had identified seven skilled nursing facilities with 1,021 licensed beds for disposal. The Company had previously recorded losses of $7.5 million on certain of these assets. The net revenues and aggregate net operating losses for the year ended December 31, 2001 for the

F-18

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

seven skilled nursing facilities were $38.7 million and $1.0 million, respectively.   As of March 1, 2002, the Company has identified a total of 13 skilled nursing facilities with 1,764 licensed beds for disposal.

     During the year ended December 31, 2000, the Company divested 49 skilled nursing facilities and 20 assisted living facilities. The net revenues and net operating losses for the year ended December 31, 2000 for these 69 facilities were approximately $132.3 million and $9.0 million, respectively. The aggregate net loss on disposal during the year ended December 31, 2000 for these divestitures was approximately $1.7 million recorded in (gain) loss on sale of assets, net, and $21.1 million which was included in reorganization costs, net, in the Company's 2000 consolidated statement of losses. In 2000, the Company decided not to divest 23 skilled nursing facilities and six outpatient rehabilitation facilities. A reversal of approximately $34.8 million was recorded in reorganization costs, net, in the Company's 2000 consolidated statement of losses.

     Of the 20 assisted living facilities identified above, the Company sold 16 assisted living facilities for a total consideration of $67.3 million in 2000. The cash consideration received was approximately $1.2 million, and the Company received a note receivable of approximately $0.5 million. In addition, the aggregate debt, capital leases and other liabilities assumed by the purchaser totaled approximately $65.6 million. The Company previously recorded the anticipated loss on the sale of approximately $71.4 million in 1999. During 2000, the Company reversed approximately $1.5 million of the loss recorded in 1999. The reversal of the loss is recorded in (gain) loss on sale of assets, net, in the Company's 2000 consolidated statement of losses. During 2000, the Company divested four assisted living facilities. No material cash consideration was received for these facilities, but the Company was released from approximately $6.9 million of aggregate debt. The Company recorded a gain of $4.9 million, net, in (gain) loss on sale of assets, net, in the Company's 2000 consolidated statement of losses. In addition, the Company transferred its two remaining assisted living facilities from its Other Operations segment to its Inpatient Services segment. In December 2000, the Company sold a parcel of land for cash consideration of approximately $1.4 million. The land was received in the sale of the assisted living facilities.

     In December 1999, the Company divested eight assisted living facilities in which it had held a ten-percent equity interest. The Company managed these eight facilities until divesting them in December 1999. The cash consideration received from this transaction was approximately $3.7 million. In addition, the Company received parcels of land valued at approximately $9.2 million in this transaction. The aggregate net loss on this transaction was approximately $31.2 million of which approximately $15.8 million was recorded in (gain) loss on sale of assets, net, in 1999.

     During 1999, the Company sold three skilled nursing facilities. The Company did not receive any cash consideration from these sales. The purchasers assumed secured debt of $10.7 million related to these sales. The aggregate net revenues and aggregate net operating losses before management charges in 1999 for these facilities were approximately $9.5 million and approximately $2.6 million, respectively. The Company recorded an aggregate net gain of approximately $6.5 million on these sales in 1999.

     During 1999, 11 skilled nursing facility leases expired and were not renewed. The aggregate net revenues and aggregate net operating losses before management charges in 1999 for these facilities were approximately $13.4 million and approximately $0.1 million, respectively. The Company recorded an

F-19

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

aggregate net loss of approximately $3.8 million in 1999 primarily related to the write-off of the carrying amount of the related building and leasehold improvements, equipment and goodwill.

     During 1999, through mutual agreements with the lessors, the Company terminated 35 skilled nursing facility leases. The Company recorded an aggregate net loss of approximately $5.8 million, primarily related to the write-off of the carrying amount of building and leasehold improvements, equipment and goodwill. The aggregate net revenues and aggregate net operating losses before management charges in 1999 for these facilities were approximately $71.6 million and approximately $12.2 million, respectively.

     In addition during December 1999, the Company sold a majority interest in four assisted living facilities housed on three campuses, one of which included a skilled nursing facility. The Company managed these facilities on behalf of the purchaser during the first quarter of 2000. The cash consideration received from this transaction was approximately $0.4 million. The Company also obtained a note receivable of approximately $1.0 million from the purchaser. The aggregate debt, capital leases, notes payable and other liabilities assumed by the purchaser totaled approximately $21.0 million. The aggregate net loss on this transaction was approximately $37.2 million of which approximately $9.1 million was recorded in (gain) loss on sale of  assets, net, in 1999.

International Operations

     During the first quarter of 2000, the Company began soliciting offers to purchase its international operations. The Company recorded a loss of approximately $168.6 million in 2000 to reduce the carrying value of its international operations to the Company's estimate of selling value less selling costs. The charge was recorded in reorganization costs, net, in the Company's 2000 consolidated statement of losses.

     The Company's long-term care operations in Spain were sold for approximately $7.6 million in October 2000. The Company also sold 18 pharmacies in the United Kingdom for approximately $14.4 million in the first and second quarters of 2000.

     The Company sold its remaining operations in the United Kingdom, consisting of 146 inpatient facilities with 8,326 licensed beds, in February 2001. No material cash consideration was received for these operations, but the Company was released from approximately $112.9 million of aggregate debt, capital lease obligations, notes payable and other liabilities upon the sale. The Company's operations in Australia were liquidated in July 2001 and the Company received liquidation proceeds of approximately $0.9 million. The Company sold its long-term care and pharmacy operations in Germany in April 2001 and received proceeds of approximately $3.5 million.

Ancillary Service Operations

     In 2000, the Company began pursuing the disposition of its respiratory therapy business. The Company recorded losses of approximately $6.3 million and $0.4 million in 2000 and 2001, respectively, to reduce the carrying value of its respiratory therapy business to the Company's estimate of selling value less selling costs. The charges were recorded in reorganization costs, net, in the Company's consolidated statements of losses. SunCare's net revenues and net operating loss before management charges for the year ended

F-20

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

December 31, 2001 were $14.8 million and $1.4 million, respectively. In March 2002, the Company sold certain assets used in its respiratory therapy business for an aggregate of $0.9 million cash.

     During 2000, the Company decided to sell its SunChoice medical supplies operations. The Company recorded losses of approximately $59.4 million and $2.2 million in 2000 and 2001, respectively, to reduce the carrying value of its medical supplies operations to the Company's estimate of the selling value less selling costs. The charges were recorded in reorganization costs, net, in the Company's consolidated statement of losses. SunChoice's net revenues and net operating loss before management charges for the year ended December 31, 2000 were $61.0 million and $3.2 million, respectively. In January 2001, the Company sold the assets of SunChoice to Medline Industries, Inc. The Company received proceeds of $16.6 million in exchange for the SunChoice assets.

     During the fourth quarter of 1999, the Company divested its hospice operations in the United States. The Company received cash consideration of approximately $0.2 million from this transaction. The aggregate net revenues and the aggregate net losses before management charges in 1999 for the hospice operations were approximately $7.5 million and approximately $1.8 million, respectively. The loss on this transaction was approximately $7.2 million, which was recorded in 1999.

Other Operations

     In 2001, the Company concluded that it would sell two of its headquarters buildings in Albuquerque, New Mexico and recorded a loss on assets held for sale of $26.6 million in reorganization costs, net, in the Company's consolidated statement of losses. In January 2002, the Company entered into an agreement to sell the two buildings for approximately $15.3 million. The sale is expected to be completed in April 2002, although no assurance can be given that the sale will be completed.

     During December 1999, the Company also sold a parcel of land. The cash consideration received from this transaction was approximately $4.6 million. This transaction resulted in a gain of approximately $0.7 million.

Summary

     The following is a summary of the carrying amounts of assets held for sale at December 31, 2001 and 2000 and the loss on sales of assets and assets held for sale, net, for each of the years ended December 31, 2001, 2000 and 1999. The loss on sales of assets recorded subsequent to the Company's chapter 11 filings in the years ended December 31, 2001, 2000 and 1999 included approximately $15.3 million, $310.1 million and $7.1 million, respectively, recorded as a reorganization cost in the Company's consolidated statements of losses.

F-21

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

	Carrying Amounts
	2001	2000
International operations	$                   -	$     138,775
Other non-core businesses	18,158	17,567
Total	$         18,158	$     156,342
	=======	======

	Loss Amount
	2001		2000	1999
Assisted living facilities	$               5		$      76,055	$     41,667
Rehabilitation hospitals and other inpatient facilities	13,367		35,431	15,132
International operations	(47	)	110,154	-
Other non-core businesses	1,117		67,020	28,959
Total	$      14,442		$    288,660	$     85,758
	======		======	======

(8)  Debtor-in-Possession Financing

     On October 14, 1999, the Company entered into a Revolving Credit Agreement with CIT/Business Credit, Inc. and Heller Healthcare Finance, Inc. (the "DIP Financing Agreement"). The DIP Financing Agreement provided for maximum borrowings by the Company of $200 million, subject to certain limitations. On February 28, 2002 the Company's DIP Financing Agreement was repaid in full. The Company entered into new loan agreements to replace the DIP Financing Agreement. See "Note 23 - Subsequent Events."

     Interest accrued on the principal amount outstanding under the DIP Financing Agreement at a per annum rate of interest equal to the Alternate Base Rate ("ABR") (Chase Manhattan) plus 0.25% or the London Interbank Borrowing Offer Rate ("LIBOR") plus 2.75% and was payable in arrears on each Interest Payment Date. The one-month LIBOR was approximately 1.9% at December 31, 2001 and 6.6% at December 31, 2000. In the event of an Event of Default, interest accrued on the principal amount of the loans outstanding at a rate per annum equal to the ABR plus 2.0% and was payable daily. The ABR was approximately 4.8% and 9.4% at December 31, 2001 and 2000, respectively.

     At December 31, 2001, approximately $96.9 million was available under the DIP Financing Agreements of which the Company had borrowed approximately $54.5 million and had issued letters of credit outstanding of approximately $38.4 million. Peak borrowings under the agreement during 2001 and 2000 were $88.8 and $86.1 million, respectively, with an effective interest rate during 2001 and 2000 of approximately 7.7% and 9.4%, respectively.

F-22

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

(9)  Long-Term Debt

     As a result of the chapter 11 filing, substantially all short and long-term debt at the Filing Date were classified as "liabilities subject to compromise" in the Company's consolidated balance sheets in accordance with SOP 90-7. Through December 31, 2001, no principal had been paid or interest accrued on prepetition obligations since the Filing Date, except for amounts related to certain Industrial Revenue Bonds, a fully-secured mortgage, certain capital equipment leases and a nominal amount related to a promissory note.

     Long-term debt at December 31 consisted of the following (in thousands):

	2001		2000
Senior Credit Facility:
Revolving Credit Facility (see below)	$           437,066	(1)	$        433,319	(1)
Credit Facility Term Loans (see below)	358,981	(1)	358,981	(1)
9-1/2% Senior Subordinated Notes due 2007	250,000	(1)	250,000	(1)
9-3/8% Senior Subordinated Notes due 2008	150,000	(1)	150,000	(1)
Convertible Subordinated Debentures due 2004, interest at 6.0% per annum	83,300	(1)	83,300	(1)
DIP Financing Agreement	54,586		67,027
Mortgage notes payable due at various dates through 2014, interest at rates    from 8.0% to 11.4%, collateralized by various facilities	53,102	(2)	53,517	(2)
Mortgage notes payable in pound sterling due at various dates in 2015 and    2016, interest at 9.5% per annum, collateralized by various facilities in the    United Kingdom	-	(5)	31,354	(5)
Mortgage notes payable in Australian dollars due at various dates through    2001, interest from 7.6 % to 8.04% collateralized by various facilities in    Australia	-	(5)	12,980	(5)
Industrial Revenue Bonds	8,365	(3)	8,785	(3)
Mortgage notes payable in German marks due at various dates through 2003,    interest at rates from 6.3% to 6.8%, collateralized by various facilities in    Germany	-	(5)	7,978	(5)
Senior Subordinated Notes due 2002, interest at 11-3/4% per annum	6,161	(1)	6,161	(1)
Convertible Subordinated Debentures due 2003, interest at 6-1/2% per annum	1,382	(1)	1,382	(1)
Other long-term debt	30,947	(4)	29,427	(4)
Total long-term debt	1,433,890		1,494,211
Less long-term debt subject to compromise	(1,355,655	)	(1,353,961	)
Less amounts due within one year	(54,975	)	(86,039	)
Long-term debt, net of current portion	$             23,260		$          54,211
	=========		========

     Long-term debt at December 31, 2001 includes amounts owed under the DIP Financing Agreement, one fully secured mortgage note payable, certain Industrial Revenue Bonds and other debt.

     Long-term debt at December 31, 2000 includes amounts owed under the DIP Financing Agreement, one fully secured mortgage note payable, certain Industrial Revenue Bonds and other debt, of which approximately $85.4 million was assumed by the purchaser in a Bankruptcy Court approved sales transaction subsequent to December 31, 2000 and the Company's foreign debt obligations.

F-23

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

(1)	Classified as "liabilities subject to compromise" in the Company's consolidated balance sheets as of December 31, 2001 and December 31, 2000.
(2)	Approximately $46,023 and $46,214 are classified as "liabilities subject to compromise" in the Company's consolidated balance sheets as of December 31, 2001 and December 31, 2000, respectively.

(3)	Approximately $8,365 and $8,620 are classified as "liabilities subject to compromise" in the Company's consolidated balance sheets as of December 31, 2001 and December 31, 2000, respectively.
(4)	Approximately $14,377 and $15,984 are classified as "liabilities subject to compromise" in the Company's consolidated balance sheets as of December 31, 2001 and December 31, 2000, respectively.
(5)	International operations related to these mortgages were sold during 2001.

The scheduled maturities of long-term debt as of December 31 (not including that which is subject to compromise) is as follows (in thousands):

2002	$                  54,975
2003	1,464
2004	1,506
2005	7,200
2006	3,516
Thereafter	9,574
	$                  78,235
	============

(10)  Commitments and Contingencies

(a)  Lease Commitments

     The Company leases real estate and equipment under cancelable and noncancelable agreements. Under the Bankruptcy Code, the Company could generally elect to assume or reject executory contracts, including lease agreements, prior to confirmation of the Company's Plan of Reorganization. Future minimum lease payments under real estate leases and equipment assumed by the Company are as follows for the years ended December 31(in thousands):

F-24

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

	Capital      Leases		Operating      Leases
2002	$             1,335		$         136,468
2003	784		132,778
2004	597		129,686
2005	235		117,152
2006	248		90,733
Thereafter	1,440		287,380
Total minimum lease payments	4,639		$         894,197
Less amount representing interest	(1,194	)	=========
Present value of net minimum lease payments under capital leases	$             3,445
	=========

     Rent expense under operating leases totaled approximately $166.1 million, $237.6 million and $267.5 million for the years ended December 31, 2001, 2000 and 1999, respectively, and are included in operating costs.

     In 2002, the Company entered into a purchase agreement for the sale of two of the buildings on its corporate campus.  The sale, expected to be completed in April 2002, is for approximately $15.3 million.  The purchase agreement includes the leaseback of one of the buildings and part of an adjacent parking structure for an initial period of ten years, with an option to extend the lease for two five-year periods.  The cost of the initial ten-year term is approximately $7.5 million.  There is no assurance that the sale of the buildings will be completed.

(b)  Insurance

     In the past, the Company has insured certain risks, including general and professional liability and workers' compensation liability, through the use of self-funded retrospectively rated premium, self-funded and other hybrid policies which varied by the states in which the Company operated. The Company's insurance carriers declined to renew the Company's general and professional liability insurance policies that expired on December 31, 1999. Previously, these carriers paid substantially more to third parties under the policies than the Company paid in premiums. Several major insurance companies no longer provide this type of coverage to long-term care providers.

     In January 2000, the Company established a self-funded insurance program for general and professional liability claims up to a base amount of $1.0 million per claim and $3.0 million aggregate per location and obtained excess insurance for coverage above these levels. Prior to January 1, 2000, the maximum loss exposure with respect to the third-party insurance policies was $100,000 per claim for general and professional liability. The aggregate annual loss exposure with respect to the general and professional liability policies was unlimited in 1999 and $8.0 million in 1998. In 2001 and for 2000, there was an unlimited aggregate loss exposure under the per claim retention on these types of claims. An actuarial analysis prepared in the current year determined the expected losses under this retention level to be approximately $39.0 million and $44.2 million in 2001 and 2000, respectively. Annual

F-25

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

reviews of the actuarial determinations are performed to determine variations from this expected loss amount, and any adjustments are made to the reserve at that time. Reserves for estimated settlements for general and professional liability under the per claim retention level, including incurred but not reported losses, are provided on an undiscounted basis in the period that the event occurred. The reserve for such risks is approximately $81.6 million, of which $21.1 million is subject to compromise and $32.9 million, of which $4.6 million is subject to compromise as of December 31, 2001 and 2000, respectively. Provisions for such risks were approximately $58.1 million, $35.3 million and $23.9 million for the years ended December 31, 2001, 2000 and 1999, respectively, and are included in operating expenses and corporate general and administrative expenses. During 2000, the Company pre-funded $22.2 million for general and professional liability claims into a cash collateral trust account held by the Company's insurance carrier. The Company funded an additional $5.0 million into the trust account in 2001. The combined pre-funding will be used to pay claims for policy years 2000 through 2002.  Claims paid from the trust account were immaterial in 2000 and were $5.8 million for the year ended December 31, 2001.

     For the year ended December 31, 1999, the workers' compensation insurance was a guaranteed cost program, and thus, after payment of the premium, risk was fully transferred to the third party insurance carrier. Subsequent to December 31, 1999, the Company purchased workers' compensation insurance for all states, except Washington, Ohio, and West Virginia where the Company is required to subscribe to those state and/or self-insured programs. The 2001 and 2000 policies provide coverage above $250,000 per claim. An analysis prepared in the current year determined the undiscounted expected losses and costs under this retention level to be approximately $35.5 million as of December 31, 2001 and $36.0 million as of December 31, 2000. The Company has pre-funded cash collateral trust accounts with its insurance carrier in the amount of $26.8 million and $32.4 million as of December 31, 2001 for the 2001 and 2000 policy years, respectively. Claims paid from the 2001 policy year trust account were $4.7 million, and claims paid from the 2000 policy year trust account were $12.5 million and $5.7 million as of December 31, 2001 and 2000, respectively. The accounts were established to fund the Company's ultimate estimated exposure and will be adjusted retrospectively based on revisions to the estimates. For years prior to 1998 in which the Company carried various forms of workers' compensation insurance, aggregate losses are provided on a fully developed basis, including any incurred but not reported claims. The reserve for such workers' compensation risks is approximately $29.5 million and $14.2 million as of December 31, 2001 and 2000, respectively. Provisions for such risks totaled approximately $54.9 million, $27.4 million and $30.9 million for the years ended December 31, 2001, 2000 and 1999, respectively, and are included in operating expenses and corporate general and administrative expenses.

(c)  Construction Commitments

     As of December 31, 2001, the Company had construction commitments under various contracts of approximately $0.7 million. These items consisted primarily of contractual commitments to improve existing facilities.

(d)  Litigation

     The Company is a party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. See "Note 18 - Other Events (a)."

(e)  Employment Agreement

F-26

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     The Company entered into an Employment Agreement with Richard K. Matros on February 28, 2002. The agreement terminates on November 6, 2005, although the term is automatically extended for an additional year on November 6, 2004, and on each anniversary thereafter, unless the Company or Mr. Matros provides notice of non-extension. Pursuant to the agreement, Mr. Matros will receive an annual base salary of $650,000 that is subject to annual merit increases as determined by the Board of Directors. In addition to the base salary, Mr. Matros is entitled to an annual bonus for each fiscal year in which the Company achieves or exceeds certain financial performance targets. If the targets are achieved, the bonus could be 50%, 75% or 100% of base salary, depending upon how much the targets are exceeded. Mr. Matros was also awarded 150,000 shares of restricted common stock and an option to purchase 150,000 shares of common stock on February 28, 2002. The restricted stock will vest as to 60,000 shares on February 28, 2003 and 30,000 shares on each of February 28, 2004, 2005 and 2006.

     Mr. Matros' Employment Agreement provides that in the event of his termination of employment by the Company without Good Cause, by Mr. Matros for Good Reason (each as defined in the Employment Agreement), or upon the expiration of the term of the agreement following the Company's notice of non-extension, then Mr. Matros would 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 of the agreement, or (ii) two year's base salary or, in the event such termination occurs on or within two years following the date of a change of control (as defined in the Employment Agreement), then three year's base salary.

     The Company is currently in the process of documenting employment agreements with Kevin W. Pendergest, William A. Mathies and Heidi J. Fisher.

(f)  Severance Agreements

     The Company has entered into Severance Agreements with Mr. Schelling and Mr. Murphy pursuant to which they would receive severance payments in the event of their Involuntary Termination of employment (as defined in the Agreements). The severance payments would be equal to 24 months of their then-current salary. In addition to the severance payments, they would have the right to participate for a defined period of time in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to them immediately prior to termination. Severance payments would be made in a lump sum or over a period of time at the discretion of the Company. If so elected, the Company could make the severance payments over time, which would release the executive from existing non-compete restrictions. Under this option, if the executive finds employment during the severance period, his severance payment will be reduced by the amount of the salary earned by him, up to a maximum of 50% of the aggregate severance payments. Otherwise, the payments could be made in a lump sum and the executive would remain subject to certain competitive prohibitions.

The Company has entered into a Severance Agreement with Mr. Hunker pursuant to which he would receive severance payments in the event of his Involuntary Termination of employment (as defined in the Agreement). The severance payment would be equal to 12 months of his then-current salary, except that if the termination is the result of a Change of Control (as defined in the Agreement), the severance payments would equal 24 months of salary. In addition to the severance payment, he would have the right to

F-27

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

participate for a defined period of time in the medical, dental, health, life and other fringe benefit plans and arrangements applicable to him immediately prior to termination. His severance payment would be made in a lump sum.

(11)  Income Taxes

     Income tax expense (benefit) on losses before extraordinary loss consists of the following for the years ended December 31 (in thousands):

	2001	2000	1999
Current:
Federal	$                       -	$                       -	$             (4,913	)
State	321	256	120
Foreign	-	-	41
	321	256	(4,752	)
Deferred:
Federal	-	-	4,076
State	-	-	837
	-	-	4,913
Total	$                  321	$                  256	$                  161
	==========	==========	==========

Actual tax expense differs from the expected tax expense on losses before extraordinary loss which is computed by applying the U.S. Federal corporate income tax rate of 35% to losses before income taxes of the Company as follows for the years ended December 31 (in thousands):

	2001		2000		1999
Computed expected tax benefit	$          (24,191	)	$     (190,909	)	$     (381,254	)
Adjustments in income taxes resulting from:
Amortization of goodwill	3,016		2,067		5,036
Impairment loss	3,785		31,641		94,978
Increase in valuation allowance	99,508		88,889		311,708
Legal and regulatory matters	8,105		3,261		-
(Loss reversal) loss on planned asset dispositions	(93,360	)	81,257		(21,236	)
State income tax expense (benefit), net of Federal     income tax benefit	(1,716	)	(18,795	)	(12,863	)
Other	5,174		2,845		3,792
	$                 321		$             256		$             161
	=========		========		========

F-28

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     Deferred tax assets (liabilities) at December 31 consisted of the following (in thousands):

	2001		2000
Deferred tax assets:
Accounts and notes receivable	$          28,586		$            72,679
Accrued liabilities	77,910		56,655
Property and equipment	49,021		71,232
Intangible assets	76,499		69,120
Carryforward of deductions limited by Internal Revenue Code       Section 382	6,250		6,250
Write-down of assets held for sale	41,473		69,967
Deferred income	-		1,374
Partnership investments	2,655		4,229
Alternative minimum tax credit	5,753		7,873
Jobs and other credit carryforwards	6,146		6,517
Capital loss carryforwards	116,315		19,272
State net operating loss carryforwards	42,181		44,570
Federal net operating loss carryforwards	222,129		162,061
United Kingdom trading loss carryforwards	-		14,846
United Kingdom capital loss carryforwards	-		1,142
Property and equipment attributable to United Kingdom operations	-		3,851
Other	1,992		4,323
	676,910		615,961
Less valuation allowance:
Federal	(561,352	)	(492,472	)
State	(114,070	)	(99,914	)
United Kingdom	-		(21,854	)
	(675,422	)	(614,240	)
Total deferred tax assets	1,488		1,721
Deferred tax liabilities:
Changes in certain subsidiaries' methods of accounting for income taxes	(1,488	)	(1,721	)
	(1,488	)	(1,721	)
Deferred taxes, net	$                    -		$                      -
	=========		==========

     The Company has Federal net operating loss ("NOL") carryforwards of $634.7 million with expiration dates from 2004 through 2021. Various subsidiaries have state NOL carryforwards totaling $926.3 million with expiration dates through the year 2021. In addition, the Company has capital loss carryforwards of $332.3 million, of which $50.6 million will expire in 2004 and $281.7 million will expire in 2006. The alternative minimum tax credit carryforward of $5.8 million has no expiration date. The $6.1 million of other tax credit carryforwards will expire in years 2005 through 2019. The compromise of debt resulting from the Company's approved plan of reorganization will result in a significant reduction in these tax loss and tax credit carryforwards. In addition, the change in ownership in the approved plan of reorganization will materially impact the Company's ability to utilize any remaining tax loss and tax credit carryforwards. The actual amount of reduction in tax loss and tax credit carryforwards, and the limitation on any remaining carryforwards, has not been determined.

F-29

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     In 2001 and 2000, the Company increased the valuation allowance by $83.0 million and $88.9 million, respectively, to fully reserve for deferred tax assets which may not be realized. The deferred tax assets and the valuation allowance related to the United Kingdom operations were written off in 2001 in connection with the Company's sale of these operations.

(12)  Supplementary Information Relating to Statements of Cash Flows

     Supplementary information for the consolidated statements of cash flows is set forth below for the years ended December 31 (in thousands):

	2001		2000		1999
Cash paid during the year ended December 31 for:
Interest, net of $69, $82 and $1,124 capitalized during    2001, 2000 and 1999, respectively	$          17,589		$         29,826		$        49,710
Income taxes refunded	(931	)	(3,022	)	(47,974	)

     The Company's acquisitions during 2001, 2000 and 1999 consisted of the following for the years ended December 31 (in thousands):

	2001	2000		1999
Fair value of assets acquired	$                    -	$         29,475		$            6,781
Liabilities assumed	-	(28,501	)	(1,050	)
Cash payments made, net of cash received from others	$                    -	$              974		$            5,731
	==========	=========		==========

(13)  Fair Value of Financial Instruments

     The estimated fair values of the Company's financial instruments as of December 31 are as follows (in thousands):

	2001		2000
	Carrying    Amount	Fair Value	Carrying     Amount	Fair Value
Cash and cash equivalents	$      50,649	$      50,649	$       37,589	$    37,589
Long-term debt including current portion and amounts    subject to compromise:
Practicable to estimate fair value	1,433,890	371,155	1,494,211	550,161
Convertible Trust Issued Preferred Securities    (CTIPS)	296,101	-	296,101	-

F-30

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     The cash and cash equivalents carrying amount approximates fair value because of the short maturity of these instruments. The fair value of the Company's long-term debt, including current maturities and amounts subject to compromise, and the CTIPS was estimated based on quoted market prices and information received from an international investment banking firm that is experienced with such securities.

(14)  Convertible Trust Issued Preferred Securities

     In May 1998, a statutory business trust, all of whose common securities are owned by the Company, issued $345.0 million of 7.0% Convertible Trust Issued Preferred Securities ("CTIPS") with a liquidation amount of $25.00 per CTIP. Each CTIP was convertible into 1.2419 shares of the Company's common stock (equivalent to a conversion price of $20.13 per share). The CTIPS holders were entitled to receive cumulative cash distributions at an annual rate of 7.0%, payable quarterly. During 2000, approximately $26.9 million of CTIPS were converted into approximately 1.3 million shares of common stock. During 1999, $22.0 million of CTIPS were converted into approximately 1.1 million shares of common stock. The Company's 2001 and 2000 statements of losses excluded the dividends as the fair value of the dividends was immaterial. As a result of the consummation of the Company's Joint Plan of Reorganization on February 28, 2002, all of the CTIPS were cancelled without any recovery to the CTIP holders.

(15)  Capital Stock

(a)  Stock Option Plans

     The Company previously had stock option plans for certain employees, officers, consultants and non-employee directors of the Company. Awards made under the plan could be in the form of stock options, stock appreciation rights, stock awards, performance share awards or other stock-based awards. The stock option plans were terminated upon the consummation of the Company's Joint Plan of Reorganization on February 28, 2002 and the outstanding stock options under these plans were cancelled. The old stock option plans have been terminated and the Company adopted a new 2002 Management Equity Incentive Plan on February 28, 2002.

     As of December 31, 2001, stock options for 533,592 shares were outstanding and 10,786,803 shares were available for future grant under the stock option plans. No options were exercised during the year ended December 31, 2001. Exercise prices of the Company's outstanding stock options ranged from $1.06 to $24.00. No restricted stock awards were made in 2001 or 2000. During January 2000, all unvested restricted shares held by employees were cancelled and rescinded.

F-31

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     The following is a summary of the status of the Company's old Stock Option Plans as of December 31 and changes during the years ended (shares in thousands):

	2001			2000			1999
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price	Shares			Weighted Average Exercise Price
Outstanding at beginning of year	856		$                    8.25	1,368		$                  9.00		4,748		$                16.75
Granted:
Price equals fair value	-		-	-		-		910		1.91
Cancelled	(322	)	7.40	(512	)	10.14		(4,290	)	15.92
Outstanding at year-end	534		8.81	856		8.25		1,368		9.00
	=====			======				=====
Options exercisable at year-end	451		10.22	544		11.43		591		15.01
	=====			======				=====
Options available for future grant	10,787			10,905				10,393
	=====			======				=====
Weighted average fair value of   options granted during the year	N/A			N/A				$       1.00
	=====			======				=====

     No options were granted in 2001 and 2000. The fair value of each option granted in 1999 is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

	1999
Expected Life (in years)	4
Risk-free Interest Rate	5.4	%
Expected Volatility	76.0	%
Dividend Yield	-

F-32

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     Had compensation cost for the Company's 2001, 2000 and 1999 option grants been determined consistent with SFAS 123 (see "Note 3 - Summary of Significant Accounting and Financial Reporting Policies", which describes that SFAS 123 establishes fair value as the measurement basis for stock-based awards) the Company's net losses and net losses per share for the years ended December 31 would approximate the pro forma amounts below (in thousands, except per share data):

	2001				2000				1999
	As Reported		Pro forma		As Reported		Pro forma		As Reported		Pro forma
Net losses	$     (69,437	)	$   (70,648	)	$     (545,711	)	$     (547,039	)	$  (1,089,458	)	$  (1,091,129	)
	=======		======		=======		=======		=======		=======
Net losses per share:
Basic	$         (1.14	)	$       (1.16	)	$           (9.04	)	$           (9.06	)	$         (18.40	)	$         (18.28	)
Diluted	(1.14	)	(1.16	)	(9.04	)	(9.06	)	(18.62	)	(18.65	)

     The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to options granted prior to 1995, and additional option grants in future years are anticipated although not under the existing plans. The following table summarizes information about stock options outstanding as of December 31, 2001 (shares in thousands):

Options Outstanding					Options Exercisable
Range of Exercise Price			Number  Outstanding	Weighted Average Remaining   Contractual Life	Weighted Average    Exercise Price	Number Outstanding	Weighted Average    Exercise Price
$  1.06	-	$  9.50	298	7.06	$                  2.08	215	$                 2.48
11.00	-	15.84	67	2.54	12.50	67	12.50
16.44	-	19.44	112	4.90	17.63	112	17.64
20.13	-	24.00	57	4.28	22.18	57	22.18
			534			451
			========			========

(b)  Grantor Stock Trust

     In the first quarter of 1996, the Company sold 3,050,000 newly issued shares of the Company's common stock to a newly established Grantor Stock Trust ("Trust") in exchange for a promissory note of approximately $37.7 million. The Trust was created to fund future obligations under certain of the Company's benefit plans, including, but not limited to, stock option plans, a stock purchase plan, and employee compensation. The sale of the shares to the Trust was recorded as an increase in stockholders' equity with a corresponding reduction for the value of the shares held by the Trust. As stock was released from the Trust to satisfy certain employee compensation and benefit plans, the number and the related fair value of shares held by the Trust was reduced and stockholders' equity increased correspondingly. The Trust held 1,915,935 shares of the Company's common stock as of December 31, 2001 and 2000.

    The Trust delivered to the Company a promissory note for approximately $37.7 million. The cash portion of the purchase price of approximately $31,000 represented the par value of the shares of the

F-33

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

Company's common stock sold to the Trust. The consummation of the Company's Plan of Reorganization on February 28, 2002 cancelled the Company's existing common stock, including the shares held by the Trust. As a result, the Trust has been terminated and the debt it owed to the Company has been forgiven.

(16)  Earnings per Share

     Diluted net earnings per share is based upon the weighted average number of common shares outstanding during the period plus the number of incremental shares of common stock contingently issuable upon exercise of stock options and if dilutive, include the assumption that the Company's convertible securities were converted as of the beginning of the period. Net earnings are adjusted for the interest on the convertible securities, net of interest related to additional assumed borrowings to fund the cash consideration on conversion of certain convertible securities and the related income tax benefits. In periods of losses, diluted net losses per share is based upon the weighted average number of common shares outstanding during the period. As the Company had a net loss for the years ended December 31, 2001, 2000 and 1999, the Company's stock options and convertible debentures were anti-dilutive.

Losses per share for the years ended December 31 is calculated as follows (in thousands, except per share data):

	2001		2000		1999
Basic:
Losses before cumulative effect of change in accounting principle	$           (69,437	)	$         (545,711	)	$     (1,076,642	)
Cumulative effect of change in accounting principle	-		-		(12,816	)
Net losses	$           (69,437	)	$         (545,711	)	$     (1,089,458	)
	=========		=========		=========
Weighted average shares outstanding	61,096		60,347		58,504
	=========		=========		=========
Losses per share:
Net losses before cumulative effect of change in accounting      principle	$               (1.14	)	$               (9.04	)	$            (18.40	)
Cumulative effect of change in accounting principle	-		-		(0.22	)
Net losses	$               (1.14	)	$               (9.04	)	$           (18.62	)
	=========		=========		=========
Diluted:
Losses before cumulative effect of change in accounting    principle used in basic calculation	$           (69,437	)	$         (545,711	)	$     (1,076,642	)
Cumulative effect of change in accounting principle	-		-		(12,816	)
Net losses	$           (69,437	)	$         (545,711	)	$     (1,089,458	)
	=========		=========		=========
Losses per share:
Losses before cumulative effect of change in accounting principle	$               (1.14	)	$               (9.04	)	$            (18.40	)
Cumulative effect of change in accounting principle	-		-		(0.22	)
Net losses	$               (1.14	)	$               (9.04	)	$            (18.62	)
	=========		=========		=========
Weighted average shares used in basic and dilutive calculations	61,096		60,347		58,504
	=========		=========		=========

F-34

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

(17)  Preferred Stock Purchase Rights

     On June 2, 1995, the Board of Directors declared a dividend of one preferred stock purchase right ("Right") for each outstanding share of the old common stock of the Company for stockholders of record on June 15, 1995 and for all future issuances of the old common stock. The consummation of the Company's Plan of Reorganization on February 28, 2002 cancelled the Company's old common stock, and the Rights were thereby also cancelled.

(18)  Other Events

(a)  Litigation

     In May and August 1999, former employees of two of the Company's subsidiaries, SunBridge Healthcare Corporation and SunDance Rehabilitation Corporation, filed proposed class action complaints in the Western District of Washington. The plaintiffs sought to represent certain current and former employees of SunBridge and SunDance who were allegedly not paid appropriate wages under federal and state law since May and August 1996, respectively. Plaintiffs filed claims in the chapter 11 cases in the amount of approximately $780 million in the SunDance action and $242 million in the SunBridge action. Although the Company disputed these claims, the parties executed a stipulation of settlement which was signed by the judge presiding over the chapter 11 cases in the United States Bankruptcy Court for the District of Delaware. The settlement provides a general unsecured claim in the chapter 11 cases of up to an aggregate $3.0 million for the claimants, the payment of claimants' attorney's fees up to $300,000, and the payment of up to $500,000 to cover the cost of notice to prospective claimants in the class and claims administration. The settlement terms remain subject to court approval.

     In March and April 1999, class action lawsuits were filed against the Company and three individuals who were at that time officers of the Company in the United States District Court for the District of New Mexico. These actions have been consolidated as In re Sun Healthcare Group, Inc. Securities and Litigation Master, File No. Civ. 99-269. The lawsuits allege, among other things, that the Company did not disclose material facts concerning the impact that PPS would have on the Company's results of operations. The lawsuits seek compensatory damages and other relief for stockholders who purchased the Company's common stock during the class-action period. Pursuant to an agreement among the parties, the Company was dismissed without prejudice in December 2000. On January 31, 2002, the District Court dismissed the lawsuit with prejudice and entered judgment in favor of the defendants. On February 14, 2002, the plaintiffs filed a Motion to Amend the Judgment and to File an Amended Complaint. The Company intends to vigorously defend the individual defendants in this matter, who are indemnified by the Company and covered by the Company's insurance.

      The United States Department of Health & Human Services ("HHS") and the United States Department of Justice ("DOJ") periodically investigate matters that come to their attention concerning the Company, including cost reporting matters. Several years ago, to expedite resolution of any outstanding investigations, the Company requested that HHS and DOJ inform it of any such investigations or outstanding concerns. In response, DOJ informed the Company of the existence of a number of outstanding inquiries, several of which were prompted by the filing of eleven qui tam lawsuits

F-35

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

by private individuals ("Relators") pursuant to the False Claims Act. HHS had also asserted claims against the Company for overpayments in connection with Medicare reimbursement for services performed prior to the implementation of the Medicare prospective payment system, and HHS and DOJ also asserted claims for violations of the False Claims Act. The Company denied any violations and asserted claims against HHS for underpayments in connection with services performed for Medicare beneficiaries for the same periods which HHS disputes.

     In February 2002, the Company, HHS, CMS, DOJ, the Tricare Management Activity Support Office ("TMA"), and the Relators in eight of the qui tam cases signed a comprehensive settlement agreement which resolved all the claims of the parties. The Bankruptcy Court has approved the settlement. The settlement agreement provided for, among other things, a release of pre-petition claims of HHS, CMS, DOJ, TMA and the Relators against the Company. The settlement agreement also provided for a release of substantially all the claims of the Company against HHS for the same period; the Company previously reserved all such claims due to the uncertainty of the Company recovering such amounts. The settlement agreement required the Company to pay $1,000,000 in cash and deliver a promissory note for $10,000,000. The Relators in the remaining three qui tam cases previously separately entered into settlement agreements with the Company resolving all of their claims against the Company.

     In contemplation of a settlement with HHS, the Company entered into a corporate integrity agreement with the HHS' Office of Inspector General in July 2001. The agreement officially took effect upon the Company's emergence from bankruptcy. Under the terms of this agreement, the Company implemented further internal controls with respect to its quality of care standards and its Medicare and Medicaid billing, reporting and claims submission processes.

     The Company is a party to various other legal actions and administrative proceedings and is subject to various claims arising in the ordinary course of its business, including claims that its services have resulted in injury or death to the residents of its facilities. The Company has experienced an increasing trend in the number and severity of litigation claims asserted against the Company. The Company believes that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiff's lawyers of potentially large recoveries. In certain states in which the Company has significant operations, including California, insurance coverage for the risk of punitive damages arising from general and professional liability litigation is not available due to state law public policy prohibitions. There can be no assurance that the Company will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available. The Company also believes that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on the Company.

(b)  Other Inquiries

F-36

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     From time to time, fiscal intermediaries and Medicaid agencies examine cost reports filed by predecessor operators of the Company's skilled nursing facilities. If, as a result of any such examination, it is concluded that overpayments to a predecessor operator were made, the Company, as the current operator of such facilities, may be held financially responsible for such overpayments. At this time the Company is unable to predict the outcome of any existing or future examinations.

(c)  Legislation, Regulations and Market Conditions

     The Company is subject to extensive federal, state and local government regulation relating to licensure, conduct of operations, ownership of facilities, expansion of facilities and services and reimbursement for services. As such, in the ordinary course of business, the Company's operations are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which may be non-routine. The Company believes that it is in substantial compliance with the applicable laws and regulations. However, if the Company is ever found to have engaged in improper practices, it could be subjected to civil, administrative or criminal fines, penalties or restitutionary relief which may have a material adverse impact on the Company's financial results and operations.

     In December 2000, the federal government released the final privacy rules of the Health Insurance Portability and Accountability Act of 1996 ("HIPPA").  The rules provide for, among other things, (i) giving consumers the right and control over the release of their medical records, (ii) the establishment of boundaries for the use of medical information, and (iii) penalties for violation of an individual's privacy rights.

     These privacy regulations apply to "protected health information," which is defined generally as individually identifiable health information transmitted or maintained in any form or medium, excluding certain education records and student medical records. The privacy regulations seek to limit the use and disclosure of most paper, oral and electronic communications regarding an individual's past, present or future physical or mental health or condition, or relating to the provision of healthcare to the individual or payment for that healthcare, if the individual can or may be identified by such information. HIPAA provides for the imposition of civil or criminal penalties if protected health information is improperly disclosed. The Company is not required to comply with the HIPAA privacy rules until April 2003, but the Company will require substantial efforts and resources to prepare for meeting the compliance deadline and for continued compliance thereafter. No assurance can be given that the Company will meet the April 2003 deadline. See "Item 1 - Business - Certain Additional Business Risks."

     HIPAA's security regulations have not yet been finalized. The proposed security regulations specify administrative procedures, physical safeguards and technical services and mechanisms designed to ensure the privacy of protected health information. The Company will be required to comply with the security regulations 26 months after the regulations become final.

     In addition, HIPAA also mandates the adoption of regulations aimed at standardizing transaction formats and billing codes for documenting medical services, dealing with claims submissions and protecting the privacy and security of individually indentifiable health information. HIPAA regulations that standardize transactions and code sets became final in the fourth quarter of 2000. These regulations

F-37

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

do not require healthcare providers to submit claims electronically, but require standard formatting for those that do. The Company currently submits some of its claims electronically and will continue to do so. The Company will be required to comply with HIPAA transaction and code set standards by October 2003.

(19)  Summarized Financial Information

     The Company acquired Mediplex on June 23, 1994, and became a co-obligor with Mediplex with respect to the 6-1/2% Debentures and the 11-3/4% Debentures subsequent to the acquisition. Summarized financial information of Mediplex is provided below (in thousands):

	As of December 31
	2001	2000
Current assets	$           64,803	$     73,060
Noncurrent assets	69,576	76,668
Current liabilities	22,411	8,720
Noncurrent liabilities	50,294	50,632
Due to parent	262,082	231,487

	Year Ended  December 31
	2001		2000		1999
Net revenues	$       449,754		$        441,929		$     442,914
Costs and expenses	(490,462	)	(438,707	)	(426,418	)
Loss on impairment	(8,647	)	-		(46,779	)
Loss on sale of assets, net	-		-		(41,019	)
Cumulative effect of change in accounting principle	-		-		(2,520	)
(Losses) income before intersegment charges and income    taxes	(49,355	)	3,222		(73,822	)
Intersegment charges (1)	(9,940	)	(15,939	)	(94,759	)
Losses before income taxes	(59,295	)	(12,717	)	(168,581	)
Income tax expense	-		-		(32)
Net losses	$        (59,295	)	$        (12,717	)	$    (168,613	)
	========		========		=======

(1)








Through various intersegment agreements entered into by the Company and Mediplex, the Company provides management services, licenses the use of its trademarks and acts on behalf of Mediplex to make financing available for its operations. The Company charged Mediplex for management services totaling approximately $14.4 million, $13.4 million and $14.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Royalty fees charged to Mediplex for the year ended December 31, 1999 for the use of the Company's trademarks were approximately $7.0 million. The Company discontinued charging Mediplex for royalty fees as of December 31, 1999. Intersegment interest charged to Mediplex for the years ended December 31, 2000 and 1999, for  

F-38

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

advances from the Company was approximately $2.6 million and $72.9 million. Sun discontinued charging Mediplex for interest during 2000 due to the chapter 11 filing.

(20) Quarterly Financial Data (Unaudited)

     The following tables reflects unaudited quarterly financial data for fiscal years 2001 and 2000 (in thousands, except per share data):

	Year Ended December 31, 2001
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total net revenues	$           529,834		$           507,160		$         494,939		$        543,301
	=======		=======		======		======
Losses before income taxes	$            (15,944	)	$            (21,328	)	$          (10,438	)	$        (21,406	)
	=======		=======		======		======
Net losses	$            (15,967	)	$            (21,851	)	$          (10,552	)	$        (21,067	)
	=======		=======		======		======
Net losses per common and common equivalent share:
Net losses (1):
Basic and diluted	$                (0.26	)	$                (0.36	)	$              (0.17	)	$            (0.34	)
	=======		=======		======		======

       (1)    Earnings per share are computed independently for each of the quarters presented and
                therefore, may not sum to the totals for the year (see "Note 16 - Earnings Per Share").

	Year Ended December 31, 2000
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total net revenues	$           637,992		$           620,954		$         607,722		$        592,260
	=======		=======		=======		======
Losses before income taxes	$          (165,607	)	$            (31,387	)	$       (132,250	)	$      (216,211	)
	=======		=======		=======		======
Net losses	$          (165,661	)	$            (31,445	)	$       (132,360	)	$      (216,245	)
	=======		=======		=======		======
Net losses per common and common equivalent share:
Net losses (1):
Basic and diluted	$                (2.78	)	$                (0.54	)	$              (2.18	)	$            (3.56	)
	=======		=======		=======		======

      (1)    Earnings per share are computed independently for each of the quarters presented and
               therefore, may not sum to the totals for the year (see "Note 16 - Earnings Per Share").

F-39

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

(21)  Segment Information

     The Company operates predominantly in the long-term care segment of the healthcare industry. The Company is a provider of long-term, sub-acute and related ancillary care services to nursing home patients. In addition to services provided in the United States, the Company previously provided services in the United Kingdom, Spain, Germany and Australia.

     The following summarizes the services provided by the Company's reportable and other segments:

Inpatient Services: This segment provides, among other services, inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. The Company provides 24-hour nursing care in these facilities by registered nurses, licensed practical nurses and certified nursing aids. At December 31, 2001, the Company operated 247 long-term care facilities with 27,954 licensed beds as compared with 303 facilities with 33,363 licensed beds at December 31, 2000. At December 31, 2001, the Company had identified seven facilities with 1,021 licensed beds for divestiture in 2002. As of March 1, 2002, the Company has identified a total of 13 skilled nursing facilities with 1,764 licensed beds for disposal.

Rehabilitation and Respiratory Therapy Services: This segment provides, among other services, physical, occupational, speech and respiratory therapy supplies and services to affiliated and nonaffiliated skilled nursing facilities. At December 31, 2001, this segment provided services to 859 facilities, 622 nonaffiliated and 237 affiliated, as compared to 942 facilities at December 31, 2000, of which 652 were nonaffiliated and 290 were affiliated. In March 2002, the Company sold substantially all of the assets of its respiratory therapy operation.

Pharmaceutical and Medical Supply Services: This segment provides pharmaceutical products primarily to affiliated and nonaffiliated long-term and sub-acute care facilities for such purposes as infusion therapy, pain management, antibiotic therapy and parenteral nutrition as well as providing consultant pharmacist services. This segment provided services to 654 facilities at December 31, 2001 compared with 1,506 facilities at December 31, 2000. Of the 654 facilities in 2001, 439 were nonaffiliated facilities and 215 were affiliated as compared to 1,217 nonaffiliated facilities and 289 affiliated facilities in 2000.

     The Company previously provided medical supplies to nonaffiliated and affiliated parties through SunChoice Medical Supply, Inc. ("SunChoice"). In January 2001, the Company sold substantially all of the operating assets of SunChoice.

International Operations: The Company sold its operations in the United Kingdom, Germany and Australia during 2001 in February, April and July, respectively. During 2000, the Company sold 18 pharmacies in the United Kingdom and its operations in Spain. The Company did not have any international operations at December 31, 2001.

Other Operations: This segment includes temporary medical staffing services, assisted living services, home health and hospice, software development and other ancillary services provided to affiliated and nonaffiliated facilities.

F-40

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

     The accounting policies of the segments are the same as those described in the Note 3 - "Summary of Significant Accounting and Financial Reporting Policies". The Company primarily evaluates segment performance based on profit or loss from operations after allocated expenses and before reorganization items, income taxes, extraordinary items and the cumulative effect of change in accounting principle. Gains or losses on sales of assets and certain items including impairment of assets recorded in connection with SFAS 121, legal and regulatory matters and restructuring costs are not considered in the evaluation of segment performance. Allocated expenses include intersegment charges assessed to segments for management services and asset use based on segment operating results and average asset balances, respectively. The Company accounts for intersegment sales and provision of services at estimated market prices.

     Corporate assets primarily consist of cash and cash equivalents, receivables from subsidiary segments, notes receivable, property, plant and equipment, unallocated intangible assets and goodwill. Although corporate assets include unallocated intangible assets and goodwill, the amortization of these items is reflected in the results of operations of the associated segment.

     The Company's reportable segments are strategic business units that provide different products and services. They are managed separately because each business has different marketing strategies due to differences in types of customers, different distribution channels and different capital resource needs.

F-41

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

The following tables summarize, for the years indicated, operating results and other financial information, by business segment (in thousands):

	Inpatient  Services		Rehabilitation and Respiratory Therapy Services		Pharmaceutical and Medical Supply Services		International Operations		Other Operations		Corporate		Intersegment Eliminations		Consolidated
For the Year Ended December 31, 2001
Total Net Revenues	$     1,609,388		$                175,159		$                   257,579		$             23,887		$        178,065		$            1,393		$          (170,237	)	$           2,075,234
Operating expenses,   corporate general and   administrative expense   and provision for losses on   accounts receivable	1,561,766		150,340		233,944		22,953		176,468		50,715		(170,237	)	2,025,949
Depreciation and   amortization	12,576		1,752		4,311		-		3,193		10,953		-		32,785
Interest, net	2,758		32		4		1,183		513		8,145		-		12,635
Income (losses) before   corporate allocations	32,288		23,035		19,320		(249	)	(2,109	)	(68,420	)	-		3,865
Corporate management fees	52,294		10,344		15,085		-		7,360		(85,083	)	-		-
Net segment income/(losses)	$         (20,006	)	$                  12,691		$                       4,235		$                 (249	)	$           (9,469	)	$          16,663		$                       -		$                  3,865
	======		========		=========		=======		======		=======		=======		========
Intersegment revenues	$              (526	)	$                  99,549		$                     62,209		$                       -		$            9,005		$                    -		$          (170,237	)	$                         -
Identifiable segment assets	$        382,581		$                  30,515		$                     74,815		$                       -		$          59,796		$        519,711		$          (417,614	)	$              649,804
Segment capital expenditures	$          17,595		$                       472		$                          937		$                  537		$            1,865		$            8,924		$                       -		$                30,330
For the Year Ended December 31, 2000
Total Net Revenues	$     1,718,178		$                204,367		$                   311,276		$           265,501		$        171,430		$            1,381		$          (213,205	)	$           2,458,928
Operating expenses,   corporate general and   administrative expenses,   and provision for losses on   accounts receivable	1,649,920		170,722		291,140		261,814		172,359		84,171		(213,074	)	2,417,052
Depreciation and   amortization	20,192		3,023		6,856		2,502		3,084		10,355		(131	)	45,881
Interest, net	10,567		188		58		12,989		1,416		9,051		-		34,269
Income (losses) before   corporate allocations	37,499		30,434		13,222		(11,804	)	(5,429	)	(102,196	)	-		(38,274	)
Corporate interest   allocation	24,444		8,946		10,577		7,902		5,823		(57,692	)	-		-
Corporate management fees	42,394		5,097		7,434		1,815		4,089		(60,829	)	-		-
Net segment income (losses)	$         (29,339	)	$                  16,391		$                      (4,789	)	$            (21,521	)	$         (15,341	)	$          16,325		$                       -		$              (38,274	)
	======		========		=========		=======		======		=======		=======		========
Intersegment revenues	$               601		$                113,265		$                     88,295		$                       -		$          10,716		$               328		$          (213,205	)	$                         -
Identifiable segment assets	$        234,735		$                  48,018		$                     52,022		$             83,826		$          68,974		$     1,011,775		$          (649,362	)	$              849,988
Segment capital   expenditures	$          24,781		$                       289		$                          994		$               4,590		$            3,172		$          21,540		$                       -		$                55,366
For the Year Ended December 31, 1999
Total Net Revenues	$     1,704,436		$                234,054		$                   316,880		$           296,906		$        196,760		$            2,574		$          (222,571	)	$           2,529,039
Operating expenses,   corporate general and   administrative expenses,   and provision for losses on   accounts receivable	1,790,865		248,269		312,500		290,272		217,670		120,730		(219,705	)	2,760,601
Depreciation and   amortization	29,195		7,173		8,287		12,805		11,285		12,796		(216	)	81,325
Interest, net	9,944		305		86		13,191		6,721		98,807		-		129,054
Dividends on Preferred   Securities	-		-		-		-		-		20,407		-		20,407
Losses before corporate   allocations	(125,568	)	(21,693	)	(3,993	)	(19,362	)	(38,916	)	(250,166	)	(2,650	)	(462,348	)
Corporate interest   allocation	42,945		12,977		13,863		19,550		8,392		(97,727	)	-		-
Corporate management fees	71,688		9,455		12,454		2,966		5,993		(99,906	)	(2,650	)	-
Net segment income (losses)	$       (240,201	)	$                (44,125	)	$                    (30,310	)	$            (41,878	)	$         (53,301	)	$         (52,533	)	$                       -		$            (462,348	)
	======		========		=========		=======		======		=======		=======		========
Intersegment revenues	$               598		$                126,880		$                     80,944		$                       -		$            9,981		$            4,168		$          (222,571	)	$                         -
Identifiable segment assets	$        350,038		$                  74,466		$                   121,260		$           267,604		$        143,317		$     1,143,134		$          (661,331	)	$           1,438,488
Segment capital   expenditures	$          23,114		$                    6,696		$                       3,184		$             25,632		$          11,616		$          32,211		$                       -		$              102,453

F-42

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

The following tables reconcile net segment income (losses) to consolidated losses before income taxes and cumulative effect of change in accounting principle:

	For the Year Ended December 31, 2001		For the Year Ended December 31, 2000		For the Year Ended December 31, 1999
Net segment income (losses)	$                              3,865		$                       (38,274	)	$                      (462,348	)
Loss on impairment	18,825		191,316		457,449
Legal and regulatory matters, net	11,000		2,480		38
Restructuring costs	1,064		(1,090	)	27,353
(Gain) loss on sale of assets, net	(825	)	(21,400	)	78,673
Loss on termination of interest rate swaps	-		-		2,488
Reorganization costs, net	42,917		335,875		48,132
Losses before income taxes and cumulative effect of    change in accounting principle	$                          (69,116	)	$                     (545,455	)	$                   (1,076,481	)
	===========		==========		==========

F-43

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING BALANCE SHEET

As of December 31, 2001
(in thousands)

(22)  Filer/Non-Filer Financial Statements

     In accordance with SOP 90-7, the debtor entities are required to present condensed consolidated financial statements for the years ended after the Filing Date:

ASSETS
	Filers		Non-filers	Elimination		Consolidated
Current assets:
Cash and cash equivalents	$             49,917		$                732	$                       -		$               50,649
Accounts receivable, net	200,445		4,515	(227	)	204,733
Inventory, net	19,492		923	-		20,415
Other receivables, net	9,556		-	-		9,556
Prepaids and other assets	5,610		43	-		5,653
Total current assets	285,020		6,213	(227	)	291,006
Property and equipment, net	124,832		8,384	-		133,216
Assets held for sale	15,803		2,355	-		18,158
Notes receivable, net	4,895		-	-		4,895
Goodwill, net	177,027		175	-		177,202
Other assets, net	20,788		4,539	-		25,327
Investment in subsidiaries	(280,290	)	-	280,290		-
Total assets	$           348,075		$           21,666	$           280,063		$             649,804
	=======		======	=======		========

F-44

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING BALANCE SHEET

As of December 31, 2001
(in thousands except share data)

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
	Filers		Non-filers		Elimination		Consolidated
Current liabilities:
Current portion of long-term debt	$           54,892		$                     83		$                     -		$              54,975
Accounts payable	29,055		1,507		(227	)	30,335
Accrued compensation and benefits	78,716		612		-		79,328
Accrued self-insurance obligations	45,878		1,219		-		47,097
Income taxes payable	12,430		-		-		12,430
Other accrued liabilities	79,708		392		-		80,100
Total current liabilities	300,679		3,813		(227	)	304,265
Liabilities subject to compromise (see Note 2)	1,549,139		-		-		1,549,139
Accrued self-insurance obligations, net of current portion	51,380		-		-		51,380
Long-term debt, net of current portion	17,813		5,447		-		23,260
Other long-term liabilities	22,136		408		-		22,544
Total liabilities	1,941,147		9,668		(227	)	1,950,588
Commitments and contingencies (see Note 10)
Minority interest	3,177		2,228		-		5,405
Company-obligated mandatorily redeemable convertible    preferred securities of a subsidiary trust holding solely 7%    convertible junior subordinated debentures of the    Company	296,101		-		-		296,101
Intersegment	(290,060	)	290,060		-		-
Stockholders' deficit:
Common stock of $.01 par value, authorized      155,000,000 shares, 65,209,188 shares issued and      outstanding as of December 31, 2001	652		262		(262	)	652
Additional paid-in capital	825,099		49,805		(49,805	)	825,099
Accumulated deficit	(2,400,655	)	(330,357	)	330,357		(2,400,655	)
Less:
Common stock held in treasury, at cost, 2,213,537          shares as of December 31, 2001	(27,376	)	-		-		(27,376	)
Grantor stock trust, at market, 1,915,935 shares as of          December 31, 2001	(10	)	-		-		(10	)
Total stockholders' deficit	(1,602,290	)	(280,290	)	280,290		(1,602,290	)
Total liabilities and stockholders' deficit	$        348,075		$             21,666		$         280,063		$            649,804
	======		=======		======		=======

F-45

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING BALANCE SHEET

As of December 31, 2000
(in thousands)

ASSETS
	Filers		Non-filers		Elimination		Consolidated
Current assets:
Cash and cash equivalents	$           32,600		$            4,989		$                    -		$             37,589
Accounts receivable, net	188,366		7,415		(419	)	195,362
Inventory, net	21,726		950		-		22,676
Other receivables, net	104,808		(97,912	)	-		6,896
Prepaids and other assets	4,653		40		-		4,693
Total current assets	352,153		(84,518	)	(419	)	267,216
Property and equipment, net	164,433		15,852		-		180,285
Assets held for sale	17,567		138,775		-		156,342
Notes receivable, net	14,554		-		-		14,554
Goodwill, net	187,781		224		-		188,005
Other assets, net	38,385		5,201		-		43,586
Investment in subsidiaries	(57,143	)	-		57,143		-
Total assets	$         717,730		$          75,534		$          56,724		$           849,988
	======		======		======		=======

F-46

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING BALANCE SHEET

As of December 31, 2000
(in thousands except share data)

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
	Filers		Non-filers		Elimination		Consolidated
Current liabilities:
Current portion of long-term debt	$           67,208		$             18,831		$                     -		$             86,039
Accounts payable	26,736		11,209		(419	)	37,526
Accrued compensation and benefits	86,259		15,718		-		101,977
Accrued self-insurance obligations	27,406		612		-		28,018
Income taxes payable	13,328		-		-		13,328
Other accrued liabilities	126,291		12,938		-		139,229
Total current liabilities	347,228		59,308		(419	)	406,117
Liabilities subject to compromise (see Note 2)	1,529,928		-		-		1,529,928
Accured self-insurance obligations, net of current portion	22,719		-		-		22,719
Long-term debt, net of current portion	6,797		47,414		-		54,211
Obligations under capital leases, net of current portion	-		53,553		-		53,553
Other long-term liabilities	25,953		784		-		26,737
Total liabilities	1,932,625		161,059		(419	)	2,093,265
Commitments and contingencies (see Note 10)
Minority interest	3,178		2,782		-		5,960
Company-obligated mandatorily redeemable convertible    preferred securities of a subsidiary trust holding solely 7%    convertible junior subordinated debentures of the    Company	296,101		-		-		296,101
Intersegment	31,164		(31,195	)	31		-
Stockholders' deficit:
Common stock of $.01 par value, authorized       155,000,000 shares, 65,230,853 shares issued and       outstanding as of  December 31, 2000	652		2,568		(2,568	)	652
Additional paid-in capital	825,147		273,696		(273,696	)	825,147
Accumulated deficit	(2,331,218	)	(320,893	)	320,893		(2,331,218	)
Accumulated other comprehensive loss	(12,483	)	(12,483	)	12,483		(12,483	)
Less:
Common stock held in treasury, at cost, 2,213,537          shares as of December 31, 2000	(27,376	)	-		-		(27,376	)
Grantor stock trust, at market, 1,915,935 shares as of          December 31, 2000	(60	)	-		-		(60	)
Total stockholders' deficit	(1,545,338	)	(57,112	)	57,112		(1,545,338	)
Total liabilities and stockholders' deficit	$        717,730		$             75,534		$           56,724		$            849,988
	======		=======		======		=======

F-47

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING STATEMENT OF LOSSES

For the Year Ended December 31, 2001
(in thousands)

	Filers		Non-filers		Elimination		Consolidated
Total net revenues	$      2,008,534		$           71,668		$            (4,968	)	$         2,075,234
Costs and expenses:
Operating costs	1,832,761		67,869		(4,968	)	1,895,662
Corporate general and administrative	102,599		1,716		-		104,315
Depreciation and amortization	31,371		1,414		-		32,785
Provision for losses on accounts receivable	25,162		810		-		25,972
Loss on impairment	14,482		4,343		-		18,825
Interest, net (contractual interest expense $142,800)	10,960		1,675		-		12,635
Legal and regulatory matters, net	11,000		-		-		11,000
Restructuring costs	-		1,064		-		1,064
Gain on sale of assets, net	(782	)	(43	)	-		(825	)
Equity interest in losses of subsidiaries	9,463		-		(9,463	)	-
Total costs and expenses	2,037,016		78,848		(14,431	)	2,101,433
Management fee (income) expense before reorganization    items	(2,810	)	2,810		-		-
Losses before reorganization costs, net, and income taxes	(25,672	)	(9,990	)	9,463		(26,199	)
Reorganization costs, net	43,473		(556	)	-		42,917
Income taxes	291		30		-		321
Net losses	$         (69,436	)	$            (9,464	)	$              9,463		$             (69,437	)
	======		======		======		=======

F-48

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING STATEMENT OF LOSSES

For the Year Ended December 31, 2000
(in thousands)

	Filers		Non-filers		Elimination		Consolidated
Total net revenues	$      2,145,659		$         318,485		$            (5,216	)	$         2,458,928
Costs and expenses:
Operating costs	1,931,901		303,738		(5,216	)	2,230,423
Corporate general and administrative	140,117		13,016		-		153,133
Depreciation and amortization	43,000		2,881		-		45,881
Provision for losses on accounts receivable	32,973		523		-		33,496
Loss on impairment	191,199		117		-		191,316
Interest, net (contractual interest expense $146,406)	20,260		14,009		-		34,269
Legal and regulatory matters, net	2,480		-		-		2,480
Restructuring costs	(1,090	)	-		-		(1,090	)
(Gain) loss on sale of assets, net	(21,405	)	5		-		(21,400	)
Equity interest in losses of subsidiaries	129,311		-		(129,311	)	-
Intersegment interest expense (income)	(2,198	)	2,198		-		-
Total costs and expenses	2,466,548		336,487		(134,527	)	2,668,508
Management fee (income) expense before reorganization    items	(828	)	828		-		-
Losses before reorganization costs, net, and income taxes	(320,061	)	(18,830	)	129,311		(209,580	)
Reorganization costs, net	225,423		110,452		-		335,875
Income taxes	227		29		-		256
Net losses	$       (545,711	)	$       (129,311	)	$         129,311		$           (545,711	)
	======		======		======		=======

F-49

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2001
(in thousands)

	Filers		Non-filers		Elimination		Consolidated
Cash flows from operating activities:
Net losses	$                      (69,437	)	$            (9,464	)	$           9,464		$             (69,437	)
Adjustments to reconcile net losses to net cash    provided by (used for) operating activities:
Equity interest in losses of subsidiaries	9,464		-		(9,464	)	-
Loss on impairment	14,482		4,343		-		18,825
Depreciation and amortization	31,371		1,414		-		32,785
Provision for losses on accounts receivable	25,162		810		-		25,972
Legal and regulatory costs	11,000		-		-		11,000
(Gain) loss on sale of assets, net	(782	)	(43	)	-		(825	)
Reorganization costs, net	43,473		(556	)	-		42,917
Other, net	9,844		(248	)	-		9,596
Changes in operating assets and liabilities:
Accounts receivable	(39,226	)	2,312		-		(36,914	)
Other current assets	(2,749	)	3,694		-		945
Other current liabilities	16,072		(8,051	)	-		8,021
Income taxes payable	3,810		(2,743	)	-		1,067
Net cash provided by (used for) operating       activities before reorganization costs	52,484		(8,532	)	-		43,952
Net cash paid for reorganization costs	(19,583	)	-		-		(19,583	)
Net cash (used for) provided by operating       activities	32,901		(8,532	)	-		24,369
Cash flows from investing activities:
Capital expenditures, net	(29,793	)	(537	)	-		(30,330	)
Acquisitions, net of cash acquired	-		-		-		-
Proceeds from sale of assets	14,676		3,488		-		18,164
Proceeds from redemption of strategic        investment	10,115		-		-		10,115
(Increase) decrease in long-term notes        receivable	885		-		-		885
Decrease in other assets	6,568		(3,942	)	-		2,626
Net cash (used for) provided by investing        activities	2,451		(991	)	-		1,460
Cash flows from financing activities:
Net (repayments) borrowings under Revolving       Credit Agreement (postpetition)	(12,441	)	-		-		(12,441	)
Long-term debt borrowings	3,748		94		-		3,842
Long-term debt repayments (prepetition)	-		(82	)	-		(82	)
Principal payments on prepetition debt       authorized by Bankruptcy Court	(3,017	)	-		-		(3,017	)
Other financing activities	2		(3	)	-		(1	)
Intersegment advances	(5,257	)	5,257		-		-
Net cash provided by (used for) financing          activities	(16,965	)	5,266		-		(11,699	)
Effect of exchange rate on cash and cash    equivalents	(1,070	)	-		-		(1,070	)
Net increase (decrease) in cash and cash    equivalents	17,317		(4,257	)	-		13,060
Cash and cash equivalents at beginning of year	32,600		4,989		-		37,589
Cash and cash equivalents at end of year	$                       49,917		$                   732		$                      -		$             50,649
	==========		=======		=======		=======

F-50

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Year Ended December 31, 2000
(in thousands)

	Filers		Non-filers		Elimination		Consolidated
Cash flows from operating activities:
Net losses	$                  (545,711	)	$           (129,311	)	$         129,311		$           (545,711	)
Adjustments to reconcile net losses to net cash    provided by (used for) operating activities:
Equity interest in losses of subsidiaries	129,311		-		(129,311	)	-
Loss on impairment	191,199		117		-		191,316
Depreciation and amortization	43,000		2,881		-		45,881
Provision for losses on accounts receivable	32,973		523		-		33,496
Legal and regulatory costs	1,245		-		-		1,245
(Gain) loss on sale of assets, net	(21,405	)	5		-		(21,400	)
Reorganization costs, net	225,423		110,452		-		335,875
Other, net	(18,388	)	(1,798	)	-		(20,186	)
Changes in operating assets and liabilities:
Accounts receivable	(19,886	)	1,166		-		(18,720	)
Other current assets	(6,737	)	17,766		-		11,029
Other current liabilities	1,582		(723	)	-		859
Income taxes payable	4,827		(2,712	)			2,115
Net cash provided by (used for) operating       activities before reorganization costs	17,433		(1,634	)	-		15,799
Net cash paid for reorganization costs	(17,520	)	-				(17,520	)
Net cash (used for) provided by operating       activities	(87	)	(1,634	)			(1,721	)
Cash flows from investing activities:
Capital expenditures, net	(48,236	)	(7,130	)	-		(55,366	)
Acquisitions, net of cash acquired	(974	)	-		-		(974	)
Proceeds from sale of assets held for sale	2,987		21,993		-		24,980
(Increase) decrease in long-term notes receivable	(8,024	)	1,936		-		(6,088	)
Decrease in other assets	5,536		-				5,536
Net cash (used for) provided by investing       activities	(48,711	)	16,799				(31,912	)
Cash flows from financing activities:
Net borrowings under Revolving Credit        Agreement (postpetition)	54,901		-		-		54,901
Long-term debt borrowings	6,108		3,559		-		9,667
Long-term debt repayments (prepetition)	-		(14,663	)	-		(14,663	)
Principal payments on prepetition debt       authorized by Bankruptcy Court	(3,358	)	(48	)	-		(3,406	)
Other financing activities	28		(32	)	-		(4	)
Intersegment advances	5,187		(5,187	)			-
Net cash provided by (used for) financing           activities	62,866		(16,371	)			46,495
Effect of exchange rate on cash and cash    equivalents	-		(320	)			(320	)
Net increase (decrease) in cash and cash equivalents	14,068		(1,526	)	-		12,542
Cash and cash equivalents at beginning of year	18,532		6,515		-		25,047
Cash and cash equivalents at end of year	$                     32,600		$                4,989		$                      -		$              37,589
	=========		========		=======		=======

F-51

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

(23)  Subsequent Events

(a)  Confirmation of Joint Plan of Reorganization

     On October 14, 1999, Sun and substantially all of its U.S. operating subsidiaries filed voluntary petitions for protection under chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the District of Delaware ("the Bankruptcy Court"), (case nos. 99-3657 through 99-3841, inclusive). On February 3, 2000, HoMed Convalescent Equipment, Inc. ("HoMed"), an indirect subsidiary of Sun, commenced its chapter 11 case in the Bankruptcy Court (case no. 00-00841). On February 6, 2002, the Bankruptcy Court approved the Company's joint plan of reorganization (the "Plan") and on February 28, 2002 the Company consummated the Plan. The principal provisions of the Plan are set forth below:

	Type of Claim/Security	Treatment under Plan
1.	General unsecured creditors with claims less than $50,000	To be issued cash payments at the rate of 7% of their claims
2.	General unsecured creditors with claims of $50,000 or more	To be issued an aggregate of approximately 900,000 shares (9%) of new common stock
3.	Senior bank lenders	Issued approximately 8.9 million shares of new common stock (89%) and received a cash payment of approximately $6.6 million
4.	Senior subordinated note holders	To be issued an aggregate of 200,000 shares (2%) of new common stock and warrants to purchase an additional 500,000 shares (5%)
5.	Common stock, options, warrants, convertible debt, and convertible trust issued preferred securities	Canceled with no recovery to holders

(b)  New Loan Agreements

     On February 28, 2002, the Company entered into (i) a Loan and Security Agreement with certain lenders, led by Heller Healthcare Finance, Inc. as collateral agent, and Citicorp USA, Inc., as administrative agent (the "Revolving Loan Agreement,") and (ii) a Term Loan and Note Purchase Agreement with certain lenders, led by U.S. Bank National Association as administrative and collateral agent (the "Term Loan Agreement," and together with the Revolving Loan Agreement, the "Loan Agreements"). The Revolving Loan Agreement is a $150 million three-year revolving line of credit that is secured by the Company's accounts receivable, inventory, equipment and other assets, a first priority

F-52

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 2001

pledge of the stock of the Company's subsidiaries, other than those subsidiaries providing pharmaceutical services, and a second priority pledge of the pharmaceutical services subsidiaries. The Company's borrowing availability under the Revolving Loan Agreement is limited to up to 85% of the Company's net eligible accounts receivable and up to 50% of the Company's net eligible inventory, but not to exceed $150 million. Under the Revolving Loan Agreement, depending upon the type of loan made and provided that an event of default has not occurred, the Company will pay interest at either (i) prime (or, if higher, the federal funds rate plus 0.50%) plus 2.75% (subject to certain adjustments) or (ii) the London Interbank Offered Rate plus 3.75% (subject to certain adjustments).

     The Term Loan Agreement is comprised of a three-year $20 million term loan (the "Term Loan") and a three-year $23.7 million original issue discount note (the "Discount Note" and together with the Term Loan, the "Term Debt"). The Term Debt is secured primarily by a first security pledge of the stock of the Company's subsidiaries that provide pharmaceutical services and a second priority security interest in substantially all of the Company's other assets. Under the Discount Note, the Company's borrowing availability is approximately $20.0 million. Provided that an event of Default has not occurred, interest accrues on the Term Loan at the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) plus 4.00% and (ii) 9.00%. The Company will pay interest on the Discount Note for base rate borrowings a rate of interest equal to the greater of (i) prime (or, if higher, the federal funds rate plus 0.50%) and (ii) 2.65% and for Eurodollar borrowings a rate of interest equal to the Adjusted Eurodollar Rate (as defined in the Term Loan Agreement) plus 0.50%.

     The Company used borrowings from the Loan Agreements to pay off the Company's debtor-in-possession credit facility on February 28, 2002.

(c)  Divestitures subsequent to December 31, 2001

     During the first quarter of 2002, the Company identified 13 skilled nursing facilities with 1,764 licensed beds for divestiture. The aggregate net revenues and net losses were $92.0 million and $7.7 million, respectively, for the year ended December 31, 2001.

     In March 2002, the Company sold substantially all of the assets of its SunCare respiratory therapy operations.  The aggregate sales proceeds to the Company were $0.9 million in cash.

(d)  Fresh-start accounting

     The Company's emergence from chapter 11 bankruptcy and subsequent application of fresh-start acounting will include the following:   allowed claims that are discharged will be removed from the financial statements; long-lived assets will be recorded at fair market value; and equity will be reset with no retained earnings (deficit) as of February 28, 2002. The Company expects to record goodwill in the emerged Company's consolidated financial statements. The goodwill amount has not currently been determined.

     The Company is in the process of determining the fair value of the long-lived assets; this information is expected to be available in April 2002.   The Company's first quarter 2002 consolidated financial statements will include a summary of the fresh start accounting.

F-53

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Sun Healthcare Group, Inc.:

     We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Sun Healthcare Group, Inc. (Debtor-in-Possession) and subsidiaries in this Form 10-K and have issued our report thereon dated March 18, 2002. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule identified as SCHEDULE II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

/s/  Arthur Andersen LLP     
    Arthur Andersen LLP

Albuquerque, New Mexico
March 18, 2002

1

SCHEDULE II

SUN HEALTHCARE GROUP, INC. AND SUBSIDIARIES
(Debtor-in-Possession)

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

	Column A	Column B		Column C	Column D		Column E
Description	Balance at Beginning of Period	Charged to Costs and Expenses		Additions Charged to Other Accounts	Deductions Other		Balance at End of Period
Year ended December 31, 2001:
Allowance for doubtful      accounts	$              128,106	$             22,435	(1)	$                            -	$        (76,722	)	$                   73,819
	========	=======		=========	======		=========
Notes receivable reserve	$                  1,979	$               3,537	(1)	$                       700	$                   -		$                     6,216	(2)
	========	=======		=========	======		=========
Reserve for assets held for sale	$              233,746	$             14,442		$                            -	$      (235,284	)	$                   12,904
	========	=======		=========	======		=========
Corporate restructure reserve	$                     729	$               1,064		$                            -	$             (888	)	$                        905
	========	=======		=========	======		=========
Year ended December 31, 2000:
Allowance for doubtful       accounts	$              151,841	$             33,496	(1)	$                            -	$        (57,231	)	$                 128,106
	========	=======		=========	======		=========
Notes receivable reserve	$                  6,556	$                       -		$                            -	$          (4,577	)	$                     1,979	(2)
	========	=======		=========	======		=========
Reserve for assets held for sale	$                84,522	$           288,660		$                            -	$      (139,436	)	$                 233,746
	========	=======		=========	======		=========
Corporate restructure reserve	$                  1,964	$              (1,090	)	$                            -	$             (145	)	$                        729
	========	=======		=========	======		=========
Year ended December 31, 1999:
Allowance for doubtful       accounts	$                79,015	$           118,373	(1)	$                            -	$        (45,547	)	$                 151,841
	========	=======		=========	======		=========
Exit costs for acquired       businesses	$                  4,240	$                       -		$                            -	$          (4,240	)	$                             -
	========	=======		=========	======		=========
Notes receivable reserve	$                  1,712	$               4,844	(1)	$                            -	$                    -		$                     6,556
	========	=======		=========	======		=========
Reserve for assets held for sale	$              159,828	$             85,758		$                            -	$      (161,064	)	$                   84,522
	========	=======		=========	======		=========
Corporate restructure       reserve	$                  3,138	$              27,353		$                            -	$         (28,527	)	$                     1,964
	========	=======		=========	======		=========

        (1)     Charges included in provision for losses on accounts receivable.

(2)     Included in the note receivable reserve are the following:
            $2,566 and $1,351 recorded as allowance for other receivable, net, current as of
            December 31, 2001 and 2000, respectively; and $3,650 and $628 recorded as
            allowance for note receivable, long-term as of December 31, 2001 and 2000,
            respectively.

2

EX-10

EXHIBIT 10.1

LOAN AND SECURITY AGREEMENT

among

SUN HEALTHCARE GROUP, INC., et. al
as Borrowers,

HELLER HEALTHCARE FINANCE, INC.,
as Collateral Agent and Lender

CITICORP USA, INC.
as Administrative Agent and Lender,

and

The Financial Institution(s) Listed
on the Signature Pages Hereof,

as Lenders

Dated as of February 28, 2002

TABLE OF CONTENTS

		Page
SECTION 1.	DEFINITIONS AND ACCOUNTING TERMS	1
1.1	Certain Defined Terms	1
1.2	Interpretation	2
SECTION 2.	LOANS AND COLLATERAL	2
2.1	Revolving Credit Facility	2
	(A)  Revolving Loan	2
	(B)  Borrowing Base	3
	(C)  Eligible Collateral	3
	(D)  Borrowing Mechanics	4
	(E)  Payments with Respect to the Settlement Agreement	5
	(F)  Notes	5
	(G)  Letters of Credit	5
	(1)  Maximum Amount	5
	(2)  Reminbursement	6
	(3)  Request for Letters of Credit	6
	(4)  Renewal	6
	(H)  Other Letter of Credit Provisions	6
	(1)  Obligations Absolute	6
	(2)  Nature of Lender's Duties	7
	(3)  Liability	8
	(I)  Availability of a Lender's Pro Rata Share	8
	(1)  Lender's Amounts Available on a Funding Date	8
	(2)  Lender's Failure to Fund	8
	(3)  Payments to a Defaulting Lender	8
	(4)  Defaulting Lender's Right to Vote	8
	(J)  Pricing and Structural Changes Required for Syndication	9
2.2	Interest	9
	(A)  Rate of Interest	9
	(B)  Computation and Payment of Interest	10
	(C)  Interest Laws	10
	(D)  Conversion or Continuation	11
2.3	Fees	12
	(A)  Unused Line Fee	12
	(B)  Letter of Credit Fees	12
	(C)  Prepayment Fees	12
	(D)  Collateral Management and Administrative Agent Fees	12
	(E)  Audit Fees	13
	(F)  Other Fees and Expenses	13
	(G)  Fee Letter	13

i

2.4	Payments and Prepayments	13
	(A)  Matters Relating to Cash Management	13
	(B)  Mandatory Prepayments	16
	(1)  Overadvance	16
	(2)  Prepayments from Proceeds of Asset Dispositions	16
	(3)  Prepayments for Issuance of Securities	16
	(4)  Prepayments from Tax Refunds	16
	(5)  Prepayments from Proceeds of Casualty or Condemnation	16
	(6)  Repayment from Sale of SunScript	16
	(C)  Collateralization of Lender Letters of Credit; Termination of        Commitments	17
	(D)  Payments on Business Days	17
	(E)  Application of Prepayment Proceeds	17
2.5	Term of this Agreement	17
2.6	Statements	18
2.7	Grant of Security Interest	18
	(A)  Grant of Liens in the Collateral	18
	(B)  Borrowers Remain Liable	18
	(C)  Security Agreement	19
2.8	Yield Protection	19
	(A)  Capital Adequacy and other Adjustments	19
	(B)  Increased LIBOR Funding Costs	19
2.9	Taxes	20
	(A)  No Deductions	20
	(B)  Changes in Tax Laws	20
	(C)  Foreign Leaders	21
2.10	Required Termination and Prepayment	21
2.11	Replacement of Lenders	21
	(A)  Replacement of an Affected Lender	22
	(B)  Prepayment of an Affected Lender	22
2.12	Compensation	22
2.13	Booking of LIBOR Loans	22
2.14	Assumptions Concerning Funding of LIBOR Loans	22
SECTION 3.	CONDITIONS TO LOANS	23
SECTION 4.	REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS	23
4.1	Organizations, Powers, Capitalization	23
	(A)  Organization and Powers	23
	(B)  Capitalization	23
4.2	Authorization of Borrowing, No Conflict	23

ii

4.3	Financial Condition	24
4.4	Indebtedness and Liabilities	24
4.5	Collateral Warranties and Covenants	24
	(A)  Accounts	24
	(B)  Inventory Warranties and Covenants	27
	(C)  Equipment Warranties and Covenants	27
	(D)  Chattel Paper Warranties and Covenants	27
	(E)  Instruments Warranties and Covenants	27
	(F)  Investment Property Warranties and Covenants	28
	(G)  Letter-of-Credit Rights Warranties and Covenants	28
	(H)  General Intangibles Warranties and Covenants	28
	(I)  Intellectual Property Warranties and Covenants	28
	(J)  Commercial Tort Claims Warranties and Covenants	29
	(K)  Deposit Accounts; Bank Accounts Warranties and Covenants	29
	(L)  Bailees	29
	(M)  Collateral Description; Use of Collateral	30
	(N)  Collateral Filing Requirements; Collateral Records	30
	(O)  Federal Claims	30
4.6	Names and Locations	30
4.7	Title to Properties; Liens	31
4.8	Litigation; Adverse Facts	31
4.9	Payment of Taxes	31
4.10	Performance of Agreements	31
4.11	Employee Benefit Plans	32
4.12	Broker's Fees	32
4.13	Environmental Compliance	32
4.14	Solvency	32
4.15	Disclosure	32
4.16	Insurance	32
4.17	Compliance with Laws; Government Authorizations; Consents	34
4.18	Employee Matters	34
4.19	Governmental Regulation	34
4.20	Access to Accountants and Management	34
4.21	Inspection	35
4.22	Borrower's Receipt of Payments	35
4.23	Recoupments; Overpayments	35
4.24	Reports	35
4.25	Compliance with Health Care Laws	36

iii

4.26	Funds from Restricted Grants	36
4.28	HIPAA Compliance	36
4.29	Licenses	37
4.30	Certificate of Need	37
4.31	Inactive Entities	37
4.32	Supplemental Schedules	37
Section 5.	REPORTING AND OTHER AFFIRMATIVE COVENANTS	37
5.1	Financial Statements and Other Reports	37
5.2	Endorsement; Insurance Claims	37
5.3	Maintenance of Properties	38
5.4	Further Assurances	38
5.5	Mortgages; Title Reports	38
	(A)  Title	38
	(B)  Mortgages	38
	(C)  Other Real Property	38
5.6	Use of Proceeds and Margin Security	38
5.7	Licensure; Medicaid/Medicare Cost Reports	39
5.8	Termination/Default of Contracts	39
5.9	Notice of Event of Default and Other Matters	39
5.10	Inactive Entities	39
5.11	Letters of Credit	39
SECTION 6.	FINANCIAL COVENANTS	40
SECTION 7.	NEGATIVE COVENANTS	40
7.1	Indebtedness	40
7.2	Guaranties	40
7.3	Transfers, Liens and Related Matters	41
	(A)  Transfers	41
	(B)  Liens	41
	(C)  No Negative Pledges	41
	(D)  No Restrictions on Borrower Distributions to Borrowers	42
7.4	Investments and Loans	42
7.5	Restricted Junior Payments	42
7.6	Restriction on Fundamental Changes	42
7.7	Changes Relating to Term Loan Documents	43

iv

7.8	Transactions with Affiliates	43
7.9	Conduct of Business	43
7.10	Tax Consolidations	43
7.11	Subsidiaries	43
7.12	Fiscal Year; Tax Designation	43
7.13	Use of Lenders' Name	43
7.14	Bank Accounts	43
7.15	IRS Form 8821	43
7.16	Certificates of Need	44
7.17	Sale Lease-back Transactions	44
7.18	Plan and Confirmation Order	44
SECTION 8.	DEFAULT, RIGHTS AND REMEDIES	44
8.1	Event of Default	44
	(A)  Payment	44
	(B)  Default in Other Agreements	44
	(C)  Breach of Certain Provisions	44
	(D)  Breach of Warranty	44
	(E)  Other Defaults Under Loan Documents	45
	(F)  Change in Control	45
	(G)  Involuntary Bankruptcy; Appointment of Receiver, etc.	45
	(H)  Voluntary Bankruptcy; Appointment of Receiver, etc.	45
	(I)  Liens	45
	(J)  Judgement and Attachments	46
	(K)  Dissolution	46
	(L)  Solvency	46
	(M)  Injunction	46
	(N)  Invalidity of Loan Documents	46
	(O)  Failure of Security	46
	(P)  Damage, Strike, Casualty	46
	(Q)  Licenses and Permits	46
	(R)  Forfeiture	47
	(S)  Default Under Plan and/or Confirmation Order	47
	(T)  Alteration or Revocation of Plan or Confirmation Order	47
	(U)  Term Loan Documents	47
	(V)  Material Contracts	47
8.2	Suspension of Commitments	47
8.3	Acceleration	47
8.4	Remedies	48
8.5	Appointment of Attorney-in-Fact	48

v

8.6	Limitation on Duty of Agents and Lenders with Respect to Collateral	49
8.7	Application of Proceeds	49
8.8	License of Intellectual Property	50
8.9	Waivers; Non-Exclusive Remedies	50
SECTION 9.	AGENT	50
9.1	Agent	50
	(A)  Appointment	50
	(B)  Nature of Duties	51
	(C)  Rights, Exculpation, Etc.	51
	(D)  Reliance	52
	(E)  Indemnification	52
	(F)  Lenders Includes Agents	52
	(G)  Successor Agent	52
	(1)  Resignation	52
	(2)  Appointment of Successor	53
	(3)  Successor Agent	53
	(H)  Collateral Matters	53
	(1)  Release of Collateral	53
	(2)  Confirmation of Authority; Execution of Releases	53
	(3)  Absence of Duty	54
	(I)  Agency for Perfection	54
	(J)  Exercise of Remedies	54
9.2	Notice of Default	55
9.3	Action by Agent	55
9.4	Amendments, Waivers and Consents	55
	(A)  Percentage of Lenders Required	55
	(B)  Specific Purpose or Intent	55
	(C)  Failure to Give Consent; Replacement of Non-Consenting        Lender	56
9.5	Assignments and Participations in Loans	56
	(A)  Assignments	56
	(B)  Participations	56
	(C)  No Relief of Obligations; Cooperation; Ability to Make LIBOR        Loans	57
	(D)  Security Interests; Assignment to Affiliates	57
	(E)  Recording of Assignments	57
9.6	Set Off and Sharing of Payments	58
9.7	Disbursement of Funds	58
9.8	Settlements, Payments and Information	58
	(A)  Revolving Advances and Payments; Fee Payments	58
	(1)  Fluctuation of Revolving Loan Balance	58

vi

	(2)  Settlement Dates	59
	(3)  Settlement Definitions	59
	(4)  Settlement Payments	59
	(B)  Return of Payments	60
	(1)  Recovery after Non-Receipt of Expected Payment	60
	(2)  Recovery of Returned Payment	60
9.9	Discretionary Advances	60
SECTION 10.	MISCELLANEOUS	60
10.1	Expenses and Attorneys' Fees	60
10.2	Indemnity	61
10.3	Notices	62
10.4	Survival of Representations and Warranties and Certain Agreements	63
10.5	Indulgence Not Waiver	63
10.6	Marshaling; Payments Set Aside	63
10.7	Entire Agreement	63
10.8	Severability	63
10.9	Lenders' Obligations Several; Independent Nature of Lenders' Rights	64
10.10	Headings	64
10.11	APPLICABLE LAW	64
10.12	Successors and Assigns	64
10.13	No Fiduciary Relationship; No Duty; Limitation of Liabilities	64
	(A)  No Fiduciary Relationship	64
	(B)  No Duty	64
	(C)  Limitation of Liabilities	64
10.14	CONSENT TO JURISDICTION	65
10.15	WAIVER OF JURY TRIAL	65
10.16	Construction	65
10.17	Counterparts; Effectiveness	65
10.18	Confidentiality	66
10.19	Publication	66
10.20	Intercreditor Agreement	66
SECTION 11.	DEFINITIONS AND ACCOUNTING TERMS	66
11.1	Certain Defined Terms	66
11.2	Accounting Terms	83
11.3	Other Definitional Provisions	84

vii

EXHIBITS
SCHEDULES
RIDERS

viii

LOAN AND SECURITY AGREEMENT

          This LOAN AND SECURITY AGREEMENT is dated as of February 28, 2002 and entered into among SUN HEALTHCARE GROUP, INC., a Delaware corporation (the "Company") and each direct or indirect Subsidiary of the Company identified on the signature pages of this Agreement as a borrower (individually "Borrower"; all Borrowers together with the Company, collectively, "Borrowers"), the financial institution(s) listed on the signature pages hereof, and their respective successors and Eligible Assignees (each a "Lender" and, collectively, "Lenders"), CITICORP USA, INC., a Delaware corporation (in its individual capacity as a Lender, "CITICORP", and in its capacity as an administrative agent, "Administrative Agent"), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (in its individual capacity as a Lender, "Heller", and in its capacity as a collateral agent "Collateral Agent"; Administrative Agent and Collateral Agent, collectively, "Agents" or "Joint Bookrunners").

RECITALS

                    WHEREAS, on October 14, 1999, Borrowers filed voluntary petitions under Chapter 11 of the Bankruptcy Code and became debtors in jointly administered Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") as Case No. 99-3657 (MFW) (Jointly Administered) (each a "Case" and, collectively, the "Cases");

                    WHEREAS, after a hearing held by the Bankruptcy Court on February 4-5, 2002 (the "Confirmation Hearing"), and by its "Findings Of Fact, Conclusions Of Law, And Order Under 11 U.S.C. Section 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming Debtors' Joint Plan Of Reorganization" dated February 6, 2002 (the "Confirmation Order"), the Bankruptcy Court confirmed the "Debtors' Joint Plan Of Reorganization Under Chapter 11 Of The Bankruptcy Code", dated as of December 8, 2001 (as amended) (as confirmed by the Confirmation Order, the "Plan");

                    WHEREAS, Borrowers desire that Lenders extend a revolving credit facility of up to ONE HUNDRED FIFTY MILLION DOLLARS ($150,000,000.00), in accordance with the material terms of the term sheet entered into evidence at the Confirmation Hearing and approved by the Bankruptcy Court in the Confirmation Order, to enable Borrowers to fund their obligations under the Plan and to provide working capital financing funds for other general corporate purposes; and

                    WHEREAS, to secure Borrowers' obligations under the Loan Documents, Borrowers shall grant to Collateral Agent, for the benefit of the Agents and Lenders, a first priority security interest in and lien upon all of Borrowers' personal property (except the SunScript Stock, as to which Borrower shall grant a second priority security interest and lien) and certain of the Borrowers' real property.

                    NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrowers, Agents and Lenders agree as follows:

SECTION 1. DEFINITIONS AND ACCOUNTING TERMS

          1.1     Certain Defined Terms. Capitalized terms not otherwise defined in this Agreement and the accounting terms used in this Agreement shall have the meanings set forth in Section 11 of this Agreement.

          1.2     Interpretation.

                  (A)     The definitions in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require.

                  (B)     Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time.

SECTION 2. LOANS AND COLLATERAL

          2.1     Revolving Credit Facility.

                  (A)     Revolving Loan.

                             (1)     Each Lender, severally, but not jointly, agrees to lend to Borrowers from time to time such Lender's Pro Rata Share of each advance under the Revolving Loan Commitment. The aggregate amount of the Revolving Loan Commitment shall not exceed at any time ONE HUNDRED FIFTY MILLION DOLLARS ($150,000,000). Subject to subsection 2.1(A)(2), amounts borrowed under this Agreement may be borrowed, repaid and reborrowed at any time prior to the Termination Date.

                             (2)     The Borrowers may elect to permanently reduce or partially terminate the Revolving Loan Commitment by written notice to the Agents and payments of any amounts due in accordance with subsection 2.3(C). In addition, the Borrowers may at any time prepay amounts owing pursuant to this Agreement, with no corresponding reduction or termination of the Revolving Loan Commitment, in which case all such prepaid amounts may be reborrowed by the Borrowers in accordance with the terms of this Agreement.

                             (3)     Each of the Borrowers, jointly and severally, will be obligated in respect of the aggregate principal amount of all Loans, and the aggregate amount of credit available hereunder to any of the Borrowers at any time shall be determined taking into account all Loans outstanding and all outstanding Lender Letters of Credit, regardless of which of the Borrowers may have received the proceeds of the Loans or the benefit of any of the Lender Letters of Credit. By executing this Agreement, each of the Borrowers confirms to the other parties to this Agreement that the Company shall (and has been duly appointed by each of the Borrowers to) act as agent for the Borrowers for all purposes of the Loan Documents, including, without limitation, (i) requesting Loans, (ii) requesting the issuance of Lender Letters of Credit, (iii) allocating (to the extent permitted herein) the proceeds of Loans, and (iv) taking any other action or receiving any communication on behalf of such Borrower in connection with the Loan Documents. Each of the Lenders and the Agents shall be entitled to deal with any Borrower through the Company and to rely on any instructions or other communications from the Company on behalf of any Borrower. None of the Lenders or Agents shall have any responsibility to any Borrower for dealing with the Borrowers as provided in this subsection 2.1(A)(3), and the Obligations of each of the Borrowers to the Lenders shall not be affected by any matter relating to acts or omissions of the Company relating to the Loans, requests for Lender Letters of Credit or otherwise as agent for the

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Borrowers hereunder. Notwithstanding the appointment of the Company as agent for the Borrowers hereunder, the Agents and the Lenders shall in their sole discretion be entitled to deal directly with any Borrower for all purposes of the Loan Documents.

                  (B)     Borrowing Base. Except as otherwise provided herein, no Lender shall have any obligation to make a Revolving Advance to the extent such Revolving Advance would cause the Revolving Loans (after giving effect to any immediate application of the proceeds of such Revolving Advance) to exceed the Maximum Revolving Loan Amount.

                   "Maximum Revolving Loan Amount" means, as of any date of determination, the lesser of (a) the Revolving Loan Commitments of all Lenders less the sum of the Letter of Credit Reserve and (b) the Borrowing Base less the sum of the Letter of Credit Reserve.

                   "Borrowing Base" shall mean on any day an amount that is equal to the sum of (a) eighty-five percent (85%) of the then outstanding Eligible Accounts plus (b) the lesser of (1) $10,000,000 and (2) fifty percent (50%) of the aggregate value of Eligible Inventory, less (c) such reserves as the Agents, in their reasonable business discretion, may deem appropriate from time to time, including, without limitation, reserves with respect to all recoupments and overpayments whether or not disclosed pursuant to subsection 4.23.

                  (C)     Eligible Collateral.

                   "Eligible Accounts" shall mean the net aggregate amount of the Accounts of Borrowers that (1) are generated in the ordinary course of business of the Borrowers arising or resulting from the sale of goods or the rendition of Medical Services, (2) conform to the representations, warranties and covenants contained herein and (3) at all times continue to be acceptable to Collateral Agent, less, without duplication, the sum of the following: (i) any Account or any portion of an Account that is payable (A) by an individual beneficiary, recipient or subscriber and not directly to a Borrower by a Medicaid/Medicare Account Debtor, an insurer, a managed care organization or the Veterans Administration or (B) by an Insurer that is not acceptable to Collateral Agent in its sole discretion; (ii) any Account that remains unpaid more than the Exclusion Level Number of Days (as defined below) past the claim or invoice date; (iii) any Account that is subject to any defense, set-off, counterclaim, deduction, discount, credit, chargeback, freight claim, allowance, or adjustment of any kind (whether issued, owing, granted or outstanding); (iv) any Account arising from a sale of goods, if (A) any of such goods have been returned, rejected, lost, or damaged or have not been shipped to the Account Debtor or its designee or (B) the sale was not an absolute sale, or the sale was made on consignment or on approval or on a sale-or-return basis, or the sale was made subject to any other repurchase or return agreement; (v) any Account arising from the performance of services, if the services have not been actually performed or the services were undertaken in violation of any law; (vi) any Account that is subject to a Lien other than those certain Permitted Encumbrances described in clauses (a), (b), (c), (d), (g) and (i) of the definition of Permitted Encumbrances; (vii) except to the extent the Account Debtor is acceptable to Collateral Agent in its sole discretion, any Account due from an Account Debtor that is (A)  the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law, (B) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts or (C) financially unacceptable to Collateral Agent or has a credit rating unacceptable to Collateral Agent; (viii) any Account that is evidenced by chattel paper or an instrument of any kind, or that has been reduced to judgment; (ix) any Account due from an Account Debtor with a

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principal place of business or chief executive office outside the United States; (x) any Account due from an Account Debtor that is an Affiliate or Subsidiary of any Borrower; (xi) all Accounts due from any Account Debtor other than a Medicaid/Medicare Account Debtor if (A) fifty percent (50%) or more of the Accounts due from such Account Debtor are not Eligible Accounts at the relevant time or (B) twenty percent (20%) of the aggregate Dollar amount of all Accounts due from such Account Debtor are unpaid more than the Exclusion Level Number of Days from the invoice date; (xii) all of the Accounts due from any Account Debtor other than a Medicaid/Medicare Account Debtor, if such Accounts exceed twenty percent (20%) of the net amount of all Eligible Accounts at the time (including Medicaid/Medicare Account Debtors); (xiii) any Account or any portion of an Account arising from the performance of Medical Services performed by or for any Borrower prior to the transfer or other disposition of, or of the management of, any of its Facilities or lease or other interest therein, unless Collateral Agent, in its sole discretion is satisfied that the terms of such transfer or disposition are sufficiently protective of the interests of the Agents and the Lenders in such Account that such Accounts may continue to be considered for purposes of the Borrowing Base; (xiv) contras; and (xv) such reserves as the Agents (in their reasonable business discretion) may deem appropriate from time to time. For purposes of the foregoing, "Exclusion Level Number of Days" shall mean, in relation to Accounts for Medical Services, accounts aged less than or equal to the number of days specified below for the Facilities in the business segments of the Facilities identified below, and in relation to all other Accounts, ninety (90) days:

                       SunBridge - - 120 days
                       SunDance - - 120 days
                       SunScript - - 60 days

                   "Eligible Inventory" shall mean, at any time, the gross amount of the inventory of the Borrowers that conforms to the representations, warranties and covenants contained herein and continues to be acceptable to Collateral Agent in its reasonable discretion, less any (1) work-in-progress, (2) supplies other than raw material, (3) goods not present in one of the locations identified in Schedule 2.01, (4) goods that are not, or within six (6) months will cease to be, salable in accordance with generally accepted criteria applicable to such goods at the time, (5) goods returned or rejected by the customers of any Borrower other than goods that are undamaged and resalable in the ordinary course of business, (6) goods to be returned to the suppliers of any Borrower, (7) goods in transit to third parties (other than the agents or any such distribution center) and (8) reserves as the Collateral Agent, in its reasonable business discretion, may deem appropriate from time to time. Eligible Inventory shall be valued at the lower of cost or market on a first-in first-out basis or another basis acceptable to Collateral Agent in its sole discretion.

                  (D)     Borrowing Mechanics. (1) LIBOR Loans made on any Funding Date shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in excess of such amount. (2) On any day when any Borrower desires a Revolving Advance under this subsection 2.1, such Borrower shall give Administrative Agent written or telephonic notice of the proposed borrowing by 12:00 p.m. (noon) New York time on the Funding Date of a Base Rate Loan less than $10,000,000, written or telephonic notice by 12:00 p.m. (noon) New York time one (1) Business Day prior to the Funding Date of a Base Rate Loan equal to or greater than $10,000,000, and three (3) Business Days in advance of the Funding Date of a LIBOR Loan, which notice shall specify the proposed Funding Date (which shall be a Business Day), whether such Loans shall consist of Base Rate Loans or LIBOR Loans, and, for LIBOR Loans, the Interest Period applicable thereto. Any such telephonic notice shall be confirmed with a Notice of Borrowing on the same day as such request. Neither Administrative Agent

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nor Lender shall incur any liability to any Borrower for acting upon any telephonic notice or a Notice of Borrowing that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of such Borrower or for otherwise acting in good faith under this subsection 2.1(D). Neither Administrative Agent nor Lender will be required to make any advance pursuant to any telephonic or written notice or a Notice of Borrowing, unless all of the terms and conditions set forth in Section 3 (including the Conditions Rider, attached hereto and made a part hereof, have been satisfied and Administrative Agent has also received the most recent Borrowing Base Certificate and other documents required under Section 5 and the Reporting Rider, attached hereto and made a part hereof, by 12:00 p.m. (noon) New York time on or prior to the date of such funding request. Each Advance shall be deposited by wire transfer in immediately available funds in such account as such Borrower may from time to time designate to Administrative Agent in writing. The becoming due of any amount required to be paid under this Agreement or any of the other Loan Documents as principal, Lender Letter of Credit reimbursement obligation, accrued interest, fees, compensation or any other amounts shall be deemed irrevocably to be an automatic request by Borrowers for a Revolving Advance, which shall be a Base Rate Loan on the due date of, and in the amount required to pay (as set forth on Agent's books and records), such principal, Lender Letter of Credit reimbursement obligation, accrued interest, fees, compensation or any other amounts unless such amount shall have been paid by Borrowers on or prior to the date thereof.

                  (E)     Payments with Respect to the Settlement Agreement. If an Event of Default exists and during such time a default under the Settlement Agreement shall exist, thereafter Lenders shall have the right, but not the obligation, exercisable in their sole and absolute discretion, to make Revolving Advances at the time and in the amounts of the payments Borrowers are obligated to make under the Settlement Agreement, and to deliver the proceeds of any such Revolving Advance directly to the payees under the Settlement Agreement. Any Revolving Advances made by Lenders under this subsection 2.1 (E) shall be treated for all purposes as a Revolving Advance under this Agreement. Lender's rights under this subsection 2.1 (E) are in addition to, and do not affect or limit, any of the other rights of Lenders or the obligations of Borrowers under this Agreement.

                  (F)     Notes. Borrowers shall execute and deliver to each Lender Notes with appropriate insertions to evidence such Lender's Commitments. In the event of an assignment under subsection 9.5, Borrowers shall, upon surrender and cancellation of the assigning Lender's Notes, issue new Notes to reflect the interest held by the assigning Lender and its Eligible Assignee.

                  (G)     Letters of Credit. The Revolving Loan Commitments may, in addition to Revolving Advances, be utilized, upon the request of any Borrower, for (1) the issuance of Letters of Credit by Administrative Agent or its Affiliates, or (2) the issuance by Administrative Agent of risk participations to banks to induce such banks to issue Bank Letters of Credit for the account of such Borrower (each of (1) and (2) above a "Lender Letter of Credit"). Each Lender shall be deemed to have purchased a participation in each Lender Letter of Credit issued on behalf of any Borrower in an amount equal to its Pro Rata Share thereof. In no event shall any Lender Letter of Credit be issued to the extent that the issuance of such Lender Letter of Credit would cause the sum of the Letter of Credit Reserve (after giving effect to such issuance), plus the Revolving Loan to exceed the lesser of (1) the Borrowing Base and (2) the Revolving Loan Commitments.

                         (1)     Maximum Amount. The aggregate amount of Letter of Credit Liability with respect to all Lender Letters of Credit outstanding at any time shall not exceed $50,000,000.

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                         (2)     Reimbursement. Borrowers shall be irrevocably and unconditionally obligated forthwith without presentment, demand, protest or other formalities of any kind, to reimburse Administrative Agent or the issuer for any amounts paid with respect to a Lender Letter of Credit including all fees, costs and expenses paid to any bank that issues a Bank Letter of Credit. Each Borrower hereby authorizes and directs Administrative Agent, at Administrative Agent's option, to debit such Borrower's account (by increasing the Revolving Loan) in the amount of any payment made with respect to any Lender Letter of Credit. In the event that Administrative Agent elects not to debit such Borrower's account and such Borrower fails to reimburse Administrative Agent in full on the date of any payment under a Lender Letter of Credit, Administrative Agent shall promptly notify each Lender of the unreimbursed amount of such payment together with accrued interest thereon and each Lender, on the next Business Day, shall deliver to Administrative Agent an amount equal to its respective participation in same day funds. The obligation of each Lender to deliver to Administrative Agent an amount equal to its respective participation pursuant to the foregoing sentence shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3. In the event any Lender fails to make available to Administrative Agent the amount of such Lender's participation in such Lender Letter of Credit, Administrative Agent shall be entitled to recover such amount on demand from such Lender together with interest on such amount calculated at the Base Rate.

                         (3)     Request for Letters of Credit. Any Borrower desiring the issuance of a Letter of Credit shall give Administrative Agent at least two (2) Business Days prior notice specifying the date a Lender Letter of Credit is to be issued, identifying the beneficiary and describing the nature of the transactions proposed to be supported thereby. The notice shall be accompanied by the form of the Letter of Credit being requested. Any Letter of Credit which such Borrower requests must be in such form, be for such amount, contain such terms and support such transactions as are reasonably satisfactory to Administrative Agent. The expiration date of each Lender Letter of Credit shall be on a date which is at least thirty (30) days prior to the Termination Date, unless otherwise agreed to by Administrative Agent.

                         (4)     Renewal. Except for any letters of credit outstanding on the Closing Date, no Lender Letter of Credit or Bank Letter of Credit may be issued containing any provision allowing for automatic renewal unless the provisions of subsection 5.11 shall have been met.

                  (H)     Other Letter of Credit Provisions.

                         (1)     Obligations Absolute. The obligation of any Borrower to reimburse Administrative Agent or any Lender for payments made under, and other amounts payable in connection with, any Lender Letter of Credit shall be unconditional and irrevocable and shall be paid under all circumstances strictly in accordance with the terms of this Agreement including, without limitation, the following circumstances:

                                (a)     any lack of validity or enforceability of any Lender Letter of Credit, or any other agreement;

                                (b)     the existence of any claim, set-off, defense or other right which Borrower, any of its Subsidiaries or Affiliates or any other Person may at any time have against any beneficiary or

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transferee of any Lender Letter of Credit (or any Persons for whom any such transferee may be acting), Agents, any Lender, Issuing Lender, or any other Person, whether in connection with this Agreement, any other Loan Document, or any other related or unrelated agreements or transactions;

                                (c)     any draft, demand, certificate or any other document presented under any Lender Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;

                                (d)     any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Borrowers or any of their Subsidiaries;

                                (e)     any breach of this Agreement or any other Loan Document by any party thereto;

                                (f)     the occurrence and continuance of an Event of Default (it being understood and agreed that any such payment by the Borrowers of their obligations hereunder in respect of any such Lender Letter of Credit shall be without prejudice to, and shall not constitute a waiver of, any rights any of the Borrowers may have or may acquire against the issuer or the beneficiary of such Lender Letter of Credit); or

                                (g)     payment under any Lender Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Lender Letter of Credit; provided that, in the case of any such payment by Administrative Agent or a Lender under any Lender Letter of Credit, Administrative Agent or such Lender has not acted with gross negligence or willful misconduct in determining that the demand for payment under such Lender Letter of Credit complies on its face with any applicable requirements for a demand for payment under such Lender Letter of Credit.

                         (2)     Nature of Lender's Duties. As between any Lender that issues a Lender Letter of Credit (an "Issuing Lender"), on the one hand, and all Lenders on the other hand, all Lenders assume all risks of the acts and omissions of, or misuse of any Lender Letter of Credit by the beneficiary thereof. In furtherance and not in limitation of the foregoing, neither Agents nor any Issuing Lender shall be responsible: (a) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document by any party in connection with the application for and issuance of any Lender Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (b) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Lender Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (c) for failure of the beneficiary of any Lender Letter of Credit to comply fully with conditions required in order to demand payment thereunder; provided that, in the case of any payment under any such Lender Letter of Credit, any Issuing Lender has not acted with gross negligence or willful misconduct in determining that the demand for payment under any such Lender Letter of Credit complies on its face with any applicable requirements for a demand for payment thereunder; (d) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (e) for errors in interpretation of technical terms; (f) for any loss or delay in the transmission or otherwise of any document required in order to make a payment under any such Lender Letter of Credit; (g) for the credit

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of the proceeds of any drawing under any such Lender Letter of Credit; and (h) for any consequences arising from causes beyond the control of Agents or any Lender as the case may be.

                         (3)     Liability. In furtherance and not in limitation of the specific provisions hereinabove set forth, any action taken or omitted by either Administrative Agent or any Lender under or in connection with any Lender Letter of Credit, if taken or omitted in good faith (and not as a result of gross negligence or willful misconduct of the Administrative Agent or such Lender), shall not put Administrative Agent or any Lender under any resulting liability to Borrowers or any other Lender.

                  (I)     Availability of a Lender's Pro Rata Share

                         (1)     Lender's Amounts Available on a Funding Date. Unless Administrative Agent receives written notice from a Lender on or prior to any Funding Date that such Lender will not make available to Administrative Agent as and when required such Lender's Pro Rata Share of any requested Loan or Advance, Administrative Agent may assume that each Lender will make such amount available to Administrative Agent in immediately available funds on the Funding Date and Administrative Agent shall, in reliance upon such assumption, make available to the requesting Borrower(s) on such date a corresponding amount.

                         (2)     Lender's Failure to Fund. A Defaulting Lender shall pay interest to Administrative Agent at the Federal Funds Effective Rate on the Defaulted Amount from the Business Day following the applicable Funding Date of such Defaulted Amount until the date such Defaulted Amount is paid to Administrative Agent. A notice of Administrative Agent submitted to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is not paid when due to Administrative Agent, Administrative Agent, at its option, may notify Borrowers of such failure to fund and, in the event that Administrative Agent shall have funded such Defaulted Amount on behalf of such defaulting Lender, upon demand by Administrative Agent, Borrowers shall pay such Lenders unpaid amount to Administrative Agent for Administrative Agent's account, together with interest thereon for each day elapsed since the date of such borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loan made by the other Lenders on such Funding Date. The failure of any Lender to make available any portion of its Commitment on any Funding Date or to fund its participation in a Lender Letter of Credit shall not relieve any other Lender of any obligation hereunder to fund such Lender's Commitment on such Funding Date or to fund any such participation, but no Lender shall be responsible for the failure of any other Lender to honor its Commitment on any Funding Date or to fund any participation to be funded by any other Lender.

                         (3)     Payments to a Defaulting Lender. Notwithstanding any provision to the contrary contained in this Agreement or the other Loan Documents, Administrative Agent shall not be obligated to transfer to a Defaulting Lender any payment made by Borrowers to Administrative Agent or any amount otherwise received by Administrative Agent for application to the Obligations nor shall a Defaulting Lender be entitled to the sharing of any interest, fees or payments hereunder.

                         (4)     Defaulting Lender's Right to Vote. Notwithstanding any provision to the contrary contained in this Agreement or the other Loan Documents for purposes of voting or consenting to matters with respect to (a) the Loan Documents or (b) any other matter concerning the Loans, a Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitments and outstanding Loans and Advances shall be deemed to be zero.

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                  (J)     Pricing and Structural Changes Required for Syndication. Notwithstanding anything to the contrary set forth herein (but subject to compliance with Section 3.1 of the Intercreditor Agreement), Joint Bookrunners may change pricing, terms or make structural changes to the Loans and this Agreement (without affecting the total amount of Commitments hereunder) within one hundred twenty (120) days after the Closing Date if Joint Bookrunners determine that such changes are reasonably required in order to ensure successful syndication of the credit facility on terms that are acceptable to Joint Bookrunners, and each Borrower agrees to execute such amendments and other agreements as Joint Bookrunners may request to modify this Agreement for such purposes; provided, however, that (i) no such change shall reduce the maximum aggregate amount of the Revolving Loan Commitment as set forth in subsection 2.1(A) and (ii) no such change shall increase the Base Rate Margin or the LIBOR Margin by more than one-half of one percent (0.50%) per annum or require the payment of additional fees.

          2.2     Interest.

                  (A)     Rate of Interest. From the date the Loans are made and the date the other Obligations become due the Loans and the other Obligations shall bear interest at the applicable rates set forth below (collectively, the "Interest Rate"):

                         (1)     The Revolving Loan and all other Obligations for which no other interest rate is specified shall bear interest as follows:

                                 (a)     If a Base Rate Loan, then at the sum of the Base Rate plus the Base Rate Margin applicable to Revolving Loans.

                                 (b)     If a LIBOR Loan, then at the sum of the LIBOR plus the LIBOR Margin applicable to Revolving Loans.

               All Loans made on the Closing Date shall be either Base Rate Loans or LIBOR Loans with an Interest Period of one (1) month, and shall remain so until the earlier of ninety (90) days after the Closing Date or the date Collateral Agent notifies Borrowers that it has completed the primary syndication of the Loans. Thereafter, subject to the provisions of subsection 2.1(D), Borrowers shall designate to Administrative Agent whether a Loan shall be a Base Rate or LIBOR Loan at the time a Notice of Borrowing is given pursuant to subsection 2.1(D). Such designation by Borrowers may be changed from time to time pursuant to subsection 2.2(D). If on any day a Loan or a portion of any Loan is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the basis for determining the rate of interest or if LIBOR has been specified and no LIBOR quote is available, then for that day that Loan or portion thereof shall bear interest determined by reference to the Base Rate.

               "Base Rate Margin" shall mean (1) as of the Closing Date, two and three-quarters percent (2.75%) per annum, and (2) thereafter, as of September 30, December 31, March 31, June 30 of each year (each, an "Adjustment Date"), commencing on September 30, 2002, the Base Rate Margin shall be adjusted, if necessary, to the applicable percent per annum set forth in the pricing table set forth on Schedule 2.2(A) hereto corresponding to the Total Indebtedness to EBITDA Ratio for the trailing twelve (12) month period ending on the last day of the most recently completed calendar quarter prior to the

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applicable Adjustment Date (each such period, a "Calculation Period") calculated in the manner described in the Financial Covenants Rider, hereto attached and made a part hereof.

               "LIBOR Margin" shall mean (1) as of the Closing Date, three and three-quarters percent (3.75%) per annum, and (2) thereafter, as of each Adjustment Date, commencing on September 30, 2002, the LIBOR Margin shall be adjusted, if necessary, to the applicable percent per annum set forth in the pricing table set forth on Schedule 2.2(A) hereto corresponding to the Total Indebtedness to EBITDA Ratio for the applicable Calculation Period.

               If Borrowers shall fail to deliver a Compliance and Pricing Certificate within ten (10) Business Days of the date required pursuant to the Reporting Rider, effective as of the tenth (10^th) Business Day following the date on which such Compliance and Pricing Certificate was due pursuant to the Reporting Rider, each applicable Base Rate Margin and each applicable LIBOR Margin shall be conclusively presumed to equal the highest applicable Base Rate Margin and the highest applicable LIBOR Margin specified in the pricing table set forth on Schedule 2.2(A) hereto until the date of receipt by the Agents of the Compliance and Pricing Certificate.

               After the occurrence and during the continuance of an Event of Default (1) the Loans and all other Obligations shall, at the election of Administrative Agent or Requisite Lenders, bear interest at a rate per annum equal to two percent (2%) plus the applicable Interest Rate (the "Default Rate"), (2) each LIBOR Loan shall automatically convert to a Base Rate Loan at the end of any applicable Interest Period and (3) no Loans may be converted to LIBOR Loans. If an Event of Default has occurred and is continuing on an Adjustment Date, no reduction in the Base Rate Margin or LIBOR Margin shall occur on such Adjustment Date.

                  (B)     Computation and Payment of Interest. Interest on the Loans and all other Obligations shall be computed on the daily principal balance on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. In computing interest on any Loan, the date of funding of the Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a LIBOR Loan, the date of conversion of such LIBOR Loan to such Base Rate Loan, shall be included; and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan, or with respect to a Base Rate Loan being converted to a LIBOR Loan, the date of conversion of such Base Rate Loan to such LIBOR Loan, shall be excluded; provided that if a Loan is repaid on the same day on which it is made, one (1) day's interest shall be paid on that Loan. Interest on Base Rate Loans and all other Obligations other than LIBOR Loans shall be payable to Administrative Agent for the benefit of Lenders monthly in arrears on the first day of each month, on the date of any prepayment of Loans, and at maturity, whether by acceleration or otherwise. Interest on LIBOR Loans shall be payable to Administrative Agent for the benefit of Lenders on the last day of the applicable Interest Period for such Loan, on the date of any prepayment of the Loans, and at maturity, whether by acceleration or otherwise.

                  (C)     Interest Laws. Notwithstanding any provision to the contrary contained in this Agreement or any other Loan Document, Borrowers shall not be required to pay, and neither Agent nor any Lender shall be permitted to collect, any amount of interest in excess of the maximum amount of interest permitted by applicable law ("Excess Interest"). If any Excess Interest is provided for or determined by a court of competent jurisdiction to have been provided for in this Agreement or in any other Loan Document, then in such event: (1) the provisions of this subsection shall govern and control;

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(2) Borrowers shall not be obligated to pay any Excess Interest; (3) any Excess Interest that Administrative Agent or any Lender may have received hereunder shall be, at such Lender's option, (a) applied as a credit against the outstanding principal balance of the Obligations or accrued and unpaid interest (not to exceed the maximum amount permitted by law), (b) refunded to the payor thereof, or (c) any combination of the foregoing; (4 ) the interest rate(s) provided for herein shall be automatically reduced to the maximum lawful rate allowed from time to time under applicable law (the "Maximum Rate"), and this Agreement and the other Loan Documents shall be deemed to have been and shall be, reformed and modified to reflect such reduction; and (5) no Borrowers shall have any action against any Agent or any Lender for any damages arising out of the payment or collection of any Excess Interest. Notwithstanding the foregoing, if for any period of time interest on any Obligations is calculated at the Maximum Rate rather than the applicable rate under this Agreement, and thereafter such applicable rate becomes less than the Maximum Rate, the rate of interest payable on such Obligations shall remain at the Maximum Rate until each Lender shall have received the amount of interest which such Lender would have received during such period on such Obligations had the rate of interest not been limited to the Maximum Rate during such period.

                  (D)     Conversion or Continuation. Subject to the other provisions of this Agreement, including, without limitation, satisfying the Conditions set forth in Section 3, Borrowers shall have the option to (1) convert at any time all or any part of outstanding Loans equal to $1,000,000 and integral multiples of $100,000 in excess of that amount from Base Rate Loans to LIBOR Loans or (2) upon the expiration of any Interest Period applicable to a LIBOR Loan, to (a) continue all or any portion of such LIBOR Loan equal to $1,000,000 and integral multiples of $100,000 in excess of that amount as a LIBOR Loan or (b) convert all or any portion of such LIBOR Loan to a Base Rate Loan. The succeeding Interest Period(s) of such continued or converted Loan shall commence on the last day of the Interest Period of the Loan to be continued or converted; provided that no outstanding Loan may be continued as, or be converted into, a LIBOR Loan, when any Event of Default or Default has occurred and is continuing.

              Borrowers shall deliver a Notice of Borrowing with respect to any such conversion/continuation to Administrative Agent no later than 12 p.m. (noon) New York time at least three (3) Business Days in advance of the proposed conversion/continuation date. The Notice of Borrowing with respect to such conversion/continuation shall certify: (1) the proposed conversion/continuation date which shall be a Business Day; (2) the amount of the Loan to be converted/continued; (3) the nature of the proposed conversion/continuation; (4) in the case of conversion to, or a continuation of, a LIBOR Loan, the requested Interest Period; (5) that no Default or Event of Default has occurred and is continuing or would result from the proposed conversion/continuation; and (6) that all conditions to make Loans as set forth in Section 3 and in the Conditions Rider have been satisfied.

               In lieu of delivering a Notice of Borrowing with respect to any such conversion/continuation, the Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2(D) (in such telephonic notice such Borrower shall certify to the items set forth above with respect to the Notice of Borrowing); provided that such telephonic notice shall be promptly confirmed in writing by delivery of a Notice of Borrowing (in form and substance described herein) with respect to such conversion/continuation to Administrative Agent on or before the proposed conversion/continuation date. Once given, such Borrower shall be bound by such telephonic notice. Upon the expiration of an Interest Period for a LIBOR Loan, in the absence of a new

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Notice of Borrowing or a telephonic notice submitted to Administrative Agent not less than three (3) Business Days prior to the end of such Interest Period, the LIBOR Loan then maturing shall be automatically converted to a Base Rate Loan.

               No Agent or any Lender shall incur any liability to any Borrower in acting upon any telephonic notice or a Notice of Borrowing referred to above that Administrative Agent believes in good faith to have been given by an officer or other person authorized to act on behalf of such Borrower or for otherwise acting in good faith under this subsection 2.2(D).

          2.3     Fees.

                  (A)     Unused Line Fee. Borrowers shall pay to Agent, for the benefit of Lenders, an annual fee in an amount equal to the Unused Daily Balance multiplied by one-half of one percent (0.50%) per annum. Such fee shall be calculated on the basis of a three hundred sixty (360) day year for the actual number of days elapsed and shall be payable monthly in arrears on the first day of each month following the Closing Date.

                  (B)     Letter of Credit Fees. Borrowers shall pay to Administrative Agent a fee with respect to the Lender Letters of Credit (1) for the benefit of all Lenders with a Revolving Loan Commitment (based on their respective Pro Rata Share) in the amount of the average daily amount of Letter of Credit Liability outstanding during such month multiplied by three and one-half percent (3.50%) per annum, until the first Adjustment Date and thereafter by the applicable percentage specified as the "Letter of Credit Fee Rate" in the pricing table on Schedule 2.2(A) hereto as in effect on the date on which the fee is payable and (2) for the account of Administrative Agent a fronting fee for each Lender Letter of Credit issued or obtained by Administrative Agent from the date of issuance to the date of termination equal to the average daily amount of Letter of Credit Liability with respect to such Lender Letters of Credit outstanding during such month multiplied by one-half of one percent (0.50%) per annum. Such fees will be calculated on the basis of a three hundred sixty (360) day year for the actual number of days elapsed and will be payable monthly in arrears on the first day of each month. Borrowers shall also reimburse Administrative Agent for any and all fees and expenses, if any, paid by Administrative Agent or any Lender to the issuer of any Bank Letter of Credit.

                  (C)     Prepayment Fees. If Borrowers prepay the Obligations and permanently reduce or partially terminate the Revolving Loan Commitment pursuant to and in accordance with subsection 2.1(A)(2) prior to the end of the second Loan Year, then at the time of such prepayment and permanent reduction or partial termination, as the case may be, Borrowers shall pay to the Administrative Agent, for the benefit of all Lenders with an outstanding principal balance due or Commitment outstanding under the Loan being prepaid at the time of such prepayment, as compensation for the costs of being prepared to make funds available to Borrowers under this Agreement, and not as a penalty, an amount determined by multiplying the amount of the Revolving Loan Commitment that is then being permanently reduced or terminated on such date by two percent (2%) upon such termination or reduction during the first Loan Year; and one percent (1%) upon such termination or reduction during the second Loan Year.

                  (D)     Collateral Management and Administrative Agent Fees.

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                            (1)     Borrowers shall pay to Collateral Agent, for its own account, a fully earned, nonrefundable collateral management fee in an amount equal to FOUR HUNDRED THOUSAND DOLLARS ($400,000) per annum (the "Collateral Management Fee"). Such Collateral Management Fee shall be payable in twelve (12) equal monthly installments in advance beginning on the Closing Date, next on April 1, 2002 and thereafter on the first (1^st) day of each calendar month until all of the Obligations shall have been paid in full and the Revolving Loan Commitment shall have been completely terminated in accordance with the provisions of this Agreement.

                            (2)     Borrowers shall pay to Administrative Agent, for the account of Administrative Agent, an annual fee in an amount equal to ONE HUNDRED THOUSAND DOLLARS ($100,000) per annum (the "Administrative Agent Fee"). Such Administrative Agent Fee shall be paid annually in advance beginning on the Closing Date and thereafter on each anniversary of the Closing Date until all Obligations shall have been paid in full and the Revolving Loan Commitment shall have been completely terminated in accordance with the provisions of this Agreement.

                  (E)     Audit Fees. Borrowers agree to pay all reasonable out-of-pocket expenses of Collateral Agent and any firm or individual(s) engaged by Collateral Agent in connection with any audit of Borrowers' operations or records undertaken pursuant to this Agreement.

                  (F)     Other Fees and Expenses. Borrowers shall pay to Administrative Agent, for its own account, all charges for returned items and all other bank charges incurred by Administrative Agent, as well as Administrative Agent's standard wire transfer charges for each wire transfer made under this Agreement.

                  (G)     Fee Letter. Borrowers shall pay to Heller and CITICORP, each individually, the fees specified in that certain letter agreement, dated on or about February 27, 2002, by and among the Company, the Collateral Agent and the Administrative Agent in the amounts and at the times specified therein.

          2.4     Payments and Prepayments.

                  (A)     Matters Relating to Cash Management.

                            (1)     Borrowers shall establish and maintain at their expense the following accounts, which Borrowers hereby represent are in existence as of the Closing Date:

                                      (a)     depository accounts into which collections of Accounts of any Facility are paid directly or deposited manually by any Borrower (collectively, the "Facility Deposit Accounts"), which Facility Deposit Accounts (including the bank at which such Facility Deposit Accounts are maintained) are identified on Schedule 2.4(A)(1);

                                      (b)     depository accounts into which certain collections of Accounts, including Accounts of Medicare Account Debtors, are paid directly by electronic funds transfer (collectively, the "Medicare Deposit Accounts"), which Medicare Deposit Accounts (including the bank at which such Medicare Deposit Accounts are maintained) are identified on Schedule 2.4(A)(1);

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                                      (c)     depository accounts into which certain collections of Accounts, including Accounts of Medicaid and TRICARE Account Debtors, are paid directly by electronic funds transfer (collectively, the "Medicaid Deposit Accounts" ), which Medicaid Deposit Accounts (including the bank at which such Medicaid Deposit Accounts are maintained) are identified on Schedule 2.4(A)(1);

                                      (d)     depository accounts into which certain collections of Accounts of or with respect to CareerStaff Unlimited, Inc. (and its Subsidiaries) (collectively, "CareerStaff") are paid directly by electronic funds transfer or deposited manually (collectively, the "CareerStaff Deposit Accounts"), which CareerStaff Deposit Accounts (including the bank at which such CareerStaff Deposit Accounts are maintained) are identified on Schedule 2.4(A)(1); and

                                      (e)     that certain collection account with First Union National Bank ("Collecting Bank") into which collections of Accounts paid or deposited into the depository accounts described in subparagraph (a) above are transferred on a daily basis on each business day of the Collecting Bank (such collection account, the "Primary Collection Account)."

In addition, Borrowers shall establish and maintain at their expense any other depository account that shall be required by Collateral Agent for the purpose of collecting payments or deposits relating to any other Accounts of Borrower, which additional Accounts, if any, shall also be subject to the provisions of this subsection 2.4(A) (any such Accounts, collectively with the Accounts described in subsection 2.4(A)(1)(a), (b), (c) and (d), the "Borrower Deposit Accounts" and the bank(s) at which any such Borrower Deposit Accounts are maintained, collectively, the "Depository Banks").

                            (2)     Borrowers shall ensure that all collections of Accounts (a) that are paid by the applicable Account Debtor electronically (by electronic funds transfer, wire transfer or otherwise) are paid directly into one of the Borrower Deposit Accounts or a Collection Account (as defined below), (b) that are paid by check are (i) in the case of checks sent by any Medicaid or other Account Debtor which are required by law, rule or regulation to be sent directly to Borrower, sent to the applicable Borrower and immediately deposited by such Borrower in one of the Borrower Deposit Accounts or (ii) in the case of checks sent by any Account Debtor that are not required by law, rule or regulation to be sent directly to Borrower, sent directly to a Depository Bank for deposit in a Borrower Deposit Account. Borrowers will not accept nor direct any payment of any Account of Borrowers in any manner other than as described above.

                            (3)     On each Business Day of the applicable Depository Banks, Borrowers shall ensure that all collections of Accounts on deposit in the Borrower Deposit Accounts described in subsection 2.4(A)(1)(a), are transferred into the Collection Account. Borrowers shall further ensure that, on each Business Day of the Collecting Bank, all collections of Accounts (x) then on deposit having then been transferred to the Primary Collection Account and (y) on deposit in the Borrower Deposit Accounts described in subsections 2.4(A)(1)(c) and 2.4(A)(1)(d) are, in each case, transferred into a collection account maintained by Borrower with the Collecting Bank (such account, the "Intermediate Collection Account" and, together with the Primary Collection Account, the "Collection Accounts"). Borrower shall further ensure that, on each Business Day of the Collecting Bank, all collections of Accounts then on deposit or having then been transferred to the Intermediate Collection Account are transferred to a depository account maintained by Collateral Agent at First Union National Bank or such other financial institution as may be determined by Agents from time to time in their reasonable discretion, by written notices to the Borrowers and the Collecting Bank (the "Concentration Account").

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                            (4)     Borrowers shall execute, with each of the Depository Banks and the Collecting Bank, three party lockbox agreements substantially in the applicable form(s) attached to this Agreement as Exhibit A (collectively, the "Lockbox Agreements") and such other agreements, forms or documents as Agents or any Depository Bank or the Collecting Bank may require; provided, that Borrowers shall in any event execute Lockbox Agreements with (a) the Collecting Bank, and each of the Depository Banks identified on Part 2 of Schedule 2.4(A)(1) prior to and as a condition to the Closing, and (b) with all other Depository Banks by the date that is no later than thirty (30) days after the Closing. Such Lockbox Agreements, including but not limited to the instructions to the applicable Depository Bank or Collecting Bank set forth therein, may be modified only as expressly set forth in such Lockbox Agreements, and Borrowers shall not (a) close or modify the arrangements regarding the Collection Accounts; (b) close or modify the arrangements regarding any Borrower Deposit Account, except Borrowers may close a Borrower Deposit Account so long as (i) Borrowers shall have notified Agents and (ii) Borrowers shall have arranged that, if such Borrower Deposit Account was subject to a Lockbox Agreement, all Accounts previously paid to such Borrower Deposit Account shall be paid to a newly established or existing Borrower Deposit Account that is subject to a Lockbox Agreement, or to one of the Collection Accounts; or (c) establish or open any Deposit Account into which collections of Accounts are deposited or directed to be deposited, other than as permitted by subsection (b) immediately above or as directed, or consented to by Collateral Agent in writing.

                            (5)     Administrative Agent shall apply, on a daily basis, all collections of Accounts transferred into the Concentration Account pursuant to this subsection 2.4(A) towards amounts owing by the Borrowers under this Agreement. Such transfers will (solely for purposes of computing interest) be credited against the relevant Obligations of the Borrowers on the (a) second Business Day after receipt of such collections of Accounts if received no later than 1:00 p.m. (New York City time) or (b) third Business Day after receipt of such collections of Accounts if received after 1:00 p.m. (New York City time).

                            (6)     Except as otherwise expressly provided in this Agreement, Administrative Agent shall, for value at the time specified above in this provision, apply the funds credited to the Concentration Account, first, to any expenses, indemnification or Fees owing pursuant to Article 2 or Article 10, second, to interest on the Loans that has become due and remains unpaid, and, third, to reduce the outstanding balance of the Loans (to the Base Rate Loans first), pro rata among the Loans of all the Lenders; provided, however, that any interest which is paid by Borrowers on funds which have been transferred from the Collecting Account to the Concentration Account but not yet credited against the relevant Obligations pursuant to the provisions of this subsection shall be retained by Administrative Agent and Collateral Agent and shared equally between them as compensation for their services.

                            (7)     If as the result of collections of Accounts pursuant to the terms and conditions of this subsection 2.4(A), a credit balance exists with respect to the Concentration Account, such credit balance shall accrue interest in favor of the Borrowers for each day following the first Business Day after its deposit thereto until the date of its application or release pursuant to this Agreement at a rate per annum equal to the Base Rate for such day minus a spread equal to three and one-half percent (3.5%) (but such interest shall accrue only if an Event of Default has not occurred and is continuing in each such day). Such interest shall be calculated on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. All such interest, when credited to the Concentration Account from time to

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time, shall be held therein and applied pursuant to this Agreement as Collateral. If any interest in excess of the interest referred to in this provision is actually paid on the funds held in the Concentration Account

from time to time, it shall be retained by Collateral Agent for its own benefit as compensation for its services.

                  (B)     Mandatory Prepayments.

                            (1)     Overadvance. At any time that the Revolving Loan exceeds the Maximum Revolving Loan Amount, Borrowers shall immediately repay the Revolving Loan to the extent necessary to reduce the aggregate principal balance to an amount equal to or less than the Maximum Revolving Loan Amount.

                            (2)     Prepayments from Proceeds of Asset Dispositions. Immediately upon receipt by any Borrower or any of its Subsidiaries of proceeds of any Asset Disposition (in one or a series of related transactions), which proceeds exceed $2,000,000 (it being understood that if the proceeds exceed $2,000,000, the entire amount and not just the portion above $2,000,000 shall be subject to this subsection 2.4(B)(2)), Borrowers shall prepay the Obligations in an amount equal to such proceeds. All such prepayments shall be applied to the Loans in accordance with subsection 2.4(E). Notwithstanding anything to the contrary in the foregoing, the Borrowers shall not be required to prepay the Obligations in the event that any Borrower receives proceeds in respect of the Campus Transaction or the THCI Turnover.

                            (3)     Prepayments from Issuance of Securities. Immediately upon the receipt by any Borrower of the proceeds of the issuance of equity securities in excess of $1,000,000 individually or in the aggregate (other than the issuance of equity securities in connection with any conversion of indebtedness under and in accordance with the Plan or Confirmation Order), Borrowers shall prepay the Loans in an amount equal to such excess proceeds, net of underwriting discounts and commissions and other reasonable costs associated therewith. All such prepayments shall be applied to the Loans in accordance with subsection 2.4(E).

                            (4)     Prepayments from Tax Refunds. Immediately upon the receipt by any Borrower or any of their Subsidiaries of the proceeds of any federal, state or local tax refund in excess of $1,000,000 individually or in the aggregate, Borrowers shall prepay the Loans in an amount equal to such excess proceeds. All such prepayments shall be applied to the Loans in accordance with subsection 2.4(E).

                            (5)     Prepayments from Proceeds of Casualty or Condemnation. Immediately upon receipt by any Borrower of any insurance proceeds arising from damage or casualty, or any proceeds arising from any condemnation, which proceeds exceed $1,000,000 individually or in the aggregate, Borrowers shall prepay the Loans in an amount equal to such excess proceeds, net of any reasonable costs incurred in connection therewith. All such prepayments shall be applied to the Loans in accordance with subsection 2.4(E).

                            (6)     Repayments from Sale of SunScript.

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                                    a.     Immediately upon receipt by Lenders of the proceeds of the Option Price such proceeds shall be applied to prepay the Loans, to permanently reduce the Commitment, and to pay the prepayment fee in accordance with subsection 2.3(C).

                                   b.     Immediately upon the sale of the SunScript Stock (and, following the proper completion of the Partial Purchase Option, to the extent Term Collateral Agent may elect to sell or otherwise transfer all or any portion of the SunScript Assets following the execution upon such Assets), then to the extent that the aggregate proceeds of any such sale(s) or transfer(s) are in excess of the amount necessary to repay the obligations owing under the Term Loan Agreement in full, such excess proceeds shall be paid immediately to the Collateral Agent and such proceeds shall be applied to prepay the Loans in accordance with subsection 2.4(E)

                  (C)     Collateralization of Lender Letters of Credit; Termination of Commitments. In the event that the entire Revolving Loan Commitment is terminated at a time that any Lender Letters of Credit are outstanding, Borrowers shall immediately cause the Administrative Agent and each Lender to be released from all liability under any Lender Letters of Credit or, at Borrowers' option, Borrowers shall (1) deposit with Administrative Agent for the benefit of all Lenders with a Revolving Loan Commitment cash or a back-to-back letter of credit satisfactory to the Administrative Agent in an amount equal to one hundred and five percent (105%) of the aggregate outstanding Letter of Credit Reserve to be available to Administrative Agent to reimburse payments of drafts drawn under such Lender Letters of Credit and pay any fees and expenses related thereto and (2) prepay the fees payable under subsection 2.3(B) with respect to such Lender Letters of Credit for the full remaining terms of such Lender Letters of Credit. Upon termination of any such Lender Letter of Credit, the unearned portion of such prepaid fee attributable to such Lender Letter of Credit shall be refunded to Borrowers.

                  (D)     Payments on Business Days. Whenever any payment to be made hereunder shall be stated to be due on a day that is not a Business Day, the payment may be made on the next succeeding Business Day and such extension of time shall be included in the computation of the amount of interest or fees due hereunder.

                  (E)     Application of Prepayment Proceeds. With respect to the prepayments described in subsections 2.4(B)(2), 2.4(B)(3), 2.4(B)(4), 2.4(B)(5), and 2.4(B)(6)(b) such prepayments shall be applied, at the election of the Company on written notice to the Agents, (i) to reduce the outstanding principal balance of the Revolving Loans but not as a permanent reduction of the Revolving Loan Commitment or (ii) in accordance with subsection 2.1(A)(2), to permanently reduce the Revolving Commitment with respect to such mandatory prepayment in accordance with subsection 2.1. Considering each type of Loan being prepaid separately, any such prepayment shall be applied first to Base Rate Loans of the type required to be prepaid before application to LIBOR Loans of the type required to be prepaid.

          2.5     Term of this Agreement. This Agreement shall be effective from the Closing Date to and including the Termination Date. To the extent not terminated earlier in accordance with this Agreement, the outstanding Commitments hereunder shall terminate upon the Termination Date and all Obligations shall become immediately due and payable without notice or demand. Notwithstanding any termination, until all Obligations have been fully paid and satisfied, Collateral Agent, on behalf of itself and Lenders, shall be entitled to retain security interests in and liens upon all Collateral, and following such termination, Borrowers shall secure any outstanding Lender Letter of Credit in accordance with

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subsection 2.4(C). Even after payment of all Obligations hereunder, Borrowers' obligation to indemnify Collateral Agent and each Lender in accordance with the terms hereof shall continue.

          2.6     Statements. Administrative Agent shall render a monthly statement of account to Borrowers within twenty (20) days after the end of each month. Such statement of account shall be deemed conclusive unless Borrowers make written objection thereto within forty-five (45) days from the date such statement is mailed to Borrowers. Administrative Agent shall record in its books and records, including computer records, (a) all Loans, interest charges and payments thereof, (b) all Letter of Credit Liability, (c) the charging and payment of all fees, costs and expenses and (d) all other debits and credits pursuant to this Agreement. The balance in the loan accounts shall constitute presumptive evidence, absent manifest error, of the accuracy of the information contained therein; provided, however, that any failure by Administrative Agent to so record shall not limit or affect the Borrowers' obligation to pay.

          2.7     Grant of Security Interest.

                  (A)     Grant of Liens in the Collateral.To secure the payment and performance of the Obligations, including all renewals, extensions, restructurings and refinancings of any or all of the Obligations, Borrowers hereby grant to Collateral Agent, for the benefit of Agents and Lenders, a continuing first priority security interest in, lien and mortgage in and to, right of setoff against and collateral assignment of all of Borrowers' personal property and all rights to such personal property, and Mortgaged Property, in each case, whether now owned or existing or hereafter acquired or arising and regardless of where located (all being collectively referred to as the "Collateral") including all: (1) Accounts; (2) Chattel Paper; (3) Commercial Tort Claims, including those specified on Schedule 2.7(A); (4) Deposit Accounts and cash and other monies and property of Borrower in the possession or under the control of Agent, any Lender or any participant of any Lender in the Loans; (5) Documents; (6) Equipment; (7) Fixtures; (8) General Intangibles (including Intellectual Property); (9) Goods; (10) Instruments; (11) Inventory; (12) Investment Property; (13) Letter-of-Credit Rights and Supporting Obligations; (14) other personal property whether or not subject to the UCC; and (15) all other rights to payment for money or funds advanced or sold whether or not arising out of the use of a credit or charge card together with all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to or for use with any of the property described above or are otherwise necessary or helpful in the collection thereof or realization thereon; and Proceeds and products of all or any of the property described above; provided, however, that the Collateral Agent's lien on the SunScript Stock shall be a second priority lien, subject only to the prior lien of the Term Collateral Agent.

                  (B)     Borrowers Remain Liable. Anything herein to the contrary notwithstanding: (1) Borrowers shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement or the other Loan Documents had not been executed; (2) the exercise by Agents of any of the rights under this Agreement or the other Loan Documents shall not release Borrowers from any of their duties or obligations to the parties under the contracts and agreements included in the Collateral; (3) neither Agents nor any Lender shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement or the other Loan Documents, nor shall Agents nor any Lender be obligated to perform any of the obligations or duties of Borrowers thereunder or to take any action to collect or enforce any claim for payment assigned under this Agreement or the other Loan Documents; and (4) neither Agents nor any Lender shall have any liability

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in contract or tort for Borrowers' acts or omissions with respect to the agreements included in the Collateral, unless such acts or omissions occur under protest by the applicable Borrower pursuant to written direction of any Agent or Lender, which direction constitutes gross negligence or willful misconduct on the part of such Agent or Lender.

                  (C)     Security Agreement. This Agreement shall constitute a security agreement as that term is used in the UCC in effect in the jurisdiction(s) in which Borrowers are organized and in the jurisdiction(s) in which the Collateral is situated.

                          Borrowers hereby irrevocably authorize Lender to file, in applicable UCC jurisdictions initial financing statements or amendments or continuations thereto relating to the Collateral as described in this Agreement at any time and from time to time in accordance with this Agreement and subject to the Intercreditor Agreement. Borrowers agree to furnish promptly upon request all information required for the sufficiency or filing office acceptance of any such initial financing statement or amendment thereto by the UCC of such jurisdiction. The Borrowers hereby ratify all UCC filings relating to the Collateral as described in this Agreement made prior to the date hereof and authorizes such filings as if made as of the date of this Agreement.

          2.8     Yield Protection.

                  (A)     Capital Adequacy and Other Adjustments. In the event any Lender shall have determined that the adoption after the date hereof of any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), from any central bank or governmental agency or body having jurisdiction, does or shall have the effect of increasing the amount of capital, reserves or other funds required to be maintained by such Lender or any corporation controlling such Lender and thereby reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder, then Borrowers shall within fifteen (15) days after notice and demand from such Lender (together with the certificate referred to in the next sentence and with a copy to Administrative Agent) pay to Administrative Agent, for the account of such Lender, additional amounts sufficient to compensate such Lender for such reduction. A certificate as to the amount of such cost and showing the basis of the computation of such cost submitted by such Lender to Borrowers shall, absent manifest error, be final, conclusive and binding for all purposes.

                  (B)     Increased LIBOR Funding Costs. If, after the date hereof, the introduction of, change in or interpretation of any law, rule, regulation, treaty or directive would impose or increase reserve requirements (other than as taken into account in the definition of LIBOR) or otherwise increase the cost to any Lender of making or maintaining a LIBOR Loan, then Borrowers shall from time to time within fifteen (15) days after notice and demand from such affected Lenders (together with the certificate referred to in the next sentence and with a copy to Administrative Agent) pay to Administrative Agent, for the account of such affected Lenders, additional amounts sufficient to compensate such Lenders for such increased cost. A certificate as to the amount of such cost and showing the basis of the computation of such cost submitted by such affected Lenders to Borrowers and Administrative Agent shall, absent manifest error, be final, conclusive and binding for all purposes.

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          2.9     Taxes.

                  (A)     No Deductions. Any and all payments or reimbursements made hereunder shall be made free and clear of and without deduction for any and all taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes, levies, imposts, deductions, charges or withholdings and all liabilities with respect thereto referred to herein as "Tax Liabilities"; excluding, however, taxes imposed on the net income of any Lender or any Agent by the jurisdiction under the laws of which such Agent or such Lender is organized or doing business or any political subdivision thereof and taxes imposed on its net income by the jurisdiction of such Agent's or such Lender's applicable lending office or any political subdivision). If Borrowers shall be required by law to deduct any such Tax Liabilities from or in respect of any sum payable hereunder to any Agent or any Lender, then the sum payable hereunder shall be increased as may be necessary so that, after making all required deductions, such Agent or such Lender receives an amount equal to the sum it would have received had no such deductions been made.

                  (B)     Changes in Tax Laws. In the event that, subsequent to the Closing Date, (1) any changes in any existing law, regulation, treaty or directive or in the interpretation or application thereof, (2) any new law, regulation, treaty or directive enacted or any interpretation or application thereof, or (3) compliance by Lender with any request or directive (whether or not having the force of law) from any governmental authority, agency or instrumentality:

                  (a)     does or shall subject any Agent or Lender to any tax of any kind whatsoever with respect to this Agreement, the other Loan Documents or any Loans made or Lender Letters of Credit issued hereunder, or change the basis of taxation of payments to such Agent or Lender of principal, fees, interest or any other amount payable hereunder (except for net income taxes, or franchise taxes imposed in lieu of net income taxes, imposed generally by federal, state or local taxing authorities with respect to interest or commitment or other fees payable hereunder or changes in the rate of tax on the overall net income of such Agent or Lender); or

                  (b)     does or shall impose on any Agent or Lender any other condition or increased cost in connection with the transactions contemplated hereby or participations herein; and the result of any of the foregoing is to increase the costs to such Agent or Lender of issuing any Lender Letter of Credit or making or continuing any Loan hereunder, as the case may be, or to reduce any amount receivable hereunder;

then, in any such case, Borrowers shall promptly pay to such Agent or Lender, upon its notice and demand, any additional amounts necessary to compensate such Agent or Lender, on an after-tax basis, for such additional cost or reduced amount receivable, as determined by such Agent or Lender with respect to this Agreement or the other Loan Documents; provided that if any such Lender or Agent has a lending office in a jurisdiction that does not impose such taxes, then, upon the Company's request, such Agent or Lender agrees to use commercially reasonable efforts to cause such payments or reimbursement to be made to such office. If any Agent or Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify Borrowers of the event by reason of which such Agent or Lender shall become so entitled (with any such Lender concurrently notifying such Agent). A certificate as to any additional amounts payable pursuant to the foregoing sentence, together with supporting documentation, submitted by any Agent or Lender to Borrowers shall, absent manifest error, be final, conclusive and binding for all purposes.

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                  (C)     Foreign Lenders. Each Lender organized under the laws of a jurisdiction outside the United States (a "Foreign Lender") as to which payments to be made under this Agreement are exempt from United States withholding tax or are subject to United States withholding tax at a reduced rate under an applicable statute or tax treaty shall provide to Borrowers and Administrative Agent (1) a properly completed and executed Internal Revenue Service Form W-8BEN or Form W-8ECI or other applicable form, certificate or document prescribed by the Internal Revenue Service of the United States of America certifying as to such Foreign Lender's entitlement to such exemption or reduced rate of withholding with respect to payments to be made to such Foreign Lender under this Agreement, (a "Certificate of Exemption"), or (2) a letter from any such Foreign Lender stating that it is not entitled to any such exemption or reduced rate of withholding (a "Letter of Non-Exemption"). Prior to becoming a Lender under this Agreement and within fifteen (15) days after a reasonable written request of Borrowers or Administrative Agent from time to time thereafter, each Foreign Lender that becomes a Lender under this Agreement shall provide a Certificate of Exemption or a Letter of Non-Exemption to Borrowers and Administrative Agent. If the form provided by a Lender at the time such Lender first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Tax Liabilities" as defined in subsection 2.9(A).

                     If a Foreign Lender is entitled to an exemption with respect to payments to be made to such Foreign Lender under this Agreement (or to a reduced rate of withholding) and does not provide a Certificate of Exemption to Borrowers and Administrative Agent within the time periods set forth in the preceding paragraph, Borrowers shall withhold taxes from payments to such Foreign Lender at the applicable statutory rates, and Borrowers shall not be required to pay any additional amounts as a result of such withholding; provided, however, that all such withholding shall cease upon delivery by such Foreign Lender or a Certificate of Exemption to Borrowers and Administrative Agent.

          2.10     Required Termination and Prepayment. If on any date any Lender shall have reasonably determined (which determination shall be final and conclusive and binding upon all parties) that the making or continuation of its LIBOR Loans has become unlawful or impossible by compliance by such Lender in good faith with any law, governmental rule, regulation or order (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), then, and in any such event, that Lender shall promptly give written notice (or by telephone if confirmed in writing within one (1) Business Day) to Borrowers and Agents of that determination. Subject to prior withdrawal of a Notice of Borrowing or prepayment of LIBOR Loans, the obligation of such Lender to make or maintain its LIBOR Loans during any such period shall be terminated at the earlier of the termination of the Interest Period then in effect or when required by law and Borrowers shall no later than the termination of the Interest Period in effect at the time any such determination pursuant to this subsection 2.10 is made or, earlier when required by law, repay or prepay LIBOR Loans together with all interest accrued thereon or convert LIBOR Loans to Base Rate Loans.

          2.11     Replacement of Lenders. Within fifteen (15) days after receipt by any Borrower of: (a) written notice and demand from any Lender for payment of additional costs as provided in subsection 2.8 or subsection 2.9, or (b) written notice of any Lender's inability to make LIBOR Loans as provided in subsection 2.10, (any such Lender demanding such payment or having such inability being referred to herein as an "Affected Lender"), Borrowers may, at their option notify Administrative Agent and such Affected Lender of its intention to take one of the actions set forth herein in subparagraphs (A) or (B) below.

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                  (A)     Replacement of an Affected Lender. Borrowers may obtain, at Borrowers' expense, a replacement Lender ("Replacement Lender") for an Affected Lender, which Replacement Lender shall be reasonably satisfactory to Agents. In the event Borrowers obtain a Replacement Lender that will purchase all outstanding Obligations owed to such Affected Lender and assume its Commitments hereunder within ninety (90) days following notice of Borrowers' intention to do so, the Affected Lender shall sell and assign its Loans and Commitments to such Replacement Lender in accordance with the provisions of subsection 9.5; provided, however, Borrowers have in any case where such replacement occurs as the result of a demand for payment of certain costs pursuant to subsection 2.8 or subsection 2.9, paid all increased costs for which such Affected Lender is entitled to under subsection 2.8 or subsection 2.9 through the date of such sale and assignment; or

                  (B)     Prepayment of an Affected Lender. Borrowers may prepay in full all outstanding Obligations owed to an Affected Lender and terminate such Affected Lender's Commitments. Borrowers shall, within ninety (90) days following notice of their intention to do so, prepay in full all outstanding Obligations owed to such Affected Lender, including such Affected Lender's increased costs for which it is entitled to reimbursement under this Agreement through the date of such prepayment, and terminate such Affected Lender's Commitments.

          2.12     Compensation. Borrowers shall promptly compensate Administrative Agent for the benefit of Lenders (Administrative Agent's calculation of such amounts shall, absent manifest error, be conclusive and binding upon all parties hereto), for any losses, expenses and liabilities including, without limitation, any loss (including interest paid) sustained by such Lender in connection with the re-employment of funds: (a) if for any reason (other than a default by any Lender) a borrowing of any LIBOR Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request of borrowing (confirmed in writing) by Borrowers; (b) if any prepayment of any of its LIBOR Loans occurs on a date that is not the last day of an Interest Period applicable to that Loan (regardless of the source of such prepayment and whether voluntary, by acceleration or otherwise); (c) if any prepayment of any of its LIBOR Loans is not made on any date specified in a notice of prepayment given by Borrowers; or (d) as a consequence of any other failure by Borrowers to repay its LIBOR Loans when required by the terms of this Agreement; provided, however, during the period while any such amounts have not been paid, Administrative Agent may, in its sole discretion, (i) in accordance with subsection 2.4(A), elect to make a Revolving Advance for such amount pursuant to subsection 2.1(D) or (ii) reserve an equal amount from amounts otherwise available to be borrowed under the Revolving Loan.

          2.13     Booking of LIBOR Loans. Each Lender may make, carry or transfer LIBOR Loans at, to, or for the account of, any of its branch offices or the office of an affiliate of such Lender.

          2.14     Assumptions Concerning Funding of LIBOR Loans. Calculation of all amounts payable to each Lender under subsection 2.12 shall be made as though each Lender had actually funded its relevant LIBOR Loan through the purchase of a LIBOR deposit bearing interest at LIBOR in an amount equal to the amount of that LIBOR Loan and having maturity comparable to the relevant Interest Period and through the transfer of such LIBOR deposit from an offshore office to a domestic office in the United States of America; provided, however, each Lender may fund each of its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be utilized only for the calculation of amounts payable under subsection 2.12.

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SECTION 3. CONDITIONS TO LOANS

          The obligations of Agents and each Lender to make Loans and the obligation of Administrative Agent or any Lender to issue Lender Letters of Credit on the Closing Date and on each Funding Date are subject to satisfaction of all of the terms and conditions set forth in this Agreement and in the Conditions Rider, attached hereto and incorporated herein by reference.

SECTION 4. REPRESENTATIONS, WARRANTIES AND CERTAIN COVENANTS

          To induce Agents and each Lender to enter into the Loan Documents, to make and to continue to make Loans and to issue and to continue to issue Lender Letters of Credit or risk participations to the banks that issue Bank Letters of Credit, the Company represents, warrants and covenants on behalf of itself and the other Borrowers (and each of the other Borrowers, jointly and severally, accepts responsibility for such representations and warranties) to each Agent and Lender that the following statements are and will be true, correct and complete and, unless specifically limited, shall remain so for so long as any of the Commitments hereunder shall be in effect and until indefeasible payment in full, in cash, of all Obligations and termination of all Lender Letters of Credit:

          4.1     Organization, Powers, Capitalization.

                  (A)     Organization and Powers. Each of the Borrowers is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and qualified to do business in each jurisdiction where such qualification is required except where failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. Each Borrower has all requisite power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted and to enter into each Loan Document to which it is a party.

                  (B)     Capitalization. Except as set forth on Schedule 4.1(B), each Borrower (other than the Company) is a direct or indirect Subsidiary of the Company. The authorized and the issued capital stock of each of the Borrowers and each of their respective Subsidiaries (except for the Inactive Entities) is as set forth on Schedule 4.1(B), including all preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from any Borrower of any shares of capital stock or other securities of any such entity. All issued and outstanding shares of capital stock of each of the Borrowers are duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens other than (1) as to the Company only, any pledge of the Company's capital stock by its shareholders, (2) Liens granted in favor of the Collateral Agent for the benefit of Agents and Lenders and (3) Liens granted in favor of the Term Administrative Agent for the benefit of the Term Administrative Agent and the Term Creditors (as defined in the Intercreditor Agreement), and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. Each Borrower will promptly notify Lender of any change in its ownership or corporate structure.

          4.2     Authorization of Borrowing, No Conflict. Each of the Borrowers has the power and authority to incur the Obligations and to grant security interests in the Collateral. On the Closing Date, the execution, delivery and performance of the Loan Documents by each Borrower signatory thereto will have been duly authorized by all necessary corporate and shareholder action. The execution, delivery and performance by each Borrower of each Loan Document to which it is a party and the consummation

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of the transactions contemplated thereby do not contravene any applicable law, the corporate charter or bylaws or other organizational documents of any Borrower or any material agreement or order by which any Borrower or any Borrower's property is bound. This Agreement and the other Loan Documents are the legal, valid and binding obligations of the applicable Borrowers respectively, each enforceable against the Borrowers, as applicable, in accordance with their respective terms.

          4.3     Financial Condition. All financial statements concerning the Company and its Subsidiaries (a) furnished on or before the Closing Date to any Agent or any Lender by the Company in connection with this Agreement (except for the financial statements or financial reports dated February 11, 2002), and (b) furnished subsequent to the Closing Date to any Agent or any Lender pursuant to this Agreement have been prepared in accordance with GAAP consistently applied throughout the periods involved (except as disclosed therein) and present fairly the financial condition of Persons covered thereby as at the dates thereof and the results of their operations for the periods then ended. The Pro Forma was prepared by Borrowers based on the unaudited consolidated balance sheet of Borrowers dated October 31, 2001. The Projections delivered by Borrowers will be prepared in light of the past operations of the business of Borrowers and their Subsidiaries, and such Projections will represent the good faith estimate of Borrowers concerning the most probable course of their business as of the date such Projections are delivered.

          4.4     Indebtedness and Liabilities. As of the Closing Date, except as set forth on Schedule 4.4, no Borrower has any (a) Indebtedness or other obligations for borrowed money except as reflected on the Pro Forma; or (b) Liabilities other than as reflected on the Pro Forma or otherwise as incurred in the ordinary course of business following the date of the Pro Forma. The Company, or if applicable the other Borrowers, shall promptly deliver copies of all notices given or received by any Borrower with respect to noncompliance with any term or condition of the Term Loan Documents or other Indebtedness in a principal amount in excess of $5,000,000, and shall promptly notify Administrative Agent of any default or event of default with respect to any Term Loan Document or other Indebtedness in a principal amount in excess of $5,000,000 which default or event of default gives the holders of such Indebtedness the right to accelerate the maturity thereof.

          4.5     Collateral Warranties and Covenants.

                  (A)     Accounts. Lenders may rely, in determining which Accounts are Eligible Accounts, on all statements and representations made by Borrowers in writing with respect to any Accounts. Unless otherwise indicated in writing to Lenders, with respect to each Eligible Account, Borrowers represent that:

                       (1)     the Account is genuine and in all respects what it purports to be, and is not evidenced by a judgment.

                       (2)     the Account arises from an actual, completed and bona fide sale and delivery of goods or rendition of Medical Services and other services to patients or customers, made by a Borrower in the ordinary course of its business, in accordance with the terms and conditions of all purchase orders, contracts, certifications, participations, certificates of need, provider or supplier agreements, or other documents relating thereto and forming a part of the contract between the relevant Borrower and Account Debtor;

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                       (3)     the Account is for a liquidated amount maturing as stated in a claim or invoice covering the sale or rendition of Medical Services or other services that give rise to the Account, a copy of which has been furnished or is available to the Collateral Agent;

                       (4)     except as previously disclosed in writing by the Borrowers to the Agents, none of the Borrowers has knowledge of any information that would lead it to believe that any of the following statements is incorrect: (i) the Account Debtor under the Account had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (ii) such Account Debtor under the Account is solvent;

                       (5)     except as previously disclosed in writing by the Borrowers to the Agents, none of the Borrowers has knowledge of any information that would lead it to believe that any of the following statement is incorrect: there are no proceedings or actions which are threatened or pending against any Account Debtor under the Account which might result in any material adverse change in such Account Debtor's financial condition or the collectibility of any account owed by such Account Debtor;

                      (6)     the Account has been billed and forwarded to the Account Debtor for payment in accordance with applicable laws and in compliance and conformity with any and all requisite procedures, requirements and regulations governing payment by such Account Debtor with respect to such Account, and such Account if due from a Medicaid/Medicare Account Debtor, TRICARE or the Veterans Administration is properly payable directly to a Borrower in the amount stated as the balance of such Account;

                       (7)     the goods, services and inventory sold giving rise to the Account are the exclusive property of the Borrowers owed such Accounts and are not and will not be subject to any lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever, other than Liens in Accounts in favor of any landlord that has entered into a subordination agreement or estoppel certificate in form and substance satisfactory to the Agents;

                       (8)     the invoices evidencing the Account are in the name of the Borrower to which such Account is owed;

                       (9)     the patients or customers of the Borrowers have accepted the goods or services the sale or rendition of which gave rise to the Account, owe and are obligated to pay the full amounts stated the related invoices according to their terms, without dispute, offset, defense, counterclaim or contra, except for disputes and other matters arising in the ordinary course of business of which the Borrowers have advised the Agents;

                       (10)     to the Borrower's knowledge, there are no facts, events or occurrences which in any material way impair the validity or enforceability of any Accounts or reduce the amount payable thereunder from the face amount of the claim or invoice and statements delivered or made available to the Collateral Agent with respect thereto; and

                       (11)     Borrowers have obtained and currently have all certificates of need, Medicaid, Medicare and TRICARE provider numbers, licenses, permits and authorizations that are necessary in the generation of such Accounts.

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                       (12)     Such Account does not represent a sale to any Borrower, Subsidiary of any Borrower, or Affiliate of any Borrower, or a consignment, sale or return or a bill and hold transaction.

               The Borrowers shall, at their own expense: (i) keep accurate and complete records of its Accounts and all payments and collections thereon; (ii) cause all invoices evidencing such Accounts and all copies thereof to bear a notice that such invoices are payable to the Borrower Deposit Accounts and to the extent requested by the Collateral Agent, (A) provide written notice to each private indemnity, managed care or other Insurer who is an Account Debtor on any Account of such Borrower, and, thereafter, promptly after any such Insurer becomes an Account Debtor on any such Account, provide written notice to such Insurer, that the Collateral Agent has been granted a first priority lien and security interest in, upon and to all Accounts applicable to such Insurer and directs such Account Debtor to make payments into the appropriate Blocked Account and (B) do anything further that may be reasonably requested by the Collateral Agent to preserve or protect the security interests in the Collateral contemplated in this Agreement and the Plan and effectuate the intentions and objects of this Agreement, including, but not limited to, the execution and delivery of agreements relating to the Blocked Accounts, continuation statements, amendments to financing statements, and any other documents required under this Agreement and (iii) use its reasonable best efforts to assure prompt payment of all amounts due or to become due under Accounts. Except in the ordinary course of business consistent with past practices, no discounts, credits or allowances will be issued, granted or allowed by any Borrower to customers and no returns will be accepted without Collateral Agent's prior written consent.

               Borrowers will promptly notify Collateral Agent in the event that any (x) Account Debtor (or any other Person obligated on such Account) alleges dispute or claim with respect to such Account or of any other circumstances known to Borrowers, in each case to the extent not previously disclosed to the Collateral Agent, that may materially impair the validity or collectibility of any such Account, (y) Account becomes evidenced or secured by an instrument or chattel paper and upon request of the Collateral Agent, promptly deliver such instrument or chattel paper to the Collateral Agent, or (z) Account in an aggregate face amount in excess of $250,000 ceases, to such Borrowers' knowledge, to qualify as an Eligible Account and, in which case Borrowers shall promptly describe the circumstances of such event. Collateral Agent shall have the right, at any time or times hereafter, to verify the validity, amount or any other matter relating to any Account by mail, telephone or in person and Borrowers shall take such actions as are requested by Collateral Agent to enable Collateral Agent to perform such verification.

               After the occurrence of an Event of Default: (i) no Borrower shall, without the prior consent of Collateral Agent, adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any Account Debtor (or any other Person obligated on such Account), or allow any credit or discount thereon, except in the ordinary course of business consistent with past practices, and (ii) Collateral Agent shall have the right at any time (A) to exercise the rights of any Borrower, with respect to the obligation of the Account Debtor (or any other Person obligated on such Account) to make payment or otherwise render performance to such Borrower, and with respect to any property that secures the obligations of the Account Debtor or of any such other Person obligated on such Account; and (B) to adjust, settle or compromise the amount or payment of any such Account or release wholly or partly any Account Debtor or obligor thereunder or allow any credit or discount thereon. Each Borrower shall issue credit memoranda promptly (with copies to Collateral Agent after the occurrence of an Event of Default)

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upon accepting returns or granting allowances, until Collateral Agent has notified such Borrower that an Event of Default has occurred and that all future credits or allowances are to be made only after prior written approval from Collateral Agent.

                  (B)     Inventory Warranties and Covenants. All of Borrowers' Inventory is of good and merchantable quality, free from any material defects. The completion, manufacture and sale of such Inventory is permitted under the applicable Borrower's contracts and other agreements to which the Inventory is subject. None of Borrowers' Inventory has been or will be produced in violation of the Fair Labor Standards Act and subject to the so-called "hot goods" provisions contained in 29 U.S.C. 215 or in violation of any other law. Borrowers will use their reasonable best efforts to cause all inventory and products owned by Persons other than Borrowers and located on any premises owned, leased or controlled by Borrowers, to be separately and conspicuously identified as such and to be segregated from Borrowers' own Inventory located at such premises.

                  (C)     Equipment Warranties and Covenants. Borrowers have maintained and shall cause all of their Equipment to be maintained and preserved in good working condition, repair and working order, ordinary wear and tear excepted, and shall promptly make or cause to be made all repairs, replacements, and other improvements in connection therewith that are necessary or desirable to such end. None of Borrowers' Equipment (other than motor vehicles not having a market value in excess of $10,000 individually) is covered by any certificate of title and Borrowers shall promptly notify Collateral Agent to the extent any Borrower obtains any Equipment (other than motor vehicles not having a market value in excess of $10,000 individually) covered by any certificate of title. After the occurrence and continuance of an Event of Default, upon request of Collateral Agent, Borrowers shall promptly deliver to Collateral Agent any and all certificates of title, applications for title or similar evidence of ownership of all of its Equipment and shall cause Collateral Agent to be named as lienholder on any such certificate of title or other evidence of ownership. Borrowers shall promptly inform Collateral Agent of any material additions to or material deletions from the Equipment unless such additions or deletions are promptly disclosed by Borrowers as "Capital Expenditures" in the quarterly financial statements required to be delivered pursuant to this Agreement.

                  (D)     Chattel Paper Warranties and Covenants. As of the Closing Date, no Borrower holds any Chattel Paper and does not anticipate holding any Chattel Paper in the ordinary course of its business. Schedule 4.5(D) sets forth a list of all Chattel Paper held by each Borrower immediately prior to the Closing Date, all of which has been delivered to (and, where appropriate, duly endorsed to) Collateral Agent. To the extent any Borrower shall hold or obtain any Chattel Paper, such Borrower will promptly (i) deliver to Collateral Agent all Tangible Chattel Paper duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Collateral Agent and (ii) provide Collateral Agent with Control of all Electronic Chattel Paper, by having Collateral Agent identified as the assignee of the Records(s) pertaining to the single authoritative copy thereof and otherwise complying with the applicable elements of Control set forth in the UCC. Borrowers will mark conspicuously all Chattel Paper with a legend, in form and substance satisfactory to Collateral Agent, indicating that such Chattel Paper is subject to the Lien of Collateral Agent. At the request of the Collateral Agent, Borrowers shall take all actions reasonably necessary to ensure Collateral Agent has a perfected security interest in such Chattel Paper.

                  (E)     Instruments Warranties and Covenants. Borrowers have delivered to Collateral Agent all promissory notes (duly endorsed) made by SHS to the order of the Company. At the request of

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Collateral Agent, each Borrower will deliver to Collateral Agent all Instruments it holds or obtains duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Collateral Agent. At the request of Collateral Agent, Borrowers will also deliver to Collateral Agent copies of all security agreements securing any such Instruments.

                  (F)     Investment Property Warranties and Covenants. Each Borrower will use its reasonable best efforts (or otherwise take such actions as are required or requested by Collateral Agent), from time to time, to (i) enable Collateral Agent to obtain control of any Investment Property owned by such Borrower in a manner acceptable to Collateral Agent and (ii) obtain from any issuers of such Investment Property and such other Persons, for the benefit of Collateral Agent, written confirmation of Collateral Agent's control over such Investment Property upon terms and conditions acceptable to Collateral Agent; provided, however, that the foregoing shall not apply to Investment Property in respect of certain de minimis investments in other Persons by Borrowers in an aggregate amount not to exceed $50,000.

                  (G)     Letter-of-Credit Rights Warranties and Covenants. Each Borrower will deliver to Collateral Agent all Letters of Credit under which it is the beneficiary or is otherwise entitled to receive proceeds duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Collateral Agent. Each Borrower will also deliver to Collateral Agent all security agreements securing any such Letters of Credit and execute UCC financing statement amendments evidencing the collateral assignment of Borrowers' letter-of-credit rights to Collateral Agent in connection with such security agreements. Borrowers will take any and all actions necessary (or required or requested by Agent), from time to time, to cause Collateral Agent to obtain Control of such Borrower's Letter-of-Credit Rights.

                  (H)     General Intangibles Warranties and Covenants. If an Event of Default shall have occurred and be continuing, upon request of Collateral Agent, Borrowers shall use their reasonable best efforts to obtain any consents, waivers or agreements necessary to enable Collateral Agent to exercise its remedies hereunder and under the other Loan Documents with respect to any of Borrowers' rights under any material contractual obligations constituting General Intangibles, including Borrowers' rights as a licensee of computer software.

                  (I)     Intellectual Property Warranties and Covenants. Each Borrower and each of its Subsidiaries owns, is licensed to use or otherwise has the right to use, all Intellectual Property the loss of which ownership, license or right could reasonably be expected to have a Material Adverse Effect, and all such Intellectual Property is identified on Schedule 4.5(I). Except as set forth on Schedule 4.5(I), there are no restrictions on any Borrower's nor any of its Subsidiaries' right to create a Lien in such Intellectual Property nor in Collateral Agent's right to perfect and enforce such Lien. Each Borrower shall concurrently herewith deliver to Collateral Agent each Copyright Security Agreement and Trademark Security Agreement and all other documents, instruments and other items as may be reasonably necessary for Collateral Agent to file such agreements with the U.S. Copyright Office and the U.S. Patent and Trademark Office, as applicable. If, before the Obligations are indefeasibly paid in full, in cash, any Borrower acquires or becomes entitled to any new or additional registered Patents, Trademarks or federally registered Copyrights, or rights thereto, such Borrower shall give to Collateral Agent prompt written notice thereof, and if requested by the Collateral Agent following such Borrower's delivery of such notice, shall amend the schedules to the respective security agreements or enter into new or additional security agreements to include any such Patents, Trademarks or Copyrights. With respect to

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all Intellectual Property, the loss of which could reasonably be expected to have a Material Adverse Effect, each Borrower shall: (a) prosecute diligently any copyright, patent or trademark application at any time pending; (b) preserve and maintain all rights in such Intellectual Property; (c) use its best efforts to obtain any consents, waivers or agreements necessary to enable Collateral Agent to exercise its remedies with respect to such Intellectual Property; (d) not abandon any material right to file a copyright, patent or trademark application nor abandon any pending copyright, patent or trademark application, or Copyright, Patent or Trademark without the prior written consent of Collateral Agent. All government registered Intellectual Property, the loss of which could reasonably be expected to have a Material Adverse Effect, is owned by Borrowers, is valid, subsisting and enforceable and all filings necessary to maintain the effectiveness of such registrations have been made. With respect to all Intellectual Property, the loss of which could reasonably be expected to have a Material Adverse Effect, is the execution, delivery and performance of this Agreement by Borrowers will not violate or cause a default under any of such Intellectual Property or any agreement with respect thereto.

                  (J)     Commercial Tort Claims Warranties and Covenants. Except for matters disclosed on Schedule 2.7(A), no Borrower owns any commercial tort claims. Borrowers shall advise Collateral Agent promptly upon any Borrower becoming aware that it owns any additional Commercial Tort Claims. With respect to any new commercial tort claim, Borrowers will execute and deliver such documents as Collateral Agent deems necessary to create, perfect and protect Collateral Agent's security interest in such commercial tort claim.

                  (K)     Deposit Accounts; Bank Accounts Warranties and Covenants.

                            (1)     Schedule 4.5(K) sets forth the account numbers and locations, and the name of the depository bank, of all Deposit Accounts of Borrowers (other than the Borrower Deposit Accounts and the Collection Account) that are subject to a lockbox, blocked account or similar agreement or arrangement, or the collections or deposits in which are pledged to any third party (not including the Agents or the Lenders) (any such accounts, collectively, the "Blocked Accounts"), as well as a brief description of the terms of any lockbox, blocked account or similar agreement or arrangement regarding any Blocked Account.

                            (2)     Borrowers shall not (a) transfer or direct the transfer of any collections from any Borrower Deposit Account or any Collection Account into any Blocked Account or other bank account of Borrowers or any Subsidiary of Borrowers or (b) close any Blocked Account or modify the terms of any lockbox, blocked account or similar agreement or arrangement, in either case without the prior written consent of Collateral Agent, except as otherwise expressly permitted by subsection 2.4(A)(4).

                  (L)     Bailees. Except as disclosed on Schedule 4.5(L), none of the Collateral is in the possession of any consignee, bailee, warehouseman, agent or processor. No Collateral having an aggregate value in excess of $50,000 shall at any time be in the possession or control of any warehouse, bailee or any of Borrowers' agents or processors (other than (i) patient medical records required to be retained under applicable law and (ii) Equipment that is obsolete or that is being recalibrated or refurbished) without Collateral Agent's prior written consent and unless Collateral Agent, if Collateral Agent has so requested, has received warehouse receipts or bailee lien waivers satisfactory to Collateral Agent prior to the commencement of such possession or control. If any such Collateral is at any time in the possession or control of any warehouse, bailee or any of Borrowers' agents or processors, Borrowers

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shall, upon the request of Collateral Agent, notify such warehouse, bailee, agent or processor of the Liens in favor of Collateral Agent, for the benefit of Collateral Agent and Lenders, created hereby, shall instruct such Person to hold all such Collateral for Collateral Agent's account subject to Collateral Agent's instructions, and shall obtain such Person's acknowledgement that it is holding the Collateral for Collateral Agent's benefit.

                  (M)     Collateral Description; Use of Collateral. Borrowers will furnish to Collateral Agent, from time to time upon request but, so long as no Event of Default shall have occurred and be continuing, no more than once per calendar month, statements and schedules further identifying, updating, and describing the Collateral (not including the Borrowing Base Certificate, which shall in any event be furnished to Agents on a weekly basis) and such other information, reports and evidence concerning the Collateral, as Collateral Agent may reasonably request, all in reasonable detail. No Borrower will use or permit any Collateral to be used unlawfully or in violation of any provision of applicable law, or any policy of insurance covering any of the Collateral.

                  (N)     Collateral Filing Requirements; Collateral Records. Borrowers shall keep full and accurate books and records relating to the Collateral and shall stamp or otherwise mark such books and records in such manner as Collateral Agent may reasonably request to indicate Collateral Agent's Liens in the Collateral for the benefit of Agents and Lenders.

                  (O)     Federal Claims. Except for Accounts of Medicare/Medicaid Account Debtors, Accounts of the Veteran's Administration and claims relating to refunds of federal or state taxes, none of the Collateral constitutes a claim against the United States of America, or any State or municipal government or any department, instrumentality or agency thereof, the assignment of which claim is restricted by law. Borrowers shall notify Collateral Agent of any Collateral (other than such Accounts or tax refund claims) which constitutes a claim against the United States of America, or any State or municipal government or any department, instrumentality or agency thereof, the assignment of which claim is restricted by law. Upon the request of Collateral Agent, to the extent permitted by applicable law, Borrowers shall take such steps as may be necessary to comply with any applicable federal assignment of claims laws and other comparable laws.

          4.6     Names and Locations. Schedule 4.6 sets forth (a) all legal names and all other names (including trade names, fictitious names and business names) under which each Borrower currently conducts business, or has at any time since October 14, 1999 conducted business, (b) the location of each Borrower's principal place of business, (c) the state or other jurisdiction of organization for each Borrower and each Borrower's organizational identification number or specifically designates that one does not exist, (d) the location of each Borrower's books and records, (e) the location of all other Facilities and pharmacy locations of each Borrower and (f) all other Collateral locations not set forth with respect to clause (e) of this subsection 4.6 (designating Inventory and Equipment locations and indicating between owned, leased, warehouse, storage, and processor locations). The locations designated on Schedule 4.6 are Borrowers' sole locations for their respective businesses and the Collateral. Borrowers will give Collateral Agent at least thirty (30) days advance written notice of any: (a) change of name of any Borrower, (b) change of principal place of business of any Borrower, (c) change in the location of each Borrower's books and records, (d) change in the location of any Collateral which would require the Collateral Agent to file additional UCC financing statements to maintain a perfected security interest in such Collateral and (e) change in any Borrower's state or other jurisdiction of organization or its organizational identification number.

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          4.7     Title to Properties; Liens. Each Borrower has good, sufficient and legal title to all of the Collateral (and any other material properties and assets, if any) and will have good, sufficient and legal title of all after-acquired Collateral (and any other after-acquired material properties and assets, if any), in each case, free and clear of all Liens except for the Permitted Encumbrances. Collateral Agent has a valid, perfected and, first priority Liens in the Collateral (subject only to the Permitted Encumbrances), securing the payment of the Obligations, and such Liens are entitled to all of the rights, priorities and benefits afforded by the UCC or other applicable law as enacted in any relevant jurisdiction which relates to perfected Liens.

          4.8     Litigation; Adverse Facts. There are no judgments outstanding against any Borrower or affecting any property of any Borrower nor are there any actions, suits, proceedings, governmental investigations or arbitrations now pending or, to the best knowledge of any Borrower after due inquiry, threatened against or affecting any Borrower or any of its property which, if adversely determined, could reasonably be expected to result in a Material Adverse Effect. Promptly upon any Borrower obtaining knowledge of (a) the institution of any action, suit, proceeding, governmental investigation or arbitration against or affecting any Borrower or any of its property, not previously disclosed by Borrowers to Collateral Agent, which if adversely determined could reasonably be expected to have a Material Adverse Effect or (b) any development in any action, suit, proceeding, governmental investigation or arbitration at any time pending or affecting any Borrower or any of its property which could reasonably be expected to have a Material Adverse Effect, Borrowers will promptly give notice thereof to Collateral Agent and provide such other information as may be reasonably available to enable Collateral Agent and its counsel to evaluate such matter.

          4.9     Payment of Taxes. Except as disclosed on Schedule 4.9, all material tax returns and reports of each Borrower required to be filed by any of them have been timely filed and are complete and accurate in all material respects. All taxes, assessments, fees and other governmental charges which are due and payable by each Borrower have been paid when due (except as otherwise permitted by the terms of the Plan, in which case Borrowers have complied with and shall comply with the Plan in all material respects; provided that no such tax need be paid if such Borrower is contesting same in good faith by appropriate proceedings promptly instituted and diligently conducted and if such Borrower has established appropriate reserves as required in conformity with GAAP. As of the Closing Date, except as set forth in Schedule 4.9, none of the income tax returns of any Borrower are under audit. Other than tax liens filed prior to October 14, 1999, and other than those tax liens filed after October 14, 1999 and prior to the date of this Agreement, that have been or will be discharged pursuant to the Plan, no other tax liens have been against any Borrower with respect to payroll taxes, and to Borrower's knowledge, no other tax liens have been filed against any Borrower since October 14, 1999 that are in excess of $250,000, individually or in the aggregate. The charges, accruals and reserves on the books of each Borrower in respect of any taxes or other governmental charges are in accordance with GAAP. Each Borrower has executed United States of America Internal Revenue Service ("IRS") Form 8821 designating Collateral Agent as Borrower's appointee to receive directly from the IRS, on an on-going basis, certain tax information, notices and other written communication and Borrower authorizes Collateral Agent to file such Form 8821 with the IRS. Each Borrower's federal tax identification number is listed on Schedule 4.9.

          4.10     Performance of Agreements. None of the Borrowers is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Material

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Contract, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default.

          4.11     Employee Benefit Plans. Each of the Borrowers, their Subsidiaries and their ERISA Affiliates are in compliance, and will continue to remain in compliance, in all material respects with all applicable provisions of ERISA, the IRC and all other applicable laws and the regulations and interpretations thereof with respect to all Employee Benefit Plans. No material liability has been incurred by any of the Borrowers, their Subsidiaries or their ERISA Affiliates which remains unsatisfied for any funding obligation, taxes or penalties with respect to any Employee Benefit Plan. No Borrower nor any of its Subsidiaries shall establish any new Employee Benefit Plan or amend any existing Employee Benefit Plan if the liability or increased liability resulting from such establishment or amendment is material.

          4.12     Broker's Fees. No broker's or finder's fee or commission will be payable with respect to this Agreement.

          4.13     Environmental Compliance. Each Borrower is and shall continue to remain in compliance with all applicable Environmental Laws except where failure to be in such compliance could not reasonably be expected to result in a Material Adverse Effect. To the Borrowers' knowledge, there are no claims, liabilities, Liens, investigations, litigation, administrative proceedings, whether pending or threatened, or judgments or orders relating to any Hazardous Materials asserted or threatened against any Borrower or relating to any real property currently or formerly owned, leased or operated by any Borrower.

          4.14     Solvency. From and after the date of this Agreement, the Company and its Subsidiaries, on a consolidated basis, (a) own assets the fair salable value of which are greater than the total amount of its liabilities (including contingent liabilities), (b) have capital that is not unreasonably small in relation to its business as presently conducted or any contemplated or undertaken transaction, and (c) does not intend to incur and does not believe that it will incur debts beyond its ability to pay such debts as they become due.

          4.15     Disclosure. No representation or warranty of any Borrower contained in this Agreement, the other Loan Documents, or any other document, certificate or written statement furnished to Collateral Agent or any Lender by or on behalf of any such Person for use in connection with the Loan Documents contains any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. There is no material fact known to any Borrower that has had or could reasonably be expected to have a Material Adverse Effect and that has not been disclosed herein or in such other documents, certificates and statements furnished to any Agent or Lender for use in connection with the transactions contemplated hereby.

          4.16     Insurance. Each Borrower and each of its Subsidiaries maintains and shall continue to maintain adequate insurance policies and shall provide Collateral Agent with evidence of such insurance coverage for public liability, professional liability, property damage and product liability with respect to its business and properties and the business and properties of its Subsidiaries against loss or damage commensurate with the kinds and amounts customarily carried or maintained by corporations of similar size, established reputation and engaged in similar businesses and in amounts acceptable to Collateral

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Agent in its reasonable discretion. Each Borrower shall cause Collateral Agent at all times to be named as additional loss payee, as its interests may appear, on all property damage insurance policies and shall cause Collateral Agent at all times to be named as additional insured under all general and professional liability policies relating to the Collateral, in each case pursuant to appropriate endorsements in form and substance satisfactory to Collateral Agent. No notice of cancellation has been received with respect to such policies and each Borrower and each of its Subsidiaries is in compliance with all material conditions contained in such policies. Any proceeds received from any policies of insurance relating to any Collateral shall be applied to the Obligations as set forth in subsection 2.4(B)(2). Each Borrower shall provide Collateral Agent evidence of the insurance coverage and of the assignments and endorsements required by this Agreement promptly upon request by Collateral Agent and upon renewal of any existing policy. If any Borrower elects to change insurance carriers, policies or coverage amounts, such Borrower shall notify Collateral Agent and provide Collateral Agent with evidence of the updated insurance coverage and of the assignments and endorsements required by this Agreement, except that such notice shall not be required (a) if such change does not materially reduce the coverage amounts or materially and adversely affect the terms or provisions of the coverage in existence on the Closing Date or (b) if such change does materially reduce the coverage amounts or does materially and adversely affect the terms or provisions of such coverage in existence on the Closing Date, such Borrower shall have obtained the highest amount of coverage and the most favorable terms and provisions that are then commercially available. In the event such Borrower fails to provide Collateral Agent with evidence of the insurance coverage required by this Agreement, Collateral Agent may, but is not required to, purchase insurance at such Borrower's expense to protect Collateral Agent's and the Lender's interests in the Collateral. This insurance may, but need not, protect such Borrower's interests. The coverage purchased by Collateral Agent may not pay any claim made by such Borrower or any claim that is made against such Borrower in connection with the Collateral. Such Borrower may later cancel any insurance purchased by Collateral Agent, but only after providing Collateral Agent with evidence that such Borrower has obtained insurance as required by this Agreement. If Collateral Agent purchases insurance for the Collateral, such Borrower will be responsible for the costs of that insurance, including interest thereon and other charges imposed on Collateral Agent in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance, and such costs may be added to the Obligations. The costs of the insurance may be more than the cost of insurance such Borrower is able to obtain on its own.

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          4.17     Compliance with Laws; Government Authorizations; Consents. Except as set forth on Schedule 4.17, no Borrower is in violation of any law, ordinance, rule, regulation, order, policy, guideline or other requirement of or obligation under (a) any governmental authority in all jurisdictions in which such Borrower or any of its Subsidiaries is now doing business, (b) that certain Corporate Integrity Agreement, dated as of July 12, 2001 between the Office of the Inspector General of the Department of Health and Human Services and the Company ("the Corporate Integrity Agreement") and (c) any government authority otherwise having jurisdiction over the conduct of such Borrower or any of its Subsidiaries or any of its respective businesses, or the ownership of any of its respective properties, which violation would subject such Borrower or any of its Subsidiaries, or any of their respective officers to criminal liability or, in each case, could reasonably be expected to result in a Material Adverse Effect and, to the Borrowers' knowledge, no such violation has been alleged. Borrowers will and will cause each of their Subsidiaries to comply with the requirements of all applicable laws, ordinances, rules, regulations, orders, policies, guidelines or other requirements of (a) any governmental authority as now in effect and which may be imposed in the future in all jurisdictions in which any Borrower or any of its Subsidiaries is now doing business or may hereafter be doing business, (b) any government authority otherwise having jurisdiction over the conduct of any Borrower or any of its Subsidiaries or any of its respective businesses, or the ownership of any of its respective properties, and (c) the Corporate Integrity Agreement, in each case, except to the extent the noncompliance with which could not reasonably be expected to have a Material Adverse Effect. No authorization, approval or other action by, and no notice to or filing with, any domestic or foreign governmental authority or regulatory body or consent of any other Person is required for (a) the grant by any Borrower of the Liens granted hereby or for the execution, delivery or performance of this Agreement or the other Loan Documents by any Borrower; (b) the perfection of the Liens granted hereby and pursuant to any other Loan Documents (except for filing UCC financing statements with the appropriate jurisdiction and filing any Patent Security Agreement, Trademark Security Agreement and Copyright Security Agreement with the U.S. Patent and Trademark Office or the U.S. Copyright Office, as applicable); or (c) the exercise by Collateral Agent of its rights and remedies hereunder (except as may have been taken by or at the direction of any Borrower or Collateral Agent).

          4.18     Employee Matters. Except as set forth on Schedule 4.18, (a) no Borrower nor any of such Borrower's employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the employees of any Borrower and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of any Borrower and (c) there are no strikes, slowdowns, work stoppages or controversies pending or, to the knowledge of any Borrower after due inquiry, threatened between any Borrower and its respective employees, other than employee grievances arising in the ordinary course of business, which could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 4.18, no Borrower is party to an employment contract or collective bargaining agreement.

          4.19     Governmental Regulation. No Borrower is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940 or to any federal or state statute or regulation limiting its ability to incur indebtedness for borrowed money.

          4.20     Access to Accountants and Management. Borrowers authorize Agents and Lenders to discuss the financial condition and financial statements of any Borrower and its Subsidiaries with the Company's Accountants upon reasonable notice to the Company and, if no Event of Default shall have

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occurred and be continuing, in the Company's presence, either in person or, if Agents elect, by telephone. Borrowers authorize the Company's Accountants to respond to all of Collateral Agent's inquiries. Collateral Agent and each Lender may, with the consent of Collateral Agent, which will not be unreasonably denied, confer with each Borrower's management directly regarding such Borrower's business, operations and financial condition.

          4.21     Inspection. Subject to subsection 10.18, the Borrowers shall permit Collateral Agent and any authorized representatives designated by Collateral Agent to visit and inspect any of the properties of any Borrower or any of its Subsidiaries, including their financial and accounting records, and, in conjunction with such inspection, to make copies and take extracts therefrom, and to discuss their affairs, finances and business with their officers and such Borrower's Accountants, at such reasonable times during normal business hours and as often as may be reasonably requested but no more than six (6) times per year ; provided, however, that upon the occurrence and during the continuance of an Event of Default, the number of visits and inspections per year shall not be limited. Each Lender may, with the consent of Collateral Agent which consent will not be unreasonably denied, accompany Collateral Agent on any such visit or inspection. All actual out-of-pocket expenses of Collateral Agent in connection with such visits and inspections shall be paid by Borrowers.

          4.22     Borrowers' Receipt of Payments. If any Borrower, or any of its Subsidiaries, Affiliates, employees, agents or any other Persons acting for or in concert with any Borrower, shall receive any monies, checks, notes, drafts or any other payments relating to and/or proceeds of any Borrower's Accounts or other Collateral (other than pursuant to an Asset Disposition or other dispositions permitted hereunder as to which Borrowers are expressly permitted to retain such payments and proceeds for its own account) such Borrower or such Person shall hold such instrument or funds in trust for Collateral Agent, and, immediately upon receipt thereof, shall remit the same or cause the same to be remitted, in kind, to the Borrower Deposit Accounts, to the Collection Account or to Administrative Agent at its address set forth in subsection 10.3 below.

          4.23     Recoupments; Overpayments. On each Borrowing Base Certificate given to Lenders in connection with a request for a Revolving Advance, Borrowers have disclosed to Lenders the amount of any (a) Medicare, Medicaid or TRICARE recoupments or overpayments in excess of $500,000 and (b) recoupments or overpayments of any other third-party payor in excess of $100,000, in each case being sought, requested, claimed, or, to any Borrower's knowledge, threatened against any Borrower or any of its Affiliates.

          4.24     Reports. Borrowers have timely filed or caused to be timely filed all cost reports and other reports of every kind whatsoever required by law or by written or oral contracts or otherwise to have been filed or made with respect to the Facilities, except for such reports of which the failure to file individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. There are no claims, actions or appeals pending (and no Borrower has filed any claims or reports which should result in any such claims, actions or appeals) before any commission, board or agency including without limitation any intermediary or carrier, the Provider Reimbursement Review Board or the Administrator of the Centers for Medicare and Medicaid Services, with respect to any state or federal Medicare or Medicaid cost reports or claims filed by any Borrower, or any disallowance by any commission, board or agency in connection with any audit of such cost reports, which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. As of the Closing Date, and thereafter, no validation review or program integrity review related to any Borrower, or the

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consummation of the transactions contemplated herein, or related to the Facilities or the Collateral, are being conducted by any commission, board or agency in connection with the Medicare or Medicaid programs, and to the knowledge of Borrowers, no such reviews are scheduled, pending or threatened against or affecting any of the providers, or any of the Facilities or the Collateral, or the consummation of the transactions contemplated hereby except those reviews that could not reasonably be expected to have a Material Adverse Effect.

          4.25     Compliance With Health Care Laws. Without limiting the generality of subsection 4.17 or any other representation or warranty made herein, to Borrowers' knowledge, each of the Facilities, and each of its licensed employees and contractors (other than contracted agencies) in the exercise of their respective duties on behalf of each of the Facilities, is in compliance with all applicable statutes, laws, ordinances, rules and regulations of any governmental authority (including without limitation Section 1128B(b) of the Social Security Act, as amended, 42 U.S.C. Section 1320a-7(b) (Criminal Penalties Involving Medicare or State Health Care Programs), commonly referred to as the "Federal Anti-Kickback Statute," and the Social Security Act, Section 1877, (Prohibition Against Certain Referrals), commonly referred to as "Stark Statute" (collectively, "Healthcare Laws")). Borrowers have maintained in all material respects all records required to be maintained by the Joint Commission on Accreditation of Healthcare Organizations, the Food and Drug Administration, the Drug Enforcement Agency, the State Boards of Pharmacy and, to the extent required by Healthcare Laws, the federal and state Medicare, Medicaid and TRICARE programs and, to the knowledge of Borrowers, there are no presently existing circumstances which would result or likely would result in material violations of the Healthcare Laws. Each Borrower and its Affiliates and the owners of the facilities and other businesses managed by any Borrower or its Affiliates have such permits, licenses, franchises, certificates and other approvals or authorizations of governmental or regulatory authorities as are necessary under applicable law to own their respective properties and to conduct their respective business (including without limitation such permits as are required under such federal, state and other health care laws, and under such HMO or similar licensure laws and such insurance laws and regulations, as are applicable thereto), and with respect to those facilities and other businesses that participate in Medicare, Medicaid and/or TRICARE to receive reimbursement under Medicare, Medicaid and TRICARE. To Borrowers' knowledge, there currently exist no restrictions, deficiencies, required plans of corrective actions or other such remedial measures with respect to federal and state Medicare, Medicaid and TRICARE certifications or licensure that could reasonably be expected to have a Material Adverse Effect.

          4.26     Funds from Restricted Grants. None of the Facilities or other Collateral is subject to, and Borrowers shall indemnify and hold Lenders harmless from and against, any liability in respect of amounts received by Borrower or others for the purchase or improvement of the Facilities or other Collateral or any part thereof under restricted or conditioned grants or donations, including, without limitation, monies received under the Public Health Service Act, 42 U.S.C. Section 291 et seq.

          4.27     Intentionally Deleted.

          4.28     HIPAA Compliance. To the extent that and for so long as any Borrower is a "covered entity" within the meaning of HIPAA, such Borrower (i) has undertaken or will promptly undertake all necessary surveys, audits, inventories, reviews, analyses and/or assessments (including any necessary risk assessments) of all areas of its business and operations required by HIPAA and/or that could be adversely affected by the failure of such Borrower to be HIPAA Compliant (as defined below); (ii) has developed or will promptly develop a detailed plan and time line for becoming HIPAA Compliant (a "HIPAA

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Compliance Plan"); and (iii) has implemented or will implement those provisions of such HIPAA Compliance Plan in all material respects necessary to ensure that such Borrower is or becomes HIPAA Compliant. For purposes hereof, "HIPAA Compliant" shall mean that such Borrower is or will be in compliance with each of the applicable requirements of the so-called "Administrative Simplification" provisions of HIPAA on and as of each date that any part thereof, or any final rule or regulation thereunder, becomes effective in accordance with its or their terms, as the case may be, except where failure to be in compliance could not reasonably be expected to result in a Material Adverse Effect or otherwise materially adversely affect the rights and remedies of the Agents and Lenders hereunder.

          4.29     Licenses. Except as disclosed in Schedule 4.29, each of the Borrowers has all necessary licenses, permits, franchises, certificates of need, rights to participate in (or the benefit of valid agreements to participate in) Medicare, Medicaid, TRICARE and other material third party payor programs participated in by it, and has all Medicaid, TRICARE and Medicare provider numbers, provider agreements and other rights necessary for the generation of its Accounts and otherwise for the conduct of its business and for the intended use of its properties and assets to the extent necessary or appropriate to ensure no material interruption in cash flow.

          4.30     Certificates of Need. Borrowers are the lawful owner of any certificates of need or other required license for the operation of each of the Facilities.

          4.31     Inactive Entities. Except as set forth on Schedule 4.31, as of the Closing Date, none of the Inactive Entities (a) has Total Assets valued at greater than $260,000, (b) had Total Revenues during the fourth calendar quarter of 2001 in excess of $3,000 or (c) is currently conducting any business operations.

          4.32     Supplemental Schedules. Borrowers may amend any one or more of the Schedules referred in this Section 4 by notice to the Collateral Agent. Any representation, warranty, or covenant contained herein which refers to any such Schedule shall from and after the date of any such amendment refer to such Schedule as so amended; provided, however, that in no event shall the amendment of any such Schedule constitute a waiver by Collateral Agent or Lenders of any Event of Default that has occurred and is continuing at the time of such amendment unless such Event of Default has been cured by the amendment of such Schedule and has been expressly waived by the Collateral Agent and Requisite Lenders.

SECTION 5. REPORTING AND OTHER AFFIRMATIVE COVENANTS

          Each of the Borrowers covenants and agrees that, so long as any of the Commitments hereunder shall be in effect and until payment in full, in cash, of all Obligations and termination of all Lender Letters of Credit, Borrowers shall perform and shall cause each of its Subsidiaries to perform, all covenants in this Section 5.

          5.1     Financial Statements and Other Reports. The Company will deliver to Collateral Agent and each Lender (unless specified to be delivered solely to Collateral Agent) the financial statements and other reports contained in the Reporting Rider attached hereto.

          5.2     Endorsement; Insurance Claims. Borrowers hereby constitute and appoint Collateral Agent and all Persons designated by Collateral Agent for that purpose as Borrowers' true and lawful attorney-in-

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fact, with power in the place and stead of each Borrower and in the name of each Borrower (a) to endorse such Borrower's name to any of the items of payment or proceeds described in subsection 4.22 above and all proceeds of Collateral that come into Collateral Agent's possession or under Collateral Agent's control, including, without limitation, with respect to any drafts, Instruments, Documents and Chattel Paper, and (b) during the continuance of an Event of Default, to obtain, adjust and settle insurance claims, which are required to be paid to Collateral Agent. Borrowers hereby ratify and approve all acts of Collateral Agent made or taken in accordance with this subsection 5.2 Both the appointment of Collateral Agent as Borrowers' attorney and Collateral Agent's rights and powers hereunder are coupled with an interest and are irrevocable.

          5.3   Maintenance of Properties. Borrowers will maintain or cause to be maintained in good repair, working order and condition all material properties used in the business of Borrowers and its Subsidiaries and will make or cause to be made all appropriate repairs, renewals and replacements thereof.

          5.4    Further Assurances. Borrowers shall from time to time, execute such financing or continuation statements, documents, security agreements, reports and other documents or deliver to Collateral Agent such instruments, certificates of title, mortgages, deeds of trust, or other documents as Collateral Agent at any time may reasonably request to evidence, perfect or otherwise implement the security for repayment of the Obligations provided for in the Loan Documents.

          5.5    Mortgages; Title Reports.

                  (A)     Title Reports. Within sixty (60) days following the Closing Date, Borrower shall deliver or cause to be delivered to Collateral Agent, title reports or title commitments prepared by title insurance companies reasonably satisfactory to Collateral Agent in form and substance reasonably satisfactory to Collateral Agent so that Collateral Agent can determine that the Mortgages shall create first priority mortgage liens on the respective Mortgaged Property, free and clear of all mortgages, deeds of trust and other Liens arising from Indebtedness.

                  (B)     Mortgages. Borrowers shall as promptly as possible (and in any event within sixty (60) days after the Closing Date) deliver to Collateral Agent fully executed Mortgages, in form and substance satisfactory to Collateral Agent.

                  (C)     Other Real Property. If Borrowers intend to acquire any real property after the Closing Date (i) Borrowers shall comply with all provisions of this Agreement, (ii) Borrowers shall grant to Collateral Agent a first priority mortgage or deed of trust upon such real property, and (iii) Borrowers shall obtain such lender's title insurance, ALTA surveys, environmental reports, structural and engineering inspection reports and other documents in form and substance satisfactory to Collateral Agent.

          5.6     Use of Proceeds and Margin Security. Borrowers shall use the proceeds of all Loans for proper business purposes (as described in the recitals to this Agreement) consistent with all applicable laws, statutes, rules and regulations. No portion of the proceeds of any Loan shall be used for the purpose of purchasing or carrying margin stock within the meaning of Regulation U, or in any manner that might cause the borrowing or the application of such proceeds to violate Regulation T or Regulation

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X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Act.

          5.7     Licensure; Medicaid/Medicare Cost Reports. Borrowers will maintain all certificates of need, provider numbers, provider agreements and licenses necessary to conduct their business as currently conducted. Borrowers will take any steps required to comply with any new or additional requirements that may be imposed on providers of medical products and Medical Services except where failure to maintain or comply could not reasonably be expected to result in a Material Adverse Effect. All Medicaid, Medicare and TRICARE cost reports required by law and all claims for reimbursement will be properly filed.

          5.8     Termination/Default of Contracts. Borrowers shall notify Collateral Agent of any (a) default or event of default under, (b) termination of, (c) modification or amendment of, or (d) failure of any party to renew, any Material Contract as soon as reasonably possible (other than with respect to any notice of default, termination or failure to renew that originates with Borrowers, which notice shall be sent concurrently to Collateral Agent). Notwithstanding anything in this subsection 5.8 to the contrary, no provision in this subsection 5.8 shall modify, reduce or otherwise affect Collateral Agent's or any Lender's rights hereunder or under any other Loan Document.

          5.9     Notice of Event of Default and Other Matters. Promptly after any of the following, give notice of:

                  (A)     any Default or Event of Default;

                  (B)     any change in the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrowers taken as a whole which has had or could reasonably, individually or in the aggregate, be expected to have a Material Adverse Effect; and

                  (C)     any material amendment of the articles of incorporation or by-laws of any Borrower or any of its Subsidiaries which could reasonably be expected to materially adversely affect the interests, rights and remedies of the Agents and Lenders under this Agreement.

          5.10     Inactive Entities. Each Inactive Entity shall be merged into or consolidated with a Borrower (or with another Inactive Entity that is promptly merged into or consolidated with a Borrower) as promptly as practicable and in any event by January 31, 2003 or such later date to which Collateral Agent may consent in writing; provided, however, that any Inactive Entity that has Total Assets valued at greater than zero and less than $10,000 may be dissolved without being merged or consolidated into a Borrower provided that prior notice of such dissolution is given to the Collateral Agent. The financial statements relating to each Inactive Entity shall be maintained in accordance with GAAP, including the financial records relating to the merger or consolidation of such Inactive Entity as required hereunder. In the event that any Inactive Entity shall remain in existence after January 31, 2003 (or such later date to which Collateral Agent shall have consented in writing), an Event of Default pursuant to this subsection 5.10 shall immediately occur without further action or notice by Agents or Lenders unless by such date the Borrowers shall have caused such Inactive Entity to become a Borrower hereunder.

          5.11     Letters of Credit.

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                  (A)     Borrowers shall use commercially reasonable efforts to cause the beneficiary of any Lender Letters of Credit or Bank Letters of Credit to accept such letters of credit without provisions for automatical renewal.

                  (B)     With respect to any Lender Letter of Credit or Bank Letter of Credit, issued at the request of, or on behalf of any Borrower, that contains an automatic renewal provision, if Borrowers desire to permit the renewal of such letter of credit, Borrowers shall notify Agents not later than fifteen (15) days prior to the earlier of (i) the expiration date of such letter of credit or (ii) the date by which notice must be given by the issuer of such letter of credit that it is not being renewed.

SECTION 6. FINANCIAL COVENANTS

          Each of the Borrowers covenants and agrees that so long as any of the Commitments remain in effect and until indefeasible payment in full, in cash, of all Obligations and termination of all Lender Letters of Credit, Borrowers shall comply with and shall cause each of their Subsidiaries to comply with all covenants contained in the Financial Covenant Rider.

SECTION 7. NEGATIVE COVENANTS

          Each of the Borrowers covenants and agrees that so long as any of the Commitments remain in effect and until indefeasible payment in full, in cash, of all Obligations and termination of all Lender Letters of Credit, Borrowers shall not and will not permit any of their Subsidiaries to:

          7.1     Indebtedness. Directly or indirectly create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable, on a fixed or contingent basis, with respect to any Indebtedness except: (a) the Obligations; (b) intercompany Indebtedness among the Borrowers, incurred in the ordinary course of business; (c) Indebtedness owing by SHS to the Company or another Borrower in an aggregate principal amount not to exceed the sum of (i) the principal balance of such Indebtedness as of the Closing Date and (ii) $1,500,000; (d) Indebtedness incurred after the Closing Date in connection with Capital Leases or purchases secured by purchase money Liens, in both cases together not to exceed $5,000,000 in outstanding principal amount in the aggregate; (e)Indebtedness under the Term Loan Documents but only to the extent permitted under the terms of the Intercreditor Agreement; (f) Indebtedness existing on the Closing Date and identified on Schedule 7.1; (g) Indebtedness incurred in connection with refinancing of those certain mortgages existing on the date hereof that encumber certain real property owned by the Borrowers on the date hereof, as set forth in Schedule 7.1, which Indebtedness shall not exceed the principal balance secured by such mortgages on the Closing Date; (h) Indebtedness incurred in connection with the Sumitomo Transaction and the SunTrust Transaction; and (i) unsecured Indebtedness not to exceed $2,000,000 in outstanding principal amount in the aggregate. No Borrower will, and will not permit any of its Subsidiaries to, incur any Liabilities except for Indebtedness permitted herein and trade payables and normal accruals in the ordinary course of business not yet due and payable or with respect to which any Borrower or any of its Subsidiaries is contesting in good faith the amount or validity thereof by appropriate proceedings and then only to the extent that such Borrower or any of its Subsidiaries has established adequate reserves therefor under GAAP.

          7.2     Guaranties. Except for endorsements of instruments or items of payment for collection in the ordinary course of business, guaranty, endorse, or otherwise in any way become or be responsible for

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any obligations of any other Person (unless such obligation constitutes Indebtedness permitted by subsection 7.1), whether directly or indirectly by agreement to purchase the indebtedness of any other Person or through the purchase of goods, supplies or services, or maintenance of working capital or other balance sheet covenants or conditions, or by way of stock purchase, capital contribution, advance or loan for the purpose of paying or discharging any indebtedness or obligation of such other Person or otherwise; provided, however, that any Borrower may guarantee any obligation of any other Borrower so long as such obligation is otherwise not prohibited under this Agreement.

          7.3     Transfers, Liens and Related Matters.

                  (A)     Transfers. Sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to any of the Collateral, except that (1) Borrowers may permit the Inactive Entities to sell or transfer their respective assets in connection with any dissolution or liquidation permitted under subsection 5.10 of this Agreement; (2) Borrowers may (a) sell Inventory to a buyer in the ordinary course of business and license a General Intangible to a licensee in the ordinary course of business; (b) make Asset Dispositions, if all of the following conditions are met: (i) the market value of assets sold or otherwise disposed of in any single transaction or series of related transactions does not exceed $2,000,000 or, if such market value exceeds $2,000,000, (A) the Borrowers shall have complied with subsections 2.4(B)(2) and (B) at least ninety percent (90%) of the consideration received is in the form of (x) cash, (y) an assumption of then existing Indebtedness or (z) a combination of cash and assumption of then existing Indebtedness; (ii) the consideration received is at least equal to the fair market value of such assets; (iii) after giving effect to the sale or other disposition of the assets included within the Asset Disposition and the repayment of the Obligations with the proceeds thereof, Borrowers are in compliance on a pro forma basis with the covenants set forth in the Financial Covenant Rider recomputed for the most recently ended calendar quarter for which information is available as if such Asset Disposition occurred at the beginning of such calendar quarter and are in compliance with all other terms and conditions contained in this Agreement, as determined by Collateral Agent in its reasonable discretion upon receipt of information it deems adequate for such purposes; and (iv) no Default or Event of Default shall then exist or result from such sale or other disposition; and (3) if no Event of Default shall then exist or result from such sale or disposition, consummate the Permitted Divestitures, the Campus Transaction and/or the THCI Turnover.

                  (B)     Liens. Except for Permitted Encumbrances and Liens incurred in connection with Indebtedness permitted under clauses (f), (g) and (h) of subsection 7.1 (provided that such Liens shall not encumber Accounts or Inventory unless the grantee in respect of such Liens have entered into a subordination agreement in form and substance satisfactory to the Agents), directly or indirectly create, incur, assume or permit to exist any Lien on or with respect to any of the Collateral or any proceeds, income or profits therefrom.

                  (C)     No Negative Pledges. Except for the Term Loan Agreement and agreements in connection with Indebtedness permitted under clauses (f), (g) and (h) of subsection 7.1 (provided that such agreements shall not restrict encumbrances on Accounts or Inventory unless the parties benefitting from such agreements have entered into subordination agreements or other agreements in form and substance satisfactory to the Agents), enter into or assume any agreement (other than the Loan Documents and the Term Loan Documents) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired except if such agreement is entered into or assumed in connection with Capital Leases, or purchases secured by purchase money Liens, in either

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case (i) permitted by subsection 7.1 and (ii) not restricting the creation or assumption of any Lien upon its Accounts or Inventory.

                  (D)     No Restrictions on Borrower Distributions to Borrowers. Except as provided herein or in the Term Loan Documents, directly or indirectly create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Borrower to: (1) pay dividends or make any other distribution on any of such Borrower's capital stock owned by any Borrower; (2) pay any indebtedness owed to any Borrower; (3) make loans or advances to any Borrower; or (4) transfer any of its property or assets to any Borrower other than property, or assets subject to Capital Leases or purchase money Liens permitted by this Agreement.

          7.4     Investments and Loans. Make or permit to exist investments in, loans to or distributions to any other Person, except: (a) Cash Equivalents held by a Borrower; (b) loans and advances to employees of Borrowers for moving, entertainment, travel and other similar expenses in the ordinary course of business in an aggregate outstanding amount not in excess of $250,000 at any time; (c) loans in respect of intercompany Indebtedness permitted in subsection 7.1 of this Agreement; (d) investments by any Borrower in the capital stock of any Subsidiary that is a Borrower on the Closing Date or in any Person that has become a Subsidiary and a Borrower after the Closing Date in accordance with the terms of subsection 7.11 of this Agreement or otherwise with the prior written consent of the Agents; (e) investments after Closing Date by the Company or any other Borrower in SHS in an aggregate amount not to exceed $1,500,000; and (f) the investments disclosed on Schedule 7.4 existing on the date hereof. Notwithstanding any contrary provision contained in this Agreement (including, without limitation, the provisions of subsection 7.1 of this Agreement), Borrowers shall not permit any Inactive Entity to acquire any assets, incur any Indebtedness or Liabilities of any kind, conduct any business, perform any operations (other than those specifically required for liquidation or dissolution), receive any distributions from any Borrower or from any Subsidiary of any Borrower, make any investments or issue any stock or other equity interests.

          7.5     Restricted Junior Payments. Directly or indirectly declare, order, pay, make or set apart any sum for any Restricted Junior Payment, except payments in respect of the Indebtedness owing in connection with the Term Loan Documents, but only to the extent permitted under the terms of the Intercreditor Agreement.

          7.6     Restriction on Fundamental Changes. (a) Enter into any transaction of merger or consolidation; (b) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); (c) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, or the capital stock of any of its Subsidiaries, whether now owned or hereafter acquired; or (d) acquire by purchase or otherwise all or any substantial part of the business or assets of, or stock or other beneficial ownership of, any Person; provided, however, that notwithstanding anything in the foregoing to the contrary, so long as no Event of Default shall have occurred and be continuing (or otherwise with the prior written consent of the Collateral Agent (which consent shall not be unreasonably withheld)), the following shall be permitted under this Agreement upon notice to the Collateral Agent: (x) the merger, consolidation or dissolution of any Inactive Entity in accordance with subsection 5.10 and (y) the mergers and consolidations of Borrowers with other Borrowers.

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          7.7     Changes Relating to Term Loan Documents. Without the prior written consent of the Collateral Agent, change or amend the terms of the Term Loan Documents other than to the extent permitted by the Intercreditor Agreement.

          7.8     Transactions with Affiliates. Directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale or exchange of property or the rendering of any service) with any Affiliate or with any officer, director or employee of any Borrower, except for transactions among Borrowers or transactions in the ordinary course of business and upon fair and reasonable terms which are fully disclosed to Agents and Lenders and which are no less favorable to Borrowers than they would obtain in a comparable arm's length transaction with an unaffiliated Person.

          7.9     Conduct of Business. From and after the Closing Date, engage in any business other than businesses of the type engaged in by Borrowers or any of their Subsidiaries on the Closing Date.

          7.10     Tax Consolidations. File or consent to the filing of any consolidated income tax return with any Person other than any of its Subsidiaries.

          7.11     Subsidiaries. Other than the Subsidiaries set forth on Schedule 7.11, establish, create or acquire, subject to subsection 7.4, any new Subsidiaries without the written consent of the Collateral Agent. Notwithstanding anything in this subsection 7.11 to the contrary, Borrowers may, without the consent of the Collateral Agent establish any new domestic Subsidiary that, immediately upon its establishment, becomes a Borrower hereunder and thus becomes obligated in the same manner and to the same extent of any other Borrower under this Agreement. Borrowers shall cause each new Subsidiary to execute and deliver any and all agreements or modifications, revisions or amendments to the Loan Documents, necessary to evidence the addition of such new Subsidiary as a Borrower.

          7.12     Fiscal Year; Tax Designation. Change its Fiscal Year; or elect to be designated as an entity other than a C corporation as defined in the IRC.

          7.13     Use of Lenders' Name. Borrowers will not and will not permit its Affiliates to, in the future, issue any press release or other public disclosure using the name of Lenders, General Electric Capital Corporation or any of their respective Affiliates or referring to this Agreement or the other Loan Documents without at least two (2) Business Days prior written notice to Lenders and without the prior written consent of Lenders unless (and only to the extent that) such Borrower or Affiliate are required to so disclose under law and then, in any event, such Borrower or Affiliate will consult with Lender before issuing such press release or other public disclosure. Borrowers consents to the publication by Lenders of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement.

          7.14     Bank Accounts. Establish any new bank accounts, or attempt to amend or terminate any Lockbox Agreement or other agreement required under subsection 2.4(A) or relating to the Collection Account or any Borrower Deposit Account, except as expressly permitted by Section 2.4(A)(4), without Collateral Agent's prior written consent.

          7.15     IRS Form 8821. Revoke IRS Form 8821 designating Collateral Agent as Borrowers' appointee to receive directly from the IRS, on an on-going basis, certain tax information, notices and

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other written communication or fail to take actions necessary to renew such Form 8821 prior to its expiration for all time periods prior to the Termination Date.

          7.16     Certificates of Need. Except in the ordinary course of its business, amend, alter or suspend or terminate or make provisional in any material way, any certificate of need, provider number or provider agreement without the prior written consent of Collateral Agent, which consent shall not be unreasonably withheld.

          7.17     Sale Lease-back Transactions. Directly or indirectly, enter into any arrangement whereby any Borrower sells or transfers all or any of its assets and, within one (1) year thereafter, rents or leases such assets so sold or transferred, without the prior consent of Collateral Agent; provided that the Borrowers may enter into any such arrangements so long as the aggregate fair market value of all property subject to such arrangements does not exceed $5,000,000 (based on the fair market value at the time of the transaction). Notwithstanding anything in the foregoing to the contrary, the Borrowers may enter into sale and lease back transactions (i) in connection with the THCI Turnover and (ii) in respect of the Campus Transaction.

          7.18     Plan and Confirmation Order. Without the prior written consent of the Agents, Borrowers will not (i) make any material change to the Plan, (ii) seek to revise or amend the Confirmation Order, or (iii) fail to fully implement or fail to perform any duty or other obligation under the Plan or the Confirmation Order, including, but not limited to, making any payment(s) to creditor(s) when due under the terms of the Plan and the Confirmation Order, including, but not limited to, any agreement(s) or document(s) approved or incorporated therein or executed pursuant thereto.

SECTION 8. DEFAULT, RIGHTS AND REMEDIES

          8.1     Event of Default. "Event of Default" shall mean the occurrence or existence of any one or more of the following (for each subsection a different grace or cure period may be specified, if no grace or cure period is specified, such occurrence or existence constitutes an immediate Event of Default):

                  (A)     Payment. Failure to make payment of any of the Obligations when due and in the case of interest, such failure shall not be cured within five (5) days of the applicable due date; or

                  (B)     Default in Other Agreements. (1) Failure of any Borrower to pay when due any principal or interest on any Indebtedness (other than Obligations) or (2) breach or default of any Borrower with respect to any Indebtedness (other than the Obligations), in each case, only if such failure to pay, breach or default entitles the holder to cause such Indebtedness having an individual principal amount in excess of $1,000,000 or having an aggregate principal amount in excess of $3,000,000 to become or be declared due prior to its stated maturity; or

                  (C)     Breach of Certain Provisions. Failure of any Borrower to perform or comply with any term or condition contained in subparagraphs (A), (B), (C), (D), (E), (F) and (M) of the Reporting Rider in subsection 5.3, in subsection 5.4, in subsection 5.10, in Section 6, or in Section 7; or

                  (D)     Breach of Warranty. Any representation, warranty, certification or other statement made by any Borrower in any Loan Document or in any statement or certificate at any time given by such

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Person in writing pursuant or in connection with any Loan Document is false in any material respect on the date made; or

                  (E)     Other Defaults Under Loan Documents. Any Borrower defaults in the performance of or compliance with any term contained in this Agreement other than those otherwise set forth in this subsection 8.1, or defaults in the performance of or compliance with any term contained in the other Loan Documents and such default is not remedied or waived within fifteen (15) days after notice from Administrative Agent to Borrowers of such default; provided that if such default is not capable of being cured within such fifteen (15) day period and Borrowers have and continue to diligently, continuously and in good faith pursue a cure, Borrowers shall have an additional period of fifteen (15) days to cure such default; or

                  (F)     Change in Control (1) Any Person or group (as defined in the Securities Exchange Act of 1934, as amended), other than the holders of the voting stock of the Company as of the Closing Date, shall acquire for the first time direct or indirect ownership (constructive or otherwise), or the direct or indirect power to vote more than forty percent (40%) of the outstanding voting stock of the Company, or (2) individuals who, as of the Closing Date, were members of the board of directors of the Company (together with any new director whose election by the Company's board of directors or whose nomination for election by the Company's shareholders were approved by a vote of at least a majority of the directors then in office who themselves were either directors as of the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute at least a majority of the members of the board of directors of the Company then in office; or

                  (G)     Involuntary Bankruptcy; Appointment of Receiver, etc. (1) A court enters a decree or order for relief with respect to the Company or any of its Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed or other similar relief is not granted under any applicable federal or state law; or (2) the continuance of any of the following events for sixty (60) days unless dismissed, bonded or discharged: (a) an involuntary case is commenced against the Company or any of its Subsidiaries, under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect; or (b) a receiver, liquidator, sequestrator, trustee, custodian or other fiduciary having similar powers over the Company or any of its Subsidiaries, or over all or a substantial part of their respective property, is appointed; or

                  (H)     Voluntary Bankruptcy; Appointment of Receiver, etc.(1) the Company or any of its Subsidiaries commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case or to the conversion of an involuntary case to a voluntary case under any such law or consents to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or (2) the Company or any of its Subsidiaries makes any assignment for the benefit of creditors; or (3) the board of directors of the Company or any of its Subsidiaries adopts any resolution or otherwise authorizes action to approve any of the actions referred to in this subsection 8.1(H); or

                  (I)     Liens. Any lien, levy or assessment is filed or recorded with respect to or otherwise imposed upon all or any part of the Collateral or the assets of the Company or any of its Subsidiaries by the United States or any department or instrumentality thereof or by any state, county, municipality or other governmental agency (other than Permitted Encumbrances) and such lien, levy or assessment is not stayed, vacated, paid or discharged within ten (10) days; or

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                  (J)     Judgment and Attachments. Any money judgment, writ or warrant of attachment, or similar process involving (1) an amount in any individual case in excess of $500,000 or (2) an amount in the aggregate at any time in excess of $1,000,000 (in either case not adequately covered by insurance as to which the insurance company has acknowledged coverage) is entered or filed against the Company or any of its Subsidiaries or any of their respective assets and remains undischarged, unvacated, unbonded or unstayed for a period of forty-five (45) consecutive days; or

                  (K)     Dissolution. Any order, judgment or decree is entered against the Company or any of its Subsidiaries decreeing the dissolution or split up of the Company or such Subsidiary, and such order remains undischarged or unstayed for a period in excess of twenty (20) consecutive days, but in any event not later than five (5) days prior to the date of any proposed dissolution or split up; provided that in the case of a dissolution or split up of a Subsidiary that is not a Borrower, such dissolution or split up could reasonably be expected to result in a Material Adverse Effect; or

                  (L)     Solvency. The Borrowers, on a consolidated basis, cease to be solvent (as such term is used in subsection 4.14) or any Borrower admits in writing its present or prospective inability to pay its debts as they become due; or

                  (M)     Injunction. The Company or any of its Subsidiaries is enjoined, restrained or in any way prevented by the order of any court or any administrative or regulatory agency from conducting all or any material part of its business and such order continues for thirty (30) consecutive days or more; or

                  (N)     Invalidity of Loan Documents. Any of the Loan Documents for any reason, other than a partial or full release in accordance with the terms thereof, ceases to be in full force and effect or is declared to be null and void, or any Borrower denies that it has any further liability under any Loan Documents to which it is party, or gives notice to such effect (in each case prior to such respective partial or full release); or

                  (O)     Failure of Security. Collateral Agent, on behalf of itself and Lenders, does not have or ceases to have a valid and perfected first priority security interest in the Collateral (subject to Permitted Encumbrances), in each case, for any reason other than the failure of any Agent or Lender to take any action within its control; or

                  (P)     Damage, Strike, Casualty. Any damage to, or loss, theft or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than ten (10) consecutive days, the cessation or substantial curtailment of revenue producing activities at any Facility of any Borrower or any of its Subsidiaries, if any such event or circumstance could reasonably be expected to have a Material Adverse Effect; or

                  (Q)     Licenses and Permits. The loss, suspension or revocation of, or failure to renew, any license, permit or other governmental authorization now held or hereafter acquired by the Borrowers that is required for either the Borrowers to conduct their business as presently conducted or for the Borrowers to receive reimbursements, which loss, suspension, revocation or failure to renew could reasonably be expected to have a Material Adverse Effect; or

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                  (R)     Forfeiture. There is filed against any Borrower any civil or criminal action, suit or proceeding under any federal or state racketeering statute (including, without limitation, the Racketeer Influenced and Corrupt Organization Act of 1970), which action, suit or proceeding (1) is not dismissed within one hundred twenty (120) days; and (2) could reasonably be expected to result in the confiscation or forfeiture of any material portion of the Collateral; or

                  (S)     Default Under Plan and/or Confirmation Order. The default by Borrowers (or any of them) under any of Borrowers' duties under the Plan or the Confirmation Order, including, but not limited to the failure of Borrowers (or any of them) to make any payment(s) to creditor(s) when due under the terms of the Plan or the Confirmation Order, including, but not limited to, any agreement(s) or document(s) approved or incorporated therein or executed pursuant thereto and subject to any applicable grace periods; or

                  (T)     Alteration Or Revocation Of Plan Or Confirmation Order. Any change to the Plan or Confirmation Order requested by Borrowers without the prior written consent of the Agents and any change to, or the revocation or change of the terms of the Plan or the Confirmation Order approved by the Bankruptcy Court on any basis, including, but not limited to orders of the Bankruptcy Court entered under Bankruptcy Code Section 1127(b), Bankruptcy Code Section 1144, and Federal Rule of Civil Procedure 60, as incorporated by Bankruptcy Rule 9024 in each case which could reasonably be expected to have a Material Adverse Effect; or

                  (U)     Term Loan Documents. The occurrence of an event of default by any Borrower under the Term Loan Documents which event of default gives the holders of the obligations under such Term Loan Documents the right to accelerate the Indebtedness thereunder prior to the stated maturity thereof; or

                  (V)     Material Contracts. The termination of, expiration (without renewal or replacement on then market terms) of, or occurrence of an event of default by any Borrower under any Material Contract that could reasonably be expected to have a Material Adverse Effect.

               Notwithstanding the foregoing, Borrowers' failure to comply with any same provision of this Agreement two (2) times in any twelve (12) month period shall effect an immediate Event of Default (without the expiration of any applicable cure period) with respect to all subsequent failures by Borrowers to comply with such provision of this Agreement, and Lenders thereupon may exercise any remedy set forth in this Section 8 without affording Borrowers any opportunity to cure such Event of Default.

          8.2     Suspension of Commitments. Upon the occurrence of any Default or Event of Default, notwithstanding any grace period or right to cure, Administrative Agent may or upon demand by Requisite Lenders shall, without notice or demand, immediately cease making additional Loans and the Commitments shall be suspended; provided that, in the case of a Default, if the subject condition or event is waived or cured within any applicable grace or cure period, the Commitments shall be reinstated.

          8.3     Acceleration. Upon the occurrence of any Event of Default described in the foregoing subsections 8.1(G) or 8.1(H), all Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby

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expressly waived by Borrower, and the Commitments shall thereupon terminate. Upon the occurrence and during the continuance of any other Event of Default, Administrative Agent may, and upon demand by Requisite Lenders shall, by written notice to Borrowers, (a) declare all or any portion of the Obligations to be, and the same shall forthwith become, immediately due and payable and the Commitments shall thereupon terminate and (b) demand that Borrowers immediately comply with the obligations set forth in subsection 2.4(C).

          8.4     Remedies. If any Event of Default shall have occurred and be continuing, in addition to and not in limitation of any other rights or remedies available to Agents and Lenders at law or in equity, Collateral Agent may, and shall upon the request of Requisite Lenders, exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the UCC (whether or not the UCC applies to the affected Collateral) and may also (a) require Borrowers to, and Borrowers hereby agree that they will, at their expense and upon request of Collateral Agent forthwith, assemble all or part of the Collateral as directed by Collateral Agent and make it available to Collateral Agent at a place to be designated by Collateral Agent which is reasonably convenient to both parties; (b) withdraw all cash in the Blocked Accounts to the extent permitted by law and the Concentration Account and apply such monies in payment of the Obligations in the manner provided in subsection 8.7; and (c) without notice or demand or legal process, enter upon any premises of any Borrower and take possession of the Collateral. Borrowers agree that, to the extent notice of sale of the Collateral or any part thereof shall be required by law, at least ten (10) business days notice to Borrowers of the time and place of any public disposition or the time after which any private disposition (which notice shall include any other information required by law) is to be made shall constitute reasonable notification. At any disposition of the Collateral (whether public or private), if permitted by law, any Agent or any Lender may bid (which bid may be, in whole or in part, in the form of cancellation of indebtedness) for the purchase, lease, or licensing of the Collateral or any portion thereof for the account of such Agent or Lender. Collateral Agent shall not be obligated to make any disposition of Collateral regardless of notice of disposition having been given. Borrowers shall remain liable for any deficiency to the extent the proceeds of the Collateral is insufficient to satisfy the payment in full of the Obligations hereunder. Collateral Agent may adjourn any public or private disposition from time to time by announcement at the time and place fixed therefor, and such disposition may, without further notice, be made at the time and place to which it was so adjourned. Collateral Agent is not obligated to make any representations or warranties in connection with any disposition of the Collateral. To the extent permitted by law, Borrowers hereby specifically waives all rights of redemption, stay or appraisal, which it has or may have under any law now existing or hereafter, enacted. Collateral Agent shall not be required to proceed against any Collateral but may proceed against Borrowers directly.

          8.5     Appointment of Attorney-in-Fact. Borrowers hereby constitute and appoint Collateral Agent as Borrowers' attorney-in-fact with full authority in the place and stead of any Borrower and in the name of any Borrower, Collateral Agent or otherwise, from time to time in Collateral Agent's discretion while an Event of Default is continuing to take any action and to execute any instrument that Collateral Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including: (a) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to enforce the obligations of any Account Debtor or other Person obligated on the Collateral and enforce the rights of any Borrower with respect to such obligations and to any property that secures such obligations; (c) to file any claims or take any action or institute any proceedings that Collateral Agent may deem necessary or desirable for the

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collection of or to preserve the value of any of the Collateral or otherwise to enforce the rights of Agents and Lenders with respect to any of the Collateral; (d) to pay or discharge taxes or Liens levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Collateral Agent in its sole discretion, and such payments made by Collateral Agent to become Obligations, due and payable promptly on demand; (e) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, assignments, verifications and notices in connection with Accounts, Chattel Paper or General Intangibles and other Documents relating to the Collateral; and (f) generally to take any act required of any Borrower under this Agreement, and to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Collateral Agent were the absolute owner thereof for all purposes, and to do, at Collateral Agent's option and Borrowers' expense, at any time or from time to time, all acts and things that Collateral Agent deems necessary to protect, preserve or realize upon the Collateral. Without limiting the foregoing, each Borrower hereby irrevocably authorizes the Collateral Agent to send to each Insurer that is an Account Debtor on any Account of such Borrower any notice that such Borrower is required to deliver hereunder if such Borrower has failed to deliver any such notice within five (5) Business Days after such Borrower was required to deliver such notice. In addition, if any Borrower breaches its obligation hereunder to direct payments of the proceeds of the Collateral to the appropriate Blocked Account, the Collateral Agent, as the true and lawful attorney for such Borrower pursuant to this subsection 8.5 and subject to any applicable law or regulation, may, by the signature or other act of any of the Collateral Agent's officers (without requiring any of them to do so), direct any federal, state or private payor or fiscal intermediary to pay proceeds of the Collateral to such Borrower by directing payment to the appropriate Blocked Account to the extent permitted by law.

          Borrowers hereby ratify and approve all acts of Collateral Agent made or taken pursuant to and in accordance with this subsection 8.5. The appointment of Collateral Agent as Borrowers' attorney-in-fact and Collateral Agent's rights and powers are coupled with an interest and are irrevocable, so long as any of the Commitments hereunder shall be in effect and until indefeasible payment in full, in cash, of all Obligations and termination of all Lender Letters of Credit.

          8.6     Limitation on Duty of Agents and Lenders with Respect to Collateral. Beyond the safe custody thereof, no Agent or Lender shall have any duty with respect to any Collateral in its possession (or in the possession of any agent or bailee) or with respect to any income thereon or the preservation of rights against prior parties or any other rights pertaining thereto. Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which Collateral Agent accords its own property. No Agent or Lender shall be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of any warehouse, carrier, forwarding agency, consignee, broker or other agent or bailee selected by Borrowers or selected by Collateral Agent in good faith.

          8.7     Application of Proceeds. Notwithstanding anything to the contrary contained in this Agreement, upon the occurrence and during the continuance of an Event of Default, (a) Borrowers irrevocably waive the right to direct the application of any and all payments at any time or times thereafter received by Administrative Agent from or on behalf of Borrower, and such Agent shall have the continuing and exclusive right to apply and to reapply any and all payments received at any time or times after the occurrence and during the continuance of an Event of Default against the Obligations until such time that the Event of Default shall have been cured or otherwise waived by the Administrative

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Agent in writing in such manner as Administrative Agent may deem advisable notwithstanding any previous application by Administrative Agent and (b) in the absence of a specific determination by Administrative Agent with respect thereto, the proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied: first, to all fees, costs and expenses incurred by or owing to Agents and then any Lender with respect to this Agreement, the other Loan Documents or the Collateral; second, to accrued and unpaid interest on the Obligations (including any interest which but for the provisions of any bankruptcy or insolvency law would have accrued on such amounts); third, to the principal amounts of the Obligations outstanding; and fourth, to any other Obligations of Borrowers owing to any Agent or Lender under the Loan Documents. Any balance remaining shall be delivered to Borrowers or to whomever may be lawfully entitled to receive such balance or as a court of competent jurisdiction may direct.

          8.8     License of Intellectual Property. Borrowers hereby assign, transfer and convey to Collateral Agent, for the benefit of Agents and Lenders, effective upon the occurrence of any Event of Default hereunder, the non-exclusive right and license to use all Intellectual Property owned or used by Borrowers together with any goodwill associated therewith, all to the extent necessary to enable Collateral Agent to realize on the Collateral and any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Collateral Agent and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge and does not require the consent of any other person.

          8.9     Waivers; Non-Exclusive Remedies. No failure on the part of any Agent or Lender to exercise, and no delay in exercising and no course of dealing with respect to, any right under this Agreement or the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise by any Agent or Lender of any right under this Agreement or any other Loan Document preclude any other or further exercise thereof or the exercise of any other right. The rights in this Agreement and the other Loan Documents are cumulative and shall in no way limit any other remedies provided by law.

SECTION 9. AGENT

          9.1     Agent.

                  (A)     Appointment. Each Lender hereto and, upon obtaining an interest in any Loan, any participant, transferee or other assignee of any Lender irrevocably appoints, designates and authorizes Heller as Collateral Agent and CITICORP as Administrative Agent to take such actions or refrain from taking such action as its agent on its behalf and to exercise such powers hereunder and under the other Loan Documents as are delegated by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. Neither the Agents nor any of their directors, officers, employees or agents shall be liable for any action so taken. The provisions of this subsection 9.1 are solely for the benefit of Agents and Lenders and no Borrower shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and the other Loan Documents, Agents shall act solely as agents of Lenders and do not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Borrowers. Agents may perform any of their duties hereunder, or under the Loan Documents, by or through its agents or employees.

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                  (B)     Nature of Duties. Agents shall have no duties, obligations or responsibilities except those expressly set forth in this Agreement or in the Loan Documents. The duties of Agents shall be mechanical and administrative in nature. No Agent shall have by reason of this Agreement a fiduciary, trust or agency relationship with or in respect of any Lender or Borrowers. Nothing in this Agreement or any of the Loan Documents, express or implied, is intended to or shall be construed to impose upon any Agent any obligations in respect of this Agreement or any of the Loan Documents except as expressly set forth herein or therein. Each Lender shall make its own appraisal of the credit worthiness of Borrowers, and shall have independently taken whatever steps it considers necessary to evaluate the financial condition and affairs of Borrowers, and Agents shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto (other than as expressly required herein), whether coming into its possession before the Closing Date or at any time or times thereafter. If any Agent seeks the consent or approval of any Lenders to the taking or refraining from taking any action hereunder, then such Agent shall send notice thereof to each Lender. Agents shall promptly notify each Lender any time that the Requisite Lenders have instructed Agents to act or refrain from acting pursuant hereto.

                  (C)     Rights, Exculpation, Etc. No Agent or any of their officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by them hereunder or under any of the Loan Documents, or in connection herewith or therewith, except that Agents shall be liable to the extent of their own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Agents shall not be liable for any apportionment or distribution of payments made by it in good faith and if any such apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Lender to whom payment was due but not made, shall be to recover from other Lenders any payment in excess of the amount to which they are determined to be entitled (and such other Lenders hereby agree to return to such Lender any such erroneous payments received by them). In performing its functions and duties hereunder, Agents shall exercise the same care which they would in dealing with loans for their own account, but no Agent or any of its agents or representatives shall be responsible to any Lender for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of this Agreement or any of the Loan Documents or the transactions contemplated thereby, or for the financial condition of any Borrower. No Agent shall be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Loan Documents or the financial condition of any Borrower, or the existence or possible existence of any Default or Event of Default. Any Agent may at any time request instructions from Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Loan Documents such Agent is permitted or required to take or to grant, and if such instructions are promptly requested, such Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from Requisite Lenders or all or such other portion of the Lenders as shall be prescribed by this Agreement. Without limiting the foregoing, no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of Requisite Lenders in the absence of an express requirement for a greater percentage of Lender approval hereunder for such action.

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                  (D)     Reliance. No Agent shall be under any duty to examine, inquire into, or pass upon the validity, effectiveness or genuineness of this Agreement, any other Loan Document, or any instrument, document or communication furnished pursuant hereto or in connection herewith. Agents shall be entitled to rely, and shall be fully protected in relying, upon any written or oral notices, statements, certificates, orders or other documents or any telephone message or other communication (including any writing, fax, telecopy or telegram) believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder. Agents shall be entitled to rely upon the advice of legal counsel, independent accountants, and other experts selected by such Agent in its sole discretion.

                  (E)     Indemnification. Lenders will reimburse and indemnify Agents for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, attorneys' fees and expenses), advances or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against such Agent in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by Agents under this Agreement or any of the Loan Documents, in proportion to each Lender's Pro Rata Share, but only to the extent that any of the foregoing is not promptly reimbursed by Borrowers; provided, however, no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements resulting from Agents' gross negligence or willful misconduct. If any indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against, even if so directed by Lenders or Requisite Lenders, until such additional indemnity is furnished. The obligations of Lenders under this subsection 9.1(E) shall survive the payment in full of the Obligations and the termination of this Agreement.

                  (F)     Lenders Includes Agents. With respect to its Commitments and the Loans made by it, Heller and CITICORP, each in its capacity as a Lender and not as an Agent hereunder, shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. The terms "Lenders" or "Requisite Lenders" or any similar terms shall, unless the context clearly otherwise indicates, include each of Heller and CITICORP in its individual capacity as a Lender or one of the Requisite Lenders. Each Lender acknowledges and agrees that each of Heller and CITICORP, either directly or through strategic affiliations, may lend money to, acquire equity or other ownership interests in, provide advisory services to and generally engage in any kind of banking, trust or other business with any Borrower as if it were not acting as an Agent pursuant hereto and without any duty to account therefor to Lenders. Each of Heller and CITICORP, either directly or through strategic affiliations, may accept fees and other consideration from any Borrower for services in connection with this Agreement or otherwise without having to account for the same to Lenders except as otherwise provided in this Agreement.

                  (G)     Successor Agent.

                            (1)     Resignation. Any Agent may resign from the performance of all its agency functions and duties hereunder at any time by giving at least thirty (30) Business Days' prior written notice to Borrowers and the Lenders. Such resignation shall take effect upon the acceptance by a successor Agent of appointment as provided below.

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                            (2)     Appointment of Successor. Upon any such notice of resignation pursuant to subsection 9.1(G)(1) above, Requisite Lenders shall appoint a successor Agent which, unless an Event of Default has occurred and is continuing, shall be reasonably acceptable to Borrowers. If a successor Agent shall not have been so appointed within said thirty (30) Business Day period, the retiring Agent, upon notice to Borrowers, shall then appoint a successor Agent who shall serve as Agent until such time, if any, as Requisite Lenders appoint a successor Agent as provided above.

                            (3)     Successor Agent. Upon the acceptance of any appointment as Agent under the Loan Documents by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent's resignation as Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent.

                  (H)     Collateral Matters.

                            (1)     Release of Collateral. Lenders hereby irrevocably authorize Collateral Agent, at its option and in its discretion, to release any Lien granted to or held by Collateral Agent upon any Collateral (a) upon termination of the Commitments and upon payment and satisfaction of all Obligations (other than contingent indemnification obligations to the extent no claims giving rise thereto have been asserted and Letter of Credit obligations for which Borrowers have provided cash collateral or back-to-back Letters of Credit); (b) upon exercise of the Partial Purchase Option and receipt by Collateral Agent of the Option Price; or (c) constituting property being sold or disposed of by a Borrower if such Borrower certifies to Collateral Agent that the sale or disposition is made in compliance with the provisions of this Agreement (and Collateral Agent may rely in good faith conclusively on any such certificate, without further inquiry). In addition, with the consent of Requisite Lenders, Collateral Agent may release Liens granted to or held by Collateral Agent upon any Collateral having a book value of not greater than ten percent (10%) of the total book value of all Collateral, as determined by Collateral Agent, provided, however, in no event will Collateral Agent, acting under the authority granted to it pursuant to this sentence, release during any calendar year Liens granted to or held by Collateral Agent upon any Collateral having a total book value in excess of twenty percent (20%) of the total book value of all Collateral, as determined by Collateral Agent.

                            (2)     Confirmation of Authority; Execution of Releases. Without in any manner limiting Collateral Agent's authority to act without any specific or further authorization or consent by Lenders (as set forth in subsection 9.1(H)(1) above), each Lender agrees to confirm in writing, upon request by Collateral Agent or Borrowers, the authority to release any Collateral conferred upon Collateral Agent under clauses (a), (b) and (c) of subsection 9.1(H)(1). To the extent Collateral Agent agrees to release any Lien granted to or held by Collateral Agent as authorized under subsection 9.1(H)(1), (a) Collateral Agent is hereby irrevocably authorized by Lenders to execute and/or authorize the filing of such documents, including, without limitation, UCC-3 partial release statements as may be necessary to evidence the release of the Liens granted to Collateral Agent for the benefit of Agents and Lenders, upon such Collateral; provided, however, that Collateral Agent shall not be required to execute any such document on terms which, in Collateral Agent's opinion, would expose Collateral Agent to liability or create upon Collateral Agent any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (b) Borrowers shall provide at least five (5) Business

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Days prior written notice of any request for any document evidencing such release of the Liens and Borrowers agree that any such release shall not in any manner discharge, affect or impair the Obligations or any Liens granted to Collateral Agent on behalf of the Agents and Lenders upon (or obligations of any Borrower, in respect of) all interests retained by any Borrower, including, without limitation, the proceeds of any sale, all of which shall continue to constitute part of the property covered by this Agreement or the Loan Documents.

                            (3)     Absence of Duty. The Agents shall have no obligation whatsoever to any Lender or any other Person to assure that the property covered by this Agreement or the Loan Documents exists or is owned by Borrowers or is cared for, protected or insured or has been encumbered or that the Liens granted to Collateral Agent on behalf of Collateral Agent and Lenders herein or pursuant hereto have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Collateral Agent in this Agreement or in any of the Loan Documents, it being understood and agreed that in respect of the property covered by this Agreement or the Loan Documents or any act, omission or event related thereto, Collateral Agent may act in any manner it may deem appropriate, in its reasonable discretion, given Collateral Agent's own interest in property covered by this Agreement or the Loan Documents as one of the Lenders and that Collateral Agent shall have no duty or liability whatsoever to any of the other Lenders; provided, however, that Collateral Agent shall exercise the same care which it would in dealing with loans for its own account.

                  (I)     Agency for Perfection. Each Agent and each Lender hereby appoint each other Lender as agent for the purpose of perfecting Collateral Agent's security interest in assets which, in accordance with the UCC in any applicable jurisdiction, can be perfected by possession or Control. Should any Lender (other than Collateral Agent) obtain possession of any such assets, such Lender shall notify Collateral Agent thereof, and, promptly upon Collateral Agent's request therefor, shall deliver such assets to Collateral Agent or in accordance with Agent's instructions. The Collateral Agent may file such proofs of claim or documents as may be necessary or advisable in order to have the claims of the Agents and the Lenders (including any claim for the reasonable compensation, expenses, disbursements and advances of the Collateral Agent and the Lenders, their respective agents, financial advisors and counsel), allowed in any judicial proceedings relative to Borrowers and/or their Subsidiaries, or any of their respective creditors or property, and shall be entitled and empowered to collect, receive and distribute any monies, securities or other property payable or deliverable on any such claims. Any custodian in any judicial proceedings relative to Borrowers and/or their Subsidiaries are hereby authorized by each Lender to make payments to the Collateral Agent and, in the event that the Collateral Agent shall consent to the making of such payments directly to the Lenders, to pay to the Collateral Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Collateral Agent, its agents, financial advisors and counsel, and any other amounts due the Collateral Agent. Nothing contained in this Agreement or the other Loan Documents shall be deemed to authorize the Collateral Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, or revision thereto, arrangement, adjustment or composition affecting the Loans, or the rights of any holder thereof, or to authorize the Collateral Agent to vote in respect of the claim of any Lender in any such proceeding, except as specifically permitted herein.

                  (J)     Exercise of Remedies. Each Lender agrees that it will not have any right individually to enforce or seek to enforce this Agreement or any Loan Document or to realize upon any collateral

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security for the Loans, unless instructed to do so by Collateral Agent, it being understood and agreed that such rights and remedies may be exercised only by Collateral Agent.

          9.2     Notice of Default.

                    No Agent shall be deemed to have knowledge or notice of the occurrence of any Default or Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to the Administrative Agent for the account of Lenders, unless such Agent shall have received written notice from a Lender or a Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". Any Agent will notify each Lender of its receipt of any such notice.

          9.3     Action by Agent.

                    Agents shall take such action with respect to any Default or Event of Default as may be requested by Requisite Lenders in accordance with Section 8. Unless and until an Agent has received any such request, such Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to any Default or Event of Default as it shall deem advisable or in the best interests of Lenders.

          9.4     Amendments, Waivers and Consents.

                  (A)     Percentage of Lenders Required. Except as otherwise provided herein or in any of the other Loan Documents, no amendment, modification, termination or waiver of any provision of this Agreement or any other Loan Document, or consent to any departure by any Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by (i) the Requisite Lenders and the Agents or (ii) the Agents, with the consent and on behalf of the Requisite Lenders (or, Agents, if expressly set forth herein or in any of the other Loan Documents) and the applicable Borrower; provided however, no amendment, modification, termination, waiver or consent shall be effective, unless in writing and signed by all Lenders and the Agents, or by the Agents, with the consent on behalf of all Lenders, to do any of the following: (1) increase any of the Commitments; (2) reduce the principal of or the rate of interest on any Loan or reduce the fees payable with respect to any Loan or Lender Letter of Credit; (3) extend the Termination Date or the scheduled due date for all or any portion of principal of the Loans or any interest or fees due hereunder; (4) amend the definition of the term "Requisite Lenders" or the percentage of Lenders which shall be required for Lenders to take any action hereunder; (5) amend or waive this subsection 9.4 or the definitions of the terms used in this subsection 9.4 insofar as the definitions affect the substance of this subsection 9.4; or (6) consent to the assignment, delegation or other transfer by any Borrower of any of its rights and obligations under any Loan Document; provided, further, that no amendment, modification, termination, waiver or consent affecting the rights or duties of any Agent under this Section 9 or under any Loan Document shall in any event be effective, unless in writing and signed by such Agent, in addition to the Lenders required to take such action. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 9 shall be binding upon each Lender or future Lender.

                  (B)     Specific Purpose or Intent. Each amendment, modification, termination, waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was

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given. No amendment, modification, termination, waiver or consent shall be required for Agent to take additional Collateral.

                  (C)     Failure to Give Consent; Replacement of Non-Consenting Lender. In the event any Agent requests the consent of a Lender and does not receive a written consent or denial thereof within ten (10) Business Days or such earlier date as may be specified in such request after such Lender's receipt of such request, then such Lender will be deemed to have denied the giving of such consent. If, in connection with any proposed amendment, modification, termination or waiver of any of the provisions of this Agreement requiring the consent or approval of all Lenders under this subsection 9.4, the consent of the Requisite Lenders is obtained but the consent of one or more other Lenders whose consent is required is not obtained, then Borrowers shall have the right, so long as all such non-consenting Lenders are either replaced or prepaid as described in clauses (1) or (2) below, to either (1) replace the non-consenting Lenders with one or more Replacement Lenders pursuant to subsection 2.11(A), as if such Lender were an Affected Lender thereunder, but only so long as each such Replacement Lender consents to the proposed amendment, modification, termination or waiver, or (2) prepay in full the Obligations of the non-consenting Lenders and terminate the non-consenting Lenders' Commitments pursuant to subsection 2.11(B), as if such Lender were an Affected Lender thereunder.

          Notwithstanding anything in this subsection 9.4, Collateral Agent and Borrowers, without the consent of either Requisite Lenders or all Lenders, may execute amendments to this Agreement and the Loan Documents, which consist solely of the making of typographical corrections.

          9.5     Assignments and Participations in Loans.

                  (A)     Assignments. Each Lender may assign its rights and delegate its obligations under this Agreement to an Eligible Assignee; provided, however, (1) such Lender (other than Heller and CITICORP) shall first obtain the written consent of Joint Bookrunners, (2) the amount of Commitments and Loans of the assigning Lender being assigned shall in no event be less than the lesser of (a) $10,000,000 or (b) the entire amount of the Commitments and Loans of such assigning Lender, and (3)(a) each such assignment shall be of a pro rata portion of all such assigning Lender's Loans and Commitments hereunder, and (b) the parties to such assignment shall execute and deliver to Administrative Agent, with a copy of Collateral Agent, for acceptance and recording a Assignment and Acceptance Agreement together with (i) a processing and recording fee of $3,500 payable by the assigning Lender equally to Agents and (ii) each of the Notes originally delivered to the assigning Lender for cancellation. The administrative fee referred to in clause (3) of the preceding sentence shall not apply to an assignment of a security interest in all or any portion of a Lender's rights under this Agreement or the other Loan Documents, to another Related Fund (as defined below) or Participant or as described in clause (1) of subsection 9.5(D) below. Upon receipt of all of the foregoing, Joint Bookrunners shall notify Borrowers of such assignment and Borrowers shall comply with its obligations under the last sentence of subsection 2.1(I). In the case of an assignment authorized under this subsection 9.5 and otherwise in accordance with the terms of this Agreement , the assignee shall be considered to be a "Lender" hereunder and Borrowers hereby acknowledge and agree that any assignment will give rise to a direct obligation of Borrowers to the assignee. The assigning Lender shall be relieved of its obligations to make Loans hereunder with respect to the assigned portion of its Commitment.

                  (B)     Participations. Each Lender may sell participations in all or any part of any Loans or Commitments made by it to another Person; provided, however, such Lender shall first obtain the prior

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written consent of Joint Bookrunners, which consent shall not be unreasonably withheld. All amounts payable by Borrowers hereunder shall be determined as if that Lender had not sold such participation and the holder of any such participation shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly effecting (1) any reduction in the principal amount or an interest rate on any Loan in which such holder participates; (2) any extension of the Termination Date or the date fixed for any payment of interest or principal payable with respect to any Loan in which such holder participates; and (3) any release of substantially all of the Collateral. Borrowers hereby acknowledge and agree that the participant under each participation shall for purposes of subsections 2.8, 2.9, 2.10, 9.6 and 10.2 be considered to be a "Lender".

                  (C)     No Relief of Obligations; Cooperation; Ability to Make LIBOR Loans. Except as otherwise provided in subsection 9.5(A) no Lender shall, as between any Borrower and that Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of participation in, all or any part of the Loans or other Obligations owed to such Lender. Each Lender may furnish any information concerning Borrowers and their Subsidiaries in the possession of that Lender from time to time to Eligible Assignees and participants (including prospective assignees and participants provided that such prospective assignees and participants agree to be bound by the confidentiality provisions hereof). Borrowers agree that they will use their reasonable best efforts to assist and cooperate with Joint Bookrunners and any Lender in any manner reasonably requested by Joint Bookrunners or such Lender to effect the sale of a participation or an assignment described above, including without limitation assistance in the preparation of appropriate disclosure documents or placement memoranda provided that the recipient of such information agrees to comply with the confidentiality provisions hereof. Notwithstanding anything contained in this Agreement to the contrary, so long as the Requisite Lenders shall remain capable of making LIBOR Loans, no Person shall become a Lender hereunder unless such Person shall also be capable of making LIBOR Loans.

                  (D)     Security Interests; Assignment to Affiliates. Notwithstanding any other provision set forth in this Agreement, any Lender may at any time following written notice to Agent (1) pledge the Obligations held by it or create a security interest in all or any portion of its rights under this Agreement or the other Loan Documents to secure obligations to any Federal Reserve Bank pursuant to Regulation A of the Federal Reserve Board or any Related Fund and the provisions of subsection 9.5(A) shall not apply to such pledge or security interest; provided, however, (a) no such pledge or grant of security interest to any Person shall release such Lender from its obligations hereunder or under any other Loan Document and (b) the acquisition of title to such Lender's Obligations pursuant to any foreclosure or other exercise of remedies by such Person shall be subject to the provisions of this Agreement and the other Loan Documents in all respects including, without limitation, any consent required by subsection 9.5; and (2) subject to complying with the provisions of subsection 9.5 (A), assign all or any portion of its funded loans to an Eligible Assignee which is a Subsidiary of such Lender or its parent company, to one or more other Lenders, or to a Related Fund. For purposes of this paragraph, a "Related Fund" shall mean, with respect to any Lender, a fund or other investment vehicle that invests in commercial loans and is managed by such Lender or by the same investment advisor that manages such Lender or by an Affiliate of such investment advisor.

                  (E)     Recording of Assignments. Administrative Agent shall maintain at its office in New York, New York, a copy of each Assignment and Acceptance Agreement delivered to it, with a copy to Collateral Agent, and a register for the recordation of the names and addresses of Lenders, and the commitments of, and principal amount of the Loans owing to each Lender pursuant to the terms hereof

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from time to time (the "Register"). The entries in the Register shall be presumptive evidence of the amounts due and owing to Lender in the absence of manifest error. Each Borrower, Agent and Lender may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by any Borrower and any Lender, at any reasonable time upon reasonable prior notice.

          9.6     Set Off and Sharing of Payments. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Lender is hereby authorized by Borrowers at any time or from time to time, with reasonably prompt subsequent notice to Borrowers (any prior or contemporaneous notice being hereby expressly waived) to set off and to appropriate and to apply any and all (a) balances held by such Lender or any of its Affiliates at any of its offices for the account of any Borrower or any of its Subsidiaries (regardless of whether such balances are then due to a Borrower or its Subsidiaries), and (b) other property at any time held or owing by such Lender or any of its Affiliates to or for the credit or for the account of any Borrower against and on account of any of the Obligations; except that no Lender shall exercise any such right without the prior written consent of Joint Bookrunners. Any Lender exercising its right to set off shall purchase for cash (and the other Lenders shall sell) interests in each of such other Lender's Pro Rata Share of the Obligations as would be necessary to cause all Lenders to share the amount so set off with each other Lender in accordance with their respective Pro Rata Shares. Borrowers agree, to the fullest extent permitted by law, that any Lender may exercise its right to set off with respect to amounts in excess of its Pro Rata Share of the Obligations and upon doing so shall deliver such amount so set off to Administrative Agent for the benefit of Agents and of all Lenders in accordance with their Pro Rata Shares.

          9.7     Disbursement of Funds. Administrative Agent may, on behalf of Lenders, disburse funds to Borrowers for Loans requested. Each Lender shall reimburse Administrative Agent on demand for all funds disbursed on its behalf by Administrative Agent, or if Administrative Agent so requests, each Lender will remit to Administrative Agent its Pro Rata Share of any Loan or Advance before Administrative Agent disburses same to Borrowers. If Administrative Agent elects to require that each Lender make funds available to Administrative Agent prior to a disbursement by Administrative Agent to Borrowers, Administrative Agent shall advise each Lender by telephone, telex, fax or telecopy of the amount of such Lender's Pro Rata Share of the Loan requested by Borrowers no later than 1:00 p.m. New York time on the Funding Date applicable thereto, and each such Lender shall pay Administrative Agent such Lender's Pro Rata Share of such requested Loan, in same day funds, by wire transfer to Administrative Agent's account on such Funding Date.

          9.8     Settlements, Payments and Information.

                   (A)     Revolving Advances and Payments; Fee Payments.

                             (1)     Fluctuation of Revolving Loan Balance. The Revolving Loan balance may fluctuate from day to day through Administrative Agent's disbursement of funds to, and receipt of funds from, Borrowers. In order to minimize the frequency of transfers of funds between Agent and each Lender notwithstanding terms to the contrary set forth in Section 2 and subsection 9.7, Revolving Advances and repayments, except as set forth in subsection 2.1, will be settled according to the procedures described in this subsection 9.8. Notwithstanding these procedures, each Lender's obligation to fund its portion of any advances made by Administrative Agent to Borrowers will commence on the date such advances are

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made by Administrative Agent. Such payments will be made by each Lender without set-off, counterclaim or reduction of any kind.

                            (2)     Settlement Dates. Once each week for the Revolving Loan or if an Event of Default shall have occurred and be continuing more frequently (including daily), if Administrative Agent so elects (each such day being a "Settlement Date"), Administrative Agent will advise each Lender by telephone, fax or telecopy of the amount of each such Lender's Pro Rata Share of the Revolving Loan. In the event payments are necessary to adjust the amount of such Lender's required Pro Rata Share of the Revolving Loan balance to such Lender's actual Pro Rata Share of the Revolving Loan balance as of any Settlement Date, the party from which such payment is due will pay the other, in same day funds, by wire transfer to the other's account not later than 3:00 p.m. New York time on the Business Day following the Settlement Date.

                            (3)     Settlement Definitions. For purposes of this subsection 9.8(A), the following terms and conditions will have the meanings indicated:

                                     (a)     "Daily Loan Balance" means an amount calculated as of the end of each calendar day by subtracting (i) the cumulative principal amount paid by Administrative Agent to a Lender on a Loan from the Closing Date through and including such calendar day, from (ii) the cumulative principal amount on a Loan advanced by such Lender to Administrative Agent on that Loan from the Closing Date through and including such calendar day.

                                     (b)     "Daily Interest Rate" means an amount calculated by dividing the interest rate payable to a Lender on a Loan (as set forth in subsection 2.2) as of each calendar day by three hundred sixty (360).

                                     (c)     "Daily Interest Amount" means an amount calculated by multiplying the Daily Loan Balance of a Loan by the associated Daily Interest Rate on that Loan.

                                     (d)     "Interest Ratio" means a number calculated by dividing the total amount of the interest on a Loan received by Administrative Agent with respect to the immediately preceding month by the total amount of interest on that Loan due from Borrowers during the immediately preceding month.

                            (4)     Settlement Payments. On the first Business Day of each month ("Interest Settlement Date"), Administrative Agent will advise each Lender by telephone, fax or telecopy of the amount of such Lender's share of interest and fees on each of the Loans as of the end of the last day of the immediately preceding month. Provided that such Lender has made all payments required to be made by it under this Agreement, Administrative Agent will pay to such Lender, by wire transfer to such Lender's account (as specified by such Lender on the signature page of this Agreement or the applicable Assignment and Acceptance Agreement, as amended by such Lender from time to time after the date hereof or in the applicable Assignment and Acceptance Agreement) not later than 3:00 p.m. Chicago time on the next Business Day following the Interest Settlement Date, such Lender's share of interest and fees on each of the Loans. Such Lender's share of interest on each Loan will be calculated for that Loan by adding together the Daily Interest Amounts for each calendar day of the prior month for that Loan and

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multiplying the total thereof by the Interest Ratio for that Loan. Such Lender's share of the Unused Line Fee described in subsection 2.3(A) shall be an amount equal to (a)(i) such Lender's average Revolving Loan Commitment during such month, less (ii) the sum of (x) such Lender's average Daily Loan Balance of the Revolving Loans, plus (y) such Lender's Pro Rata Share of the average daily aggregate amount of Letter of Credit Reserve, in each case for the preceding month, multiplied by (b) the percentage required by subsection 2.3(A). Such Lender's share of all other fees paid to Administrative Agent for the benefit of Lenders hereunder shall be paid and calculated based on such Lender's Commitment with respect to the Loans on which such fees are associated. To the extent Administrative Agent does not receive the total amount of any fee owing by Borrowers under this Agreement, each amount payable by Administrative Agent to a Lender under this subsection 9.8(A)(4) with respect to such fee shall be reduced on a pro rata basis. The Administrative Agent and the Lenders hereby acknowledge and agree that in no event shall the aggregate fee payments received by such Lenders pursuant to this subsection 9.8(A)(4) exceed the total amount of fees pursuant to subsection 2.3.

                  (B)     Return of Payments.

                            (1)     Recovery after Non-Receipt of Expected Payment. If any Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by such Agent from Borrowers and such related payment is not received by such Agent, then such Agent will be entitled to recover such amount from such Lender without set-off, counterclaim or deduction of any kind together with interest thereon, for each day from and including the date such amount is made available by such Agent to such Lender to but excluding the date of repayment to such Agent, at the greater of the Federal Funds Effective Rate and a rate determined by such Agent in accordance with banking industry rules on interbank compensation.

                            (2)     Recovery of Returned Payment. If any Agent determines at any time that any amount received by such Agent under this Agreement must be returned to Borrowers or paid to any other Person pursuant to any requirement of law, court order or otherwise, then, notwithstanding any other term or condition of this Agreement, such Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to such Agent on demand any portion of such amount that such Agent has distributed to such Lender, together with interest at such rate, if any, as such Agent is required to pay to Borrowers or such other Person, without set-off, counterclaim or deduction of any kind.

          9.9     Discretionary Advances. Notwithstanding anything contained herein to the contrary, Collateral Agent may, in its sole discretion, make Revolving Advances in an aggregate amount of not more than $1,000,000 in excess of the limitations set forth in the Borrowing Base for the purpose of preserving or protecting the Collateral or for incurring any costs associated with collection or enforcing rights or remedies against the Collateral, or incurred in any action to enforce this Agreement or any other Loan Document.

SECTION 10. MISCELLANEOUS

          10.1     Expenses and Attorneys' Fees. Whether or not the transactions contemplated hereby shall be consummated, Borrowers agree to promptly pay all reasonable fees and actual costs and expenses incurred in connection with any matters contemplated by or arising out of this Agreement or the other Loan Documents including the following, and all such reasonable fees and actual costs and expenses shall be part of the Obligations, payable on demand and secured by the Collateral: (a) reasonable fees and

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actual costs and expenses incurred by any Agent (including reasonable attorneys' fees and expenses, the allocated costs of such Agent's internal legal staff and fees of environmental consultants, accountants and other professionals retained by such Agent) incurred in connection with the examination, review, due diligence investigation, documentation and closing of the financing arrangements evidenced by the Loan Documents; (b) reasonable fees and actual costs and expenses incurred by any Agent (including attorneys' fees and expenses, the allocated costs of such Agent's internal legal staff and fees of environmental consultants, accountants and other professionals retained by such Agent) incurred in connection with the review, negotiation, preparation, documentation, execution, syndication and administration of the Loan Documents, the Loans, and any amendments, waivers, consents, forbearances and other modifications relating thereto or any subordination or intercreditor agreements, including reasonable documentation charges assessed by such Agent for amendments, waivers, consents and any other documentation prepared by such Agent's internal legal staff; (c) reasonable fees and actual costs and expenses (including reasonable attorneys' fees and allocated costs of internal legal staff) incurred by any Agent or Lender in creating, perfecting and maintaining perfection of Liens in favor of Agents, on behalf of Agents and Lenders; (d) reasonable fees and actual costs and expenses incurred by any Agent in connection with forwarding to any Borrower the proceeds of Loans including such Agent's or any Lenders' standard wire transfer fee; (e) reasonable fees and actual costs and expenses and bank charges, including bank charges for returned checks, incurred by any Agent or any Lender in establishing, maintaining and handling lock box accounts, blocked accounts or other accounts for collection of the Collateral; and (f) reasonable fees and actual costs and expenses (including reasonable attorneys' fees and allocated costs of internal legal staff) of any Agent or any Lender and costs of settlement incurred in collecting upon or enforcing rights against the Collateral or incurred in any action to enforce this Agreement or the other Loan Documents or to collect any payments due from any Borrower under this Agreement or any other Loan Document or incurred in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement, whether in the nature of a "workout" or in connection with any insolvency or bankruptcy proceedings or otherwise.

          10.2     Indemnity. In addition to the payment of expenses pursuant to subsection 10.1, whether or not the transactions contemplated hereby shall be consummated, each Borrower agrees to indemnify, pay and hold each Agent and Lender, and the officers, directors, employees, agents, consultants, auditors, persons engaged by any Agent or Lender, to evaluate or monitor the Collateral, affiliates of any Agent, or Lender and permitted holders of any Note (collectively called the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnity shall be designated a party thereto) that may be imposed on, incurred by, or asserted against that Indemnitee, in any manner relating to or arising out of this Agreement or the other Loan Documents, the consummation of the transactions contemplated by this Agreement, the statements contained in that certain letter to the Company dated December 21, 2001, containing a summary of proposed terms for this Agreement, each Agent's and Lender's agreement to make the Loans hereunder, the use or intended use of the proceeds of any of the Loans or the exercise of any right or remedy hereunder or under the other Loan Documents (the "Indemnified Liabilities"); provided that Borrowers shall have no obligation to an Indemnity hereunder with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnitee.

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          10.3     Notices. Unless otherwise specifically provided herein, all notices shall be in writing addressed to the respective party as set forth below and may be personally served, faxed, telecopied or sent by overnight courier service or United States mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by fax or telecopy, on the date of transmission if transmitted on a Business Day before 4:00 p.m. New York time or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, the next succeeding Business Day after delivery to such courier properly addressed; or (d) if by U.S. Mail, four (4) Business Days after depositing in the United States mail, with postage prepaid and properly addressed.

                                           If to any Borrower:                c/o SUN HEALTHCARE GROUP, INC.
                                                                                        101 Sun Avenue NE
                                                                                        Albuquerque, New Mexico 87109
                                                                                        Attn: Treasurer
                                                                                        Fax/Telecopy No.: (505) 468-6635

                                                With a copy to:                 c/o SUN HEALTHCARE GROUP, INC.
                                                                                        101 Sun Avenue NE
                                                                                        Albuquerque, New Mexico 87109
                                                                                        Attn: General Counsel
                                                                                        Fax/Telecopy No.: (505) 468-4747

                    If to Collateral Agent or to Heller:                 HELLER HEALTHCARE FINANCE, INC.
                                                                                        2 Wisconsin Circle, Fourth Floor
                                                                                        Chevy Chase, Maryland 20815
                                                                                        Attn:  Loan Officer Portfolio Management Group,
                                                                                                 Sun Healthcare
                                                                                        Fax/Telecopy No.: (301) 664-9890

                                               With a copy to:                  HELLER HEALTHCARE FINANCE, INC.
                                                                                        2 Wisconsin Circle, Fourth Floor
                                                                                        Chevy Chase, Maryland 20815
                                                                                        Attn: Katherine Lofft, Esquire
                                                                                        Fax/Telecopy No.: (301) 664-9866

       If to Administrative Agent or CITICORP:                  Citicorp USA, Inc.
                                                                                        388 Greenwich Street
                                                                                        19^th Floor
                                                                                        New York, New York 10013
                                                                                        Attn: William Washburn
                                                                                        Fax/Telecopy No.: (212) 816-2613

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                                                 With a copy to:               Citicorp USA, Inc.
                                                                                        2 Penn's Way
                                                                                        Suite 200
                                                                                        New Castle, Delaware 19720
                                                                                        Attn: Robert Partee
                                                                                        Fax/Telecopy No.: (302) 894-6120

               If to any Lender: Its address indicated on the signature page hereto, in an Assignment and Acceptance Agreement or in a notice to Agents and Borrowers or to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this subsection 10.3.

          10.4     Survival of Representations and Warranties and Certain Agreements. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Borrowers, Agents, and Lenders set forth in subsections 9.1(E), 10.1, 10.2, 10.6, 10.11, 10.14, and 10.15 shall survive the payment of the Loans and the termination of this Agreement.

          10.5     Indulgence Not Waiver. No failure or delay on the part of any Agent, Lender or permitted holder of any Note in the exercise of any power, right or privilege hereunder or under any Note shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

          10.6     Marshaling; Payments Set Aside. No Agent or Lender shall be under any obligation to marshal any assets in favor of any Borrower or any other party or against or in payment of any or all of the Obligations. To the extent that any Borrower makes a payment or payments to any Agent and/or Lender or any Agent and/or Lender enforces its security interests or exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any applicable bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the Obligations or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

          10.7     Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement among the parties hereto and supersede all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof, and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto.

          10.8     Severability. The invalidity, illegality or unenforceability in any jurisdiction of any provision in or obligation under this Agreement or the other Loan Documents shall not affect or impair

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the validity, legality or enforceability of the remaining provisions or obligations under this Agreement, or the other Loan Documents.

          10.9     Lenders' Obligations Several; Independent Nature of Lenders' Rights. The obligation of each Lender hereunder is several and not joint and no Agent or Lender shall be responsible for the obligation or Commitment of any other Lender hereunder. In the event that any Lender at any time should fail to make a Loan as herein provided, the Lenders, or any of them, at their sole option, may make the Loan that was to have been made by the Lender so failing to make such Loan. Nothing contained in any Loan Document and no action taken by any Agent or Lender pursuant hereto or thereto shall be deemed to constitute Lenders to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and, provided the responsible Agent fails or refuses to exercise any remedies against Borrowers after receiving the direction of the Requisite Lenders, each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose.

          10.10     Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect.

          10.11     APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the law of the State of New York excluding (to the greatest extent a New York court would permit) any rule of law that would cause the application of the law of any jurisdiction other than the State of New York.

          10.12     Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, no Borrower may assign its rights or obligations hereunder without the written consent of Lenders unless such assignment is to another Borrower, in which event assignor Borrower shall remain liable for all the Obligations under this Agreement.

          10.13     No Fiduciary Relationship; No Duty; Limitation of Liabilities.

                  (A)     No Fiduciary Relationship. No provision in this Agreement or in any of the other Loan Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty by any Agent or Lender to Borrowers.

                  (B)     No Duty. All attorneys, accountants, appraisers, and other professional Persons and consultants retained by any Agent or Lender shall have the right to act exclusively in the interest of such Agent or Lender and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to any Borrower or any Borrowers' shareholders or any other Person.

                  (C)     Limitation of Liabilities. Neither any Agent nor any Lender, nor any affiliate, officer, director, shareholder, employee, attorney, or agent of any Agent or any Lender shall have any liability with respect to, and Borrowers hereby waive, release, and agree not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by any Borrower in

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connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. Borrowers hereby waive, release, and agree not to sue any Agent or Lender or any of Agents' or any Lenders' affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the transactions contemplated hereby. Notwithstanding anything in the foregoing in this subsection 10.13, the Agents and Lenders hereby acknowledge and agree that Borrowers shall not be deemed to waive or release, or agree not to sue any Indemnitee upon, any claim against any Indemnitee for direct or actual damages that is the direct result of the gross negligence or willful misconduct of such Indemnitee.

          10.14     CONSENT TO JURISDICTION. BORROWERS HEREBY CONSENT TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK AND IRREVOCABLY AGREE THAT, SUBJECT TO ANY AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. BORROWERS EXPRESSLY SUBMIT AND CONSENT TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVE ANY DEFENSE OF FORUM NON CONVENIENS. BORROWERS HEREBY WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON THE COMPANY BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO THE COMPANY, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED.

           10.15     WAIVER OF JURY TRIAL. EACH BORROWER, AGENT AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. EACH BORROWER, AGENT AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH BORROWER, AGENT AND LENDER WARRANT AND REPRESENT THAT EACH HAS HAD THE OPPORTUNITY OF REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS.

          10.16     Construction. Each Borrower, Agent and Lender acknowledge that it has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel. This Agreement and the other Loan Documents shall be construed as if jointly drafted by each Borrower, Agent and Lender.

          10.17     Counterparts; Effectiveness. This Agreement and any amendments, waivers, consents, or supplements may be executed via telecopier or facsimile transmission in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which counterparts together shall constitute one and the same

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instrument. This Agreement shall become effective upon the execution and delivery of an executed counterpart hereof by each of the parties hereto.

          10.18     Confidentiality. Each Agent and Lender agree to exercise its best efforts to keep confidential any non-public information delivered pursuant to the Loan Documents and identified as such by Borrowers and not to disclose such information to Persons other than to: its respective affiliates, officers, directors and employees and in each case, on a need-to-know basis and provided that such recipient complies with the confidentiality provisions hereof; or its potential assignees or participants; or Persons employed by or engaged by an Agent, a Lender or a Lender's assignees or participants including, without limitation, attorneys, auditors, professional consultants, rating agencies and portfolio management services and in each case, on a need-to-know basis and provided that such recipient complies with the confidentiality provisions hereof. The confidentiality provisions contained in this subsection shall not apply to disclosures (a) required to be made by any Agent or Lender to any regulatory or governmental agency or pursuant to legal process or (b) consisting of general portfolio information that does not identify any Borrower. The obligations of Agents and Lenders under this subsection 10.18 shall supersede and replace the obligations of Agents and Lenders under any confidentiality agreement in respect of this financing executed and delivered by any Agent or Lender prior to the date hereof. In no event shall any Agent or Lender be obligated or required to return any materials furnished by any Borrower; provided, however, each potential assignee or participant shall be required to agree that if it does not become an assignee (or participant) it shall return all materials furnished to it by such Borrower in connection herewith.

          10.19     Publication. Borrowers consent to the publication by Agents of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement; provided, however, Agents shall provide a draft of any such tombstone or similar advertising material to Borrowers for review prior to the publication thereof. Agents and Lenders reserve the right to provide industry trade organizations information necessary and customary for inclusion in league table measurements.

     10.20     Intercreditor Agreement. Notwithstanding any contrary provision in any Loan Document, each Loan Document is subject to the provisions of the Intercreditor Agreement, and Agents and Lenders acknowledge and agree to be bound by the provisions of the Intercreditor Agreement.

SECTION 11. DEFINITIONS AND ACCOUNTING TERMS

          11.1     Certain Defined Terms. The following terms used in this Agreement shall have the respective meanings provided for in the UCC: "Accounts", "Buyer in ordinary course of business", "Chattel Paper", "commercial tort claim", "Control", "Deposit Account", "Documents", "Electronic Chattel Paper", "Equipment", "Fixtures", "General Intangibles", "Goods", "Instruments", "Inventory", "Investment Property", "Letter of Credit", "Letter-of-Credit Rights", "Lessee", "Lessee in ordinary course of business", "Payment Intangibles", "Proceeds", "Record", "Software", "Supporting Obligations" and "Tangible Chattel Paper".

The following terms used in this Agreement shall have the following meanings:

          "Account Debtor" means any Person obligated on any Account of any Borrower, including without limitation, any Insurer and any Medicaid/Medicare Account Debtor.

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          "Administrative Agent" has the meaning assigned to that term in the Recitals section of this Agreement.

          "Administrative Agent Fee" has the meaning assigned to that term in subsection 2.3(D)

          "Advance" shall mean an advance under the Revolving Loan.

          "Affected Lender" has the meaning assigned to that term in subsection 2.11.

          "Affiliate" means, as to any Person (other than any Agent, Lender or Borrower): (a) directly or indirectly controlling, controlled by, or under common control with, such Person, provided, however, that no individual shall be an Affiliate of any Person solely by reason of his or her being a director, officer or employee of such Person; (b) directly or indirectly owning or holding five percent (5%) or more of any equity interest in Borrower; (c) five percent (5%) or more of whose stock or other equity interest having ordinary voting power for the election of directors or the power to direct or cause the direction of management, is directly or indirectly owned or held by Borrower; or (d) which has a senior officer who is also a senior officer of Borrower; provided, however, that for purposes of this Agreement a Borrower shall not be deemed an "Affiliate" of any other Borrower. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or other equity interest, or by contract or otherwise.

          "Agents" mean, collectively, Heller in its capacity as Collateral Agent for the Lenders, together with CITICORP in its capacity as Administrative Agent under the Loan Documents and any successor in either such capacity appointed pursuant to subsection 9.1(G).

          "Agreement" means this Loan and Security Agreement as it may be amended, restated, supplemented or otherwise modified from time to time.

          "Asset Disposition" means the disposition, whether by sale, lease, transfer, loss, damage, destruction, condemnation or otherwise, of any or all of the assets of any Borrower or any of its Subsidiaries other than (i) sales of Inventory to a Buyer in Ordinary Course of Business, (ii) disposition of worn out or obsolete equipment, (iii) transfers or other dispositions of assets or property by a Borrower to another Borrower, (iv) Permitted Divestitures, (v) the Campus Transaction and (vi) the THCI Turnover.

          "Assignment and Acceptance Agreement" shall mean an Assignment and Acceptance Agreement substantially in the form of Exhibit B.

          "Bank Letter of Credit" means each Letter of Credit issued by a bank acceptable to and approved by Administrative Agent for the account of Borrower and supported by a risk participation agreement issued by Administrative Agent.

          "Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978, as amended, and codified as 11 U.S.C. Sections 101 et seq.

          "Bankruptcy Court" has the meaning assigned to that term in the Recitals to this Agreement.

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          "Base Rate" means a variable rate of interest per annum equal to the higher of (a) the rate of interest from time to time published by the Board of Governors of the Federal Reserve System as the "Bank Prime Loan" rate in Federal Reserve Statistical Release H.15(519) entitled "Selected Interest Rates" or any successor publication of the Federal Reserve System reporting the Bank Prime Loan rate or its equivalent, or (b) the Federal Funds Effective Rate plus fifty (50) basis points. The statistical release generally sets forth a Bank Prime Loan rate for each Business Day. The applicable Bank Prime Loan rate for any date not set forth shall be the rate set forth for the last preceding date. In the event the Board of Governors of the Federal Reserve System ceases to publish a Bank Prime Loan rate or its equivalent, the term "Base Rate" shall mean a variable rate of interest per annum equal to the highest of the "prime rate", "reference rate", "base rate", or other similar rate announced from time to time by any of the three largest banks (based on combined capital and surplus) headquartered in New York, New York (with the understanding that any such rate may merely be a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer by any such bank).

          "Base Rate Loans" means Loans bearing interest at rates determined by reference to the Base Rate.

          "Base Rate Margin" has the meaning assigned to that term in subsection 2.2 (A).

          "Blocked Accounts" has the meaning assigned to that term in subsection 4.5(K)(1).

          "Borrower" has the meaning assigned to that term in the Recitals section of this agreement.

          "Borrowing Base" has the meaning assigned to the term in subsection 2.1(B).

          "Borrowing Base Certificate" means each certificate and schedules duly executed by the Financial Officer, appropriately completed and in substantially the form of Exhibit C.

          "Borrowing Deposit Accounts" has the meaning assigned to that term in subsection 2.4(A)(1).

          "Business Day" means any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the City of New York, or is a day on which banking institutions located in such city are closed, or for the purposes of LIBOR Loans only, "Business Day" means a London Banking Day.

          "Calculation Period" has the meaning assigned to that term in subsection 2.2(A).

          "Campus Transaction" means the sale of the headquarters office complex of the Company, located in Albuquerque, NM pursuant to the Plan.

          "Capital Expenditures" shall mean, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities during such period and excluding that portion of Capital Leases (except any cash down payment) which is capitalized on the consolidated balance sheet of the Company and its Subsidiaries) net of cash amounts received by the Borrowers from other Persons during such period in reimbursement of Capital Expenditures made by the Borrowers, excluding interest capitalized during construction by the Borrowers during such period, that, in conformity with GAAP, are required to be

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included in or reflected by the property, plant, equipment or intangibles or similar fixed asset accounts reflected in the consolidated balance sheet of the Company and its Subsidiaries (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by any Borrower to the extent of the gross amount of such purchase price less the book value of the equipment being traded in at such time), but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or the damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation or eminent domain of such assets being replaced.

          "Capital Lease" means any lease of any property (whether real, personal or mixed) that, in conformity with GAAP, should be accounted for as a capital lease.

          "Case" has the meaning assigned to that term in the Recitals to this Agreement.

          "CareerStaff" has the meaning assigned to that term in subsection 2.4(A)(1)(d)

          "CareerStaff Deposit Accounts" has the meaning assigned to that term in subsection 2.4(A)(1)(d).

          "Cash Equivalents" means: (a) marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within six (6) months from the date of acquisition thereof; (b) commercial paper maturing no more than six (6) months from the date issued and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Corporation or at least P-1 from Moody's Investors Service, Inc.; (c) certificates of deposit or bankers' acceptances maturing within six (6) months from the date of issuance thereof issued by, or overnight reverse repurchase agreements from any commercial bank organized under the laws of the United States of America, or any state thereof or the District of Columbia, having combined capital and surplus of not less than $250,000,000 and not subject to setoff rights in favor of such bank; and (d) any money market fund registered under the Investment Company Act of 1940, as amended, investing in the above described securities or commercial paper if such fund holds investments in excess of $100,000,000 and the Borrowers' aggregate investment in such funds is less than ten percent (10%) of the total amount invested in such fund.

          "Certificate of Exemption" has the meaning assigned to that term in subsection 2.9(C).

          "CITICORP" has the meaning assigned to that term in the Recitals section of this Agreement.

          "Closing Balance Sheet" means that consolidated balance sheet of the Borrowers, and delivered by Borrowers to Collateral Agent in accordance with the Reporting Rider.

          "Closing Date" means February 28, 2002.

          "Collateral" has the meaning assigned to that term in subsection 2.7(A).

          "Collateral Agent" has the meaning assigned to that term in the Recitals section of this Agreement.

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          "Collateral Management Fee" has the meaning assigned to that term in subsection 2.3(D).

          "Collecting Bank" has the meaning assigned to that term in subsection 2.4(A)(3).

          "Collection Account" has the meaning assigned to that term in subsection 2.4(A)(3).

          "Commitment" means the commitment or commitments of Lenders to make Loans and to provide Lender Letters of Credit as set forth in Section 2.

          "Company" has the meaning assigned to such term in the Recitals to this Agreement.

          "Company's Accountants" means the independent certified public accountants selected by the Company and its Subsidiaries and reasonably acceptable to Collateral Agent, which selection shall not be modified during the terms of this Agreement (except if the Company retains another of the so-called "Big Five" accounting firms) without the Collateral Agent's prior written consent, which consent shall not be unreasonably withheld.

          "Compliance and Pricing Certificate" means a certificate duly executed by the chief executive officer or chief financial officer of the Company appropriately completed and in substantially the form of Exhibit D.

          "Concentration Account" has the meaning assigned to that term in subsection 2.4(A).

          "Confirmation Hearing" has the meaning assigned to that term in the Recitals to this Agreement.

          "Confirmation Order" has the meaning assigned to that term in the Recitals to this Agreement.

          "Copyright Security Agreement" means any Copyright Security Agreement executed and delivered by certain of the Borrowers to Agent, as the same may be amended and in effect from time to time.

          "Copyrights" means collectively all of the following (a) all U.S. copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations and copyright applications, including those listed in the schedules to any Copyright Security Agreement; (b) all renewals of any of the foregoing; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including damages or payments for past, present or future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world.

          "Daily Interest Amount" has the meaning assigned to that term in subsection 9.8(A)(3).

          "Daily Interest Rate" has the meaning assigned to that term in subsection 9.8(A)(3).

          "Daily Loan Balance" has the meaning assigned to that term in subsection 9.8(A)(3).

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          "Default" means a condition, act or event that, after notice or lapse of time or both, would constitute an Event of Default if that condition, act or event were not waived, cured or removed within any applicable grace or cure period.

          "Default Rate" has the meaning assigned to that term in subsection 2.2(A).

          "Defaulted Amount" means, with respect to any Lender at any time, any amount required to be paid hereunder or under any other Loan Document by such Lender to the Administrative Agent or any other Lender which has not been so paid.

          "Defaulting Lender" means, at any time, any Lender that owes a Defaulted Amount.

          "Depository Banks" has the meaning assigned to that term in subsection 2.4(A)(1).

          "Dollars" and "$" shall mean lawful money of the United States of America.

          "EBITDA" means, for any period, without duplication, the total of the following for the Borrowers on a consolidated basis, each calculated for such period: (a) net income determined in accordance with GAAP; plus, to the extent included in the calculation of net income, (b) the sum of (i) income and franchise taxes paid or accrued; (ii) interest expenses, net of interest income, paid or accrued; (iii) amortization and depreciation and (iv) other non-cash charges (excluding accruals for cash expenses made in the ordinary course of business); less, to the extent included in the calculation of net income, (c) the sum of (i) the income of any Person in which any Borrower has a direct or indirect ownership interest except to the extent such income is received by such Borrower in a cash distribution during such period; (ii) gains or losses from sales or other dispositions of assets (other than Inventory in the normal course of business); and (iii) extraordinary or non-recurring gains and non-recurring losses.

          "Eligible Accounts" has the meaning assigned to that term in subsection 2.1(B).

"Eligible Assignee" shall mean (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000 (or $250,000,000 in the case of an assignment of a Revolving Loan Commitment); (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000 (or $250,000,000 in the case of an assignment of a Revolving Loan Commitment), provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (c) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including but not limited to, insurance companies, mutual funds and lease financing companies, (d) a Related Fund (as such term is defined in subsection 9.5(D)), and (e) a Person that is primarily engaged in the business of lending that is (i) a Subsidiary of a Lender, (ii) a Subsidiary of a Person of which a Lender is a Subsidiary, or (iii) a Person of which a Lender is a Subsidiary; provided, however, that no Affiliate of any Borrower shall be an Eligible Assignee.

          "Employee Benefit Plan" means any employee benefit plan within the meaning of Section 3(3) of ERISA which (a) is maintained for employees of any Borrower or any ERISA Affiliate or (b) has at any

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time within the preceding 6 years been maintained for the employees of any Borrower or any current or former ERISA Affiliate.

          "Environmental Claims" means claims, liabilities, investigations, litigation, administrative proceedings, judgments or orders relating to Hazardous Materials.

          "Environmental Laws" means any present or future federal, state or local law, rule, regulation or order relating to pollution, waste, disposal or the protection of human health or safety, plant life or animal life, natural resources or the environment, including, without limitation (a) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act, the Solid Waste Disposal Act, the Oil Pollution Act of 1990, the Rivers and Harbors Act of 1899, the Federal Water Pollution Control Act, the Clean Water Act, the Occupational Safety and Health Act ("OSHA"), the Clean Air Act, the Coastal Zone Management Act of 1972, the Emergency Planning and Community Right to Know Act, and (b) those relating to or addressing (i) the introduction into commerce, use, handling, transportation, treatment, storage, disposal, release or threatened release, removal or remediation of, or response, abatement, or corrective action with respect to, any Hazardous Material, or (ii) personal injury, sickness, disease, death, public welfare or property damage relating to Hazardous Materials.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute and all rules and regulations promulgated thereunder.

          "ERISA Affiliate", as applied to any Borrower, means any Person who is a member of a group which is under common control with any Borrower, who together with any Borrower is treated as a single employer within the meaning of Section 414(b) and (c) of the IRC.

          "Event of Default" has the meaning assigned to that term in subsection 8.1.

          "Excess Interest" has the meaning assigned to that term in subsection 2.2(C).

          "Facilities" shall mean any hospital, outpatient clinic, long term care facility, nursing home or rehabilitation center and related medical office building or other facility owned or used by any Borrower in its business.

          "Facility Deposit Accounts" has the meaning assigned to that term in subsection 2.4(A)(1)(a).

          "Federal Funds Effective Rate" means, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the immediately following Business Day by the Board of Governors of the Federal Reserve System as the Federal Funds Rate or Federal Reserve Statistical Release H.15(519) entitled "Selected Interest Rates" or any successor publication of the Federal Reserve System reporting the Federal Funds Effective Rate or its equivalent or, if such rate is not published for any Business Day, the average of the quotations for the day of the requested Loan received by Agent from three Federal funds brokers of recognized standing selected by Agent.

          "Financial Officer" shall mean the Chief Financial Officer or the Treasurer of the Company or such other person as designated in writing to the Agents and reasonably satisfactory to such Agents.

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          "Fiscal Year" means each twelve (12) month period ending on the last day of December in each year.

          "Fixed Charge Coverage" means, for any period, Operating Cash Flow divided by Fixed Charges.

          "Fixed Charges" means, for any period, and each calculated for such period (without duplication), (a) Interest Expense of the Company and its Subsidiaries; plus (b) scheduled payments of principal with respect to all Indebtedness of the Company and its Subsidiaries payable during such period; plus (c) any provision for (to the extent it is greater than zero) income or franchise taxes included in the determination of net income, excluding any provision for deferred taxes; plus (d) payment of deferred taxes accrued in any prior period; plus (e) Restricted Junior Payments made in cash.

          "Foreign Lender" has the meaning assigned to that term in subsection 2.9(C).

          "Funding Date" means the date of each funding of a Loan or issuance of a Lender Letter of Credit.

          "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board that are applicable to the circumstances as of the date of determination.

          "Hazardous Material" means all or any of the following: (a) substances that are defined or listed in, or otherwise classified pursuant to, any Environmental Laws or regulations as "hazardous substances", "hazardous materials", "hazardous wastes", "toxic substances" or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, or toxicity; (b) oil, petroleum or petroleum derived substances, natural gas, natural gas liquids or synthetic gas and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (c) any flammable substances or explosives or any radioactive materials; (d) asbestos in any form or electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls, and (e) mold of any form or type arising from any moisture source.

          "Healthcare Laws" has the meaning assigned to that term in subsection 4.25.

          "Heller" has the meaning assigned to that term in the Recitals section of this agreement.

          "HIPAA" means the Health Insurance Portability and Accountability Act of 1996 and the federal standard for privacy of individually identifiable health information promulgated thereunder, and any and all rules or regulations promulgated from time to time thereunder including the regulations set forth at 45 CFR parts 160 and 164 as such provisions are currently drafted and, if applicable, updated, amended, or revised.

          "Inactive Entity" shall mean each entity listed on Schedule 4.31.

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          "Indebtedness", as applied to any Person, means without duplication: (a) all indebtedness for borrowed money; (b) obligations under leases which in accordance with GAAP constitute Capital Leases; (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (d) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six (6) months from the date the obligation is incurred or is evidenced by a note or similar written instrument; (e) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person; (f) obligations in respect of Letters of Credit (g) any advances under any factoring arrangement; and (h) obligations under the Settlement Agreement.

          "Indemnified Liabilities" has the meaning assigned to that term in subsection 10.2.

          "Indemnitees" has the meaning assigned to that term in subsection 10.2.

          "Insurer" shall mean a Person that insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or that has an agreement with any Borrower to compensate such Borrower for providing services to a Patient.

          "Intangible Assets" means all intangible assets (determined in conformity with GAAP) including, without limitation, goodwill, Intellectual Property, Software, licenses, organizational costs, deferred amounts, covenants not to compete, unearned income and restricted funds.

          "Intellectual Property" means, collectively, all of the foregoing: Copyrights, Patents and Trademarks.

          "Intercreditor Agreement" means that certain Intercreditor Agreement dated of even date herewith by and among the Borrowers, Term Administrative Agent and Agents.

          "Interest Expense" means, without duplication, for any period, the following, for Borrowers and their Subsidiaries each calculated for such period: interest expenses deducted in the determination of net income (excluding (a) the amortization of fees and costs with respect to the transactions contemplated by this Agreement which have been capitalized as transaction costs in accordance with the provisions of subsection 11.2; and (b) interest paid in kind).

          "Interest Period" means, in connection with each LIBOR Loan, an interest period which Borrowers shall elect to be applicable to such Loan, which Interest Period shall be either a one (1), two (2) or three (3) month period; provided that:

          (1)     the initial Interest Period for any LIBOR Loan shall commence on the Funding Date of such Loan;

           (2)     in the case of successive Interest Periods, each successive Interest Period shall commence on the day on which the immediately preceding Interest Period expires;

          (3)     if an Interest Period expiration date is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that if any Interest Period expiration date is not a

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Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the immediately preceding Business Day;

          (4)     any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to part (5) below, end on the last Business Day of a calendar month;

          (5)     no Interest Period shall extend beyond the Termination Date; and

          (6)     there shall be no more than four (4) Interest Periods relating to LIBOR Loans outstanding at any time.

          "Interest Rate" has the meaning assigned to that term in subsection 2.2(A).

          "Interest Ratio" has the meaning assigned to that term in subsection 9.8(A)(3).

          "Interest Settlement Date" has the meaning assigned to that term in subsection 9.8(A)(4).

          "IRC" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute and all rules and regulations promulgated thereunder.

          "IRS" has the meaning assigned to that term in subsection 4.9.

          "Issuing Lender" has the meaning assigned to that term in subsection 2.1(H)(2)

          "Joint Bookrunners" has the meaning assigned to that term in the Recitals section of this Agreement.

          "Lender" or "Lenders" has the meaning assigned to that term in the Recitals section of this agreement.

          "Lender Letter of Credit" has the meaning assigned to that term in subsection 2.1(F).

          "Letter of Credit Liability" means, all reimbursement and other liabilities of any Borrower with respect to each Lender Letter of Credit, whether contingent or otherwise, including: (a) the amount available to be drawn or which may become available to be drawn; (b) all amounts which have been paid or made available by any Lender issuing a Lender Letter of Credit or any bank issuing a Bank Letter of Credit to the extent not reimbursed; and (c) all unpaid interest, fees and expenses related thereto.

          "Letter of Credit Reserve" means, at any time, an amount equal to the sum of (a) the aggregate amount of Letter of Credit Liability with respect to all Lender Letters of Credit outstanding at such time plus, without duplication (b) the aggregate amount theretofore paid by Agent or any Lender under Lender Letters of Credit and not debited to the Revolving Loan pursuant to subsection 2.1(G)(2) or otherwise reimbursed by Borrower.

          "Letter of Non-Exemption" has the meaning assigned to that term in subsection 2.9(C).

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          "Liabilities" shall have the meaning given that term in accordance with GAAP and shall include Indebtedness.

          "LIBOR" means, for each Interest Period, a rate per annum equal to:

          (1)     the offered rate for deposits in U.S. dollars in an amount comparable to the amount of the applicable Loan in the London interbank market for the relevant Interest Period which is published by the British Bankers' Association and currently appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, that if such a rate ceases to be available to Agent on that or any other source from the British Bankers' Association, LIBOR shall be equal to a rate per annum equal to the average rate (rounded upwards, if necessary, to the nearest 1/100 of 1%) at which Agent determines that U.S. dollars in an amount comparable to the amount of the applicable Loans are being offered to prime banks at approximately 11:00 a.m. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period for settlement in immediately available funds by leading banks in the London interbank market selected by Agent; divided by

          (2)     a number equal to one (1.0) minus the maximum reserve percentages (expressed as a decimal fraction) (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect) for Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) which are required to be maintained by any Lender by the Board of Governors of the Federal Reserve System; such rate to be rounded upward to the next whole multiple of one-sixteenth of one percent (.0625%). LIBOR shall be adjusted automatically on and as of the effective date of any change in any such reserve percentage.

          "LIBOR Loans" means at any time that portion of the Loans bearing interest at rates determined by reference to LIBOR.

          "LIBOR Margin" has the meaning assigned to that term in subsection 2.2(A).

          "Lien" means any lien, mortgage, pledge, security interest, charge or encumbrance of any kind, whether voluntary or involuntary (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement pursuant to which a Borrower grants any security interest).

          "Loan" or "Loans" means an advance or advances under the Revolving Loan Commitment.

          "Loan Documents" means this Agreement, the Notes, the Borrowing Base Certificates and all other documents, instruments and agreements executed by or on behalf of any Borrower, any Borrower's Subsidiaries and delivered concurrently herewith or at any time hereafter to or for Agent or any Lender in connection with the Loans, any Lender Letter of Credit, and any other transaction contemplated by this Agreement, all as amended, restated, supplemented or modified from time to time.

          "Loan Year" means each period of twelve (12) consecutive months commencing on the Closing Date and on each anniversary thereof.

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          "Lockbox Agreements" has the meaning assigned to that term in subsection 2.4(A)(4).

          "London Banking Day" means any day on which dealings in deposits in U.S. dollars are transacted in the London Interbank market.

          "Material Adverse Change" means a change that results in or causes, or has a reasonable likelihood of resulting in or causing, a Material Adverse Effect.

          "Material Adverse Effect" means a material adverse effect upon (a) the business, operations, prospects, properties, assets or condition (financial or otherwise) of the Borrowers taken as a whole, (b) the ability of any Borrower to perform its obligations under any Loan Document to which it is a party, (c) the validity or enforceability of this Agreement or any Loan Document or (d) the Collateral, the liens of Lenders in the Collateral or the priority of such liens.

          "Material Contracts" means a contract or agreement (including, without limitation, a provider agreement) the default (or event of default) under, termination of, or expiration of which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

          "Maximum Rate" has the meaning assigned to that term in subsection 2.1(C).

          "Maximum Revolving Loan Amount" has the meaning assigned to that term in subsection 2.1(A)(3).

          "Medicaid Deposit Account" has the meaning assigned to that term in subsection 2.4(A)(1)(c).

          "Medicaid/Medicare Account Debtor" shall mean any Account Debtor which is (i) the United States of America acting under the Medicaid or Medicare program established pursuant to the Social Security Act, or under the TRICARE program, (ii) any state or the District of Columbia acting pursuant to a health plan adopted pursuant to Title XIX of the Social Security Act (or any successor legislation) or (iii) any agent, carrier, administrator or intermediary for any of the foregoing.

          "Medical Services" shall mean medical and health care services provided to a Patient, including, but not limited to, medical, pharmacy and health care services provided to a Patient and performed by any Borrower which are covered by a policy of insurance issued by an Insurer, and includes physician services, nurse and therapist services, dental services, hospital services, skilled nursing facility services, comprehensive outpatient rehabilitation services, home health care services, residential and out-patient behavioral healthcare services, and medicine or health care equipment provided by any Borrower to a Patient for a necessary or specifically requested valid and proper medical or health purpose.

          "Medicare Deposit Accounts" has the meaning assigned to that term in subsection 2.4(A)(1)(b).

          "Mortgage" means each of the mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, collateral assignments of leases or other real estate security documents delivered by any Borrower to Collateral Agent, on behalf of the Lenders, with respect to the Mortgaged Property, all in form and substance satisfactory to Collateral Agent.

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          "Mortgaged Property" means that certain real property owned by certain Borrowers and described on Schedule 11.1(B).

          "Net Income" means, as of any date, net income calculated in accordance with GAAP.

          "Net Worth" means, as of any date, the sum of the capital stock and additional paid-in capital plus retained earnings (or less accumulated deficit) calculated in conformity with GAAP.

          "Note" means, individually, Revolving Note, and "Notes" means collectively, all of the Revolving Notes.

          "Notice of Borrowing" means a notice duly executed by an authorized representative of Borrowers appropriately completed and in the form of Exhibit E.

          "Obligations" means all obligations, liabilities and indebtedness of every nature of each Borrower from time to time owed to Agents or to any Lender under the Loan Documents (whether incurred before or after the Termination Date) including the principal amount of all debts, claims and indebtedness, accrued and unpaid interest and all fees, costs and expenses, whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable including, without limitation, all interest, fees, cost and expenses accrued or incurred after the filing of any petition under any bankruptcy or insolvency law.

          "Operating Cash Flow" means, for any period, (a) EBITDA; plus (b) the net change in the accrued general and professional insurance liability as set forth in the cash flow statement delivered from time to time by the Company; less (c) Capital Expenditures.

          "Option Price" has the meaning assigned to that term in the Intercreditor Agreement.

          "paid in full" shall mean payment in full in cash or, with respect to letters of credit, delivery to Administrative Agent of cash or a back-to-back letter of credit, from an issuer and in form and substance satisfactory to Agents, in their sole discretion, and in each case, in an amount equal to 105% of the aggregate outstanding amount of the Letter of Credit Reserve.

          "Partial Purchase Option" has the meaning assigned to that term in the Intercreditor Agreement.

          "Patents" means collectively all of the following (a) all U.S. patents and patent applications including those listed on any schedule to any Patent Security Agreement and the inventions and improvements described and claimed therein, and patentable inventions; (b) the reissues, divisions, continuations, renewals, extensions and continuations-in-part of any of the foregoing; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages and payments for past, present and future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; and (e) all rights corresponding to any of the foregoing throughout the world.

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          "Patient" shall mean any Person receiving Medical Services from any Borrower and all Persons legally liable to pay any Borrower for such Medical Services other than Insurers.

          "Permitted Divestitures" means the disposition on commercially reasonable terms and conditions of (i) the mobile x-ray business formerly known as TLC Mobile Medical and operated by SunAlliance Healthcare Services, Inc. and (ii) the respiratory services supplies and equipment business operated by SunCare Respiratory Services, each of which shall have occurred on or before May 31, 2002.

          "Permitted Encumbrances" means the following types of Liens: (a) Liens (other than Liens relating to Environmental Claims or ERISA) for taxes, assessments or other governmental charges not yet due and payable; (b) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen and other similar liens imposed by law, which are incurred in the ordinary course of business for sums not more than thirty (30) days delinquent; (c) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (d) easements, rights-of-way, restrictions, and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of any Borrower; (e) Liens for purchase money obligations, provided that (i) the purchase of the asset subject to any such Lien is permitted under subsection 7.1(d) and subparagraph D of the Financial Covenants Rider, (ii) the Indebtedness secured by any such Lien is permitted under subsection 7.1, and (iii) such Lien encumbers only the asset so purchased; (f) Liens in respect of Indebtedness permitted under subsection 7.1(d); provided that such Liens encumber only the asset which is subject to a Capital Lease; (g) Liens in favor of the Collateral Agent, on behalf of itself and Lenders; (h) Liens on or security interests in certain accounts granted by a Borrower to the lessor of certain nursing home facilities, all as set forth on Schedule 11.1(C) or otherwise consented to in writing by the Agents; (i) Liens granted to the Term Administrative Agent pursuant to the Term Loan Documents (including the first priority lien on the SunScript Stock), (j) Liens with respect to, or hereafter incurred in connection with, the Sumitomo Transaction and the SunTrust Transaction, in each case, as set forth on Schedule 11.1(D)., and (k) Liens existing on the date hereof to the extent set forth on Schedule 11.1(D).

          "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof.

          "Plan" has the meaning assigned to that term in the Recitals.

          "Primary Collection Account" has the meaning assigned to that term in subsection 2.4(A)(1)(e).

          "Pro Forma" means the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the Closing Date after giving effect to the transactions contemplated by this Agreement.

79

          "Projections" means Borrowers' forecasted consolidated: (a) balance sheets; (b) capitalization statements; (c) cash flow statements; and (d) profit and loss statements, all prepared on a division by division and Subsidiary by Subsidiary basis consistent with the Company's historical financial statements and based upon good faith estimates and assumptions by Borrowers believed to be reasonable at the time made, together with appropriate supporting details and a statement of underlying assumptions.

          "Pro Rata Share" means (a) with respect to matters relating to a particular Commitment of a Lender, the percentage obtained by dividing (i) such Commitment of that Lender by (ii) all such Commitments of all Lenders and (b) with respect to all other matters, the percentage obtained by dividing (i) the Revolving Loan Commitment of a Lender by (ii) the Revolving Loan Commitments of all Lenders, in either (a) or (b), as such percentage may be adjusted by assignments permitted pursuant to subsection 9.5; provided, however, if any Commitment is terminated pursuant to the terms hereof, then "Pro Rata Share" means the percentage obtained by dividing (x) the aggregate amount of such Lender's outstanding Loans related to such Commitment by (y) the aggregate amount of all outstanding Loans related to such Commitment.

          "Register" has the meaning assigned to that term in subsection 9.5(E).

          "Related Fund" has the meaning assigned to that term in subsection 9.5 (D).

          "Replacement Lender" has the meaning assigned to that term in subsection 2.11(A).

          "Requisite Lenders" means Lenders, (other than a Defaulting Lender), holding or being responsible for: 51% or more of the sum of the (a) outstanding Loans, (b) Letter of Credit Reserve and (c) unutilized Commitments of all Lenders which are not Defaulting Lenders.

          "Restricted Junior Payment" means: (a) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of the Company, any other Borrower, or any of their Subsidiaries now or hereafter outstanding, except a dividend payable solely with shares of the class of stock on which such dividend is declared; (b) any payment or prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, retirement, defeasance, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any Indebtedness under the Term Loan Documents or any shares of any class of stock of the Company or any of its Subsidiaries, other than in each case for regularly scheduled payments permitted under the Intercreditor Agreement now or hereafter outstanding, or the issuance of a notice of an intention to do any of the foregoing; (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of any Borrower or any of its Subsidiaries now or hereafter outstanding; and (d) any payment by any Borrower or any of its Subsidiaries of any management, consulting or similar fees to any Affiliate, whether pursuant to a management agreement or otherwise.

          "Revolving Advance" means each advance made by Lender(s) under the Revolving Loan Commitment pursuant to subsection 2.1 (B).

          "Revolving Loan" means the outstanding balance of all Revolving Advances and any amounts added to the principal balance of the Revolving Loan pursuant to this Agreement.

80

          "Revolving Loan Commitment" means (a) as to any Lender, the commitment of such Lender to make Revolving Advances pursuant to subsection 2.1 (B), and to purchase participations in Lender Letters of Credit pursuant to subsection 2.1(G) in the aggregate amount set forth on the signature page of this Agreement opposite such Lender's signature or in the most recent Assignment and Acceptance Agreement, if any, executed by such Lender and (b) as to all Lenders, the aggregate commitment of all Lenders to make Revolving Advances and to purchase participations in Lender Letters of Credit.

          "Revolving Note" means each promissory note of Borrower, issued to evidence the Revolving Loan Commitments substantially in the form attached hereto as Exhibit F.

          "Securities Act" means the Securities Act of 1933, as the same may be amended, modified or supplemented from time to time, and any successor statute thereto, and any and all rules or regulations promulgated from time to time thereunder.

          "Settlement Agreement" means the "Settlement Agreement Entered Into Among the United States Of America, acting through the United States Department of Justice and Centers for Medicare and Medicaid Services, the TRICARE Management Activity Support Office, Sun Healthcare Group, Inc. and its subsidiaries who filed bankruptcy in the District of Delaware on October 14, 1999 and Stephen Beaujon, Renee Lundgren, Thomas DeLay, David Junga, K.G. Simmons, JudithR. Barry, Saul Epstein, Vida M. Melton and Diane Lind", date on or about February 1, 2002, which is the subject of Sections 4.3 and 5.12 of the Plan and which was incorporated into the Plan and approved by the Bankruptcy Court as part of the Confirmation Order.

          "Settlement Date" has the meaning assigned to that term in subsection 9.8(A)(2).

          "SHS" means Shared Healthcare Systems, Inc., a Delaware corporation.

          "Social Security Act" shall mean the Social Security Act as codified at 42 U.S.C. Section 1395 et seq., as amended.

          "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of stock (or equivalent ownership or controlling interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other subsidiaries of that Person or a combination thereof.

          "Sumitomo Transaction" means the conversion of the Sumitomo synthetic leases to mortgages as described in Schedule 11.1(D).

          "SunBridge" means SunBridge Healthcare Corporation and its Subsidiaries.

          "SunDance" means SunDance Rehabilitation Corporation and its Subsidiaries.

          "SunPlus" means SunPlus Home Health Services, Inc. and its Subsidiaries.

          "SunScript" means SunScript Pharmacy Corporation, SunFactors, Inc., Pharmacy Factors of Florida, Inc., Pharmacy Factors of Texas, Inc., Pharmacy Factors of California, Inc., Advantage Health

81

Services, Inc., Homed Convalescent Equipment, Inc., SunScript/HRA LLC, First Class Pharmacy, Inc., and Executive Pharmacy Services, Inc.

          "SunScript Stock" means the stock or other equity interests of SunScript.

          "SunTrust Transaction" means the conversion of the SunTrust synthetic leases to mortgages as described in Schedule 11.1(D).

          "Tangible Net Worth" of any Person means as of any date, an amount equal to: (a) Net Worth of such Person; less (b) Intangible Assets of such Person; less (c) prepaid expenses of such Person; less (d) all obligations owed to such Person by any Affiliate of such Person or any of its Subsidiaries; (determined in each case in conformity with GAAP).

          "Tax Liabilities" has the meaning assigned to that term in subsection 2.9(A).

          "Term Administrative Agent" means U.S. Bank National Association, in its capacity as administrative agent under the Term Loan Agreement.

          "Term Loan Agreement" means the Term Loan and Note Purchase Agreement, dated as of the date hereof, between the Borrowers, the lenders party thereto and Term Administrative Agent, as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with the Intercreditor Agreement.

          "Term Loan Documents" means the Term Loan Agreement, the notes (if any) and all other documents, instruments and agreements executed by or on behalf of any Borrower or Subsidiary of such Borrower and delivered concurrently therewith or at any time hereafter to or for the Term Administrative Agent or any lender in connection with the loans and any other transaction contemplated by the Term Loan Agreement, as the same may be amended, restated, supplemented or otherwise modified from time to time in accordance with the Intercreditor Agreement.

          "Termination Date" means the date that is the earlier of (1) the third anniversary of Closing Date and (2) the termination of the Revolving Loan Commitments in accordance with this Agreement.

          "THCI Transfer Facilities" means, collectively, the following nursing home facilities: (a) Mediplex Rehab. of Denver, located in Denver, CO, (b) Mediplex of Stamford, located in Stamford, CT, (c) SunBridge Care and Rehabilitation for Brookline, located in Brookline, MA and (d) SunBridge Care and Rehabilitation for East Boston, located in East Boston, MA.

          "THCI Turnover" means the going concern transfer of the THCI Transfer Facilities by the Borrowers to THCI Mortgage Holdings Company LLC.

          "Total Assets" means the "Total Assets" as reflected on the Consolidated Legal Entities report, dated February 11, 2002 (11:18 AM) prepared by the Company and previously provided to Collateral Agent.

82

          "Total Revenues" means the "4^th Qtr Total Revenue" as reflected on the Consolidated Legal Entities report, dated February 11, 2002 (11:18 AM) prepared by the Company and previously provided to Collateral Agent.

          "Trademark Security Agreement" means any Trademark Security Agreement executed and delivered by certain of the Borrowers to Collateral Agent, as the same may be amended and in effect from time to time.

          "Trademarks" means collectively all of the following: (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, other business identifiers, prints and labels on which any of the foregoing have appeared or appear, all registrations and recordings thereof, and all applications in connection therewith including those listed on any schedule to any Trademark Security Agreement; (b) all renewals thereof; (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing including damages and payments for past, present and future infringements of any of the foregoing; (d) the right to sue for past, present and future infringements of any of the foregoing; (e) all rights corresponding to any of the foregoing throughout the world; and (f) all goodwill associated with and symbolized by any of the foregoing.

          "TRICARE" means, collectively, a program of medical benefits covering former and active members of the uniformed services and certain of their dependents, financed and administered by the United States Departments of Defense, Health and Human Services and Transportation, which program was formerly known as the "Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)".

          "UCC" means the Uniform Commercial Code as in effect from time to time in the State of New York; provided, however, to the extent the law of any other state or other jurisdiction applies to the attachment, perfection, priority or enforcement of any Lien granted to Agent in any of the Collateral, "UCC" means, as applicable, the Uniform Commercial Code as in effect in such other state or jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, priority or enforcement of a Lien in such Collateral. To the extent this Agreement defines the term "Collateral" by reference to terms used in the UCC, each of such terms shall have the broadest meaning given to such terms under the UCC as in effect in any state or other jurisdiction.

          "Unused Daily Balance" means the Revolving Loan Commitment less the sum of (1) the average daily balance of the Revolving Loan during the preceding month plus (2) the average daily face amount of the Letter of Credit Reserve during the preceding month.

          "Veterans Administration" shall mean the Department of Veterans Affairs.

          11.2     Accounting Terms. For purposes of this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to such terms in conformity with GAAP. Financial statements and other information furnished to Agent or any Lender pursuant to subsection 5.1 shall be prepared in accordance with GAAP (as in effect at the time of such preparation) on a consistent basis. In the event any "Accounting Changes" (as defined below) shall occur and such changes affect financial covenants, standards or terms in this Agreement, then Borrower and Lenders agree to enter into good faith negotiations in order to amend such provisions of this Agreement so as to equitably reflect such

83

Accounting Changes with the desired result that the criteria for evaluating the financial condition of Borrower shall be the same after such Accounting Changes as if such Accounting Changes had not been made, and until such time as such an amendment shall have been executed and delivered by Borrower and Requisite Lenders, (A) all financial covenants, standards and terms in this Agreement shall be calculated and/or construed as if such Accounting Changes had not been made, and (B) Borrower shall prepare footnotes to each Compliance and Pricing Certificate and the financial statements required to be delivered hereunder that show the differences between the financial statements delivered (which reflect such Accounting Changes) and the basis for calculating financial covenant compliance (without reflecting such Accounting Changes). "Accounting Changes" means: changes in accounting principles required by GAAP and implemented by Borrower. All such adjustments resulting from expenditures made subsequent to the Closing Date (including, but not limited to, capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made and deducted as part of the calculation of EBITDA in such period.

          11.3     Other Definitional Provisions. References to "Sections", "subsections", "Riders", "Exhibits", "Schedules" and "Addendum's" shall be to Sections, subsections, Riders, Exhibits, Schedules and Addendum's, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 11.1 may, unless the context otherwise requires, be used in the singular or the plural depending on the reference. In this Agreement, words importing any gender include the other genders; the words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to agreements and other contractual instruments shall be deemed to include subsequent amendments, assignments, and other modifications thereto, but only to the extent such amendments, assignments and other modifications are not prohibited by the terms of this Agreement or any other Loan Document; references to Persons include their respective permitted successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations.

[SIGNATURES BEGIN ON FOLLOWING PAGES]

84

               Witness the due execution hereof by the respective duly authorized officers of the undersigned as of the date first written above.

                                                                                                Sun Healthcare Group, Inc.


                                                                                                By:   /s/ Robert K. Schneider           
                                                                                                Name:  Robert K. Schneider
                                                                                                Title:    Vice President and Treasurer

                                                                                                Advantage Health Services, Inc.
                                                                                                Americare Health Services Corp.
                                                                                                Americare of West Virginia, Inc.
                                                                                                Atlantic Medical Supply Holding
                                                                                                   Company, Inc.
                                                                                                Beckley Health Care Corp.
                                                                                                Bergen Eldercare, Inc.
                                                                                                Bibb Health & Rehabilitation, Inc.
                                                                                                BioPath Clinical Laboratories, Inc.
                                                                                                Braswell Enterprises, Inc.
                                                                                                Brent-Lox Hall Nursing Home, Inc.
                                                                                                Brittany Rehabilitation Center, Inc.
                                                                                                Cal-Med, Inc.
                                                                                                Care Enterprises West
                                                                                                Care Enterprises, Inc.
                                                                                                Care Home Health Services
                                                                                                CareerStaff Management, Inc.
                                                                                                CareerStaff Services Corporation
                                                                                                CareerStaff Unlimited, Inc.
                                                                                                Carmichael Rehabilitation Center
                                                                                                Charlton Healthcare, Inc.
                                                                                                Circleville Health Care Corp.
                                                                                                Clipper Home of North Conway, Inc.
                                                                                                Clipper Home of Portsmouth, Inc.
                                                                                                Clipper Home of Rochester, Inc.
                                                                                                Clipper Home of Wolfeboro, Inc.
                                                                                                Coalinga Rehabilitation Center
                                                                                                Contour Medical, Inc.
                                                                                                Correctional Care Corp.
                                                                                                Covina Rehabilitation Center
                                                                                                Dunbar Health Care Corp.
                                                                                                Duval Healthcare Center, Inc.
                                                                                              [SIGNATURE APPEARS ON PAGE S-4]

S-1

                                                                                                Executive Pharmacy Services, Inc.
                                                                                                Facility Supply, Inc.
                                                                                                Fairfield Rehabilitation Center
                                                                                                First Class Pharmacy, Inc.
                                                                                                Fullerton Rehabilitation Center
                                                                                                Gainesville Healthcare Center, Inc.
                                                                                                Gardendale Health Care Center, Inc.
                                                                                                Glendora Rehabilitation Center
                                                                                                Glenville Health Care, Inc.
                                                                                                Goodwin Nursing Home, Inc.
                                                                                                Grand Terrace Rehabilitation Center
                                                                                                Hallmark Health Services, Inc.
                                                                                                Harbor View Rehabilitation Center
                                                                                                HC, Inc.
                                                                                                Heritage Rehabilitation Center
                                                                                                HoMed Convalescent Equipment, Inc.
                                                                                                HTA of New York, Inc.
                                                                                                Huntington Beach Convalescent
                                                                                                    Hospital
                                                                                                Jeff Davis Healthcare, Inc.
                                                                                                Lake Forest Healthcare Center, Inc.
                                                                                                Libbie Rehabilitation Center, Inc.
                                                                                                Manatee Springs Nursing Center, Inc.
                                                                                                Maplewood Health Care Center of
                                                                                                   Jackson, Tennessee, Inc.
                                                                                                Marion Health Care Corp.
                                                                                                Masthead Corporation
                                                                                                Meadowbrook Rehabilitation Center
                                                                                                Mediplex Management of Palm Beach
                                                                                                   County, Inc.
                                                                                                Mediplex Management, Inc.
                                                                                                Mediplex of Concord, Inc.
                                                                                                Mediplex of Connecticut, Inc.
                                                                                                Mediplex of Kentucky, Inc.
                                                                                                Mediplex of Maryland, Inc.
                                                                                                Mediplex of Massachusetts, Inc.
                                                                                                Mediplex of New Hampshire, Inc.
                                                                                                Mediplex of New Jersey, Inc.
                                                                                                Mediplex Rehabilitation of
                                                                                                   Massachusetts, Inc.
                                                                                                Mid-Florida, Inc.
                                                                                                Mountain Care Management, Inc.
                                                                                                New Bedford Nursing Center, Inc.
                                                                                                Newport Beach Rehabilitation Center
                                                                                                Nursing Home, Inc.

                                                                                              [SIGNATURE APPEARS ON PAGE S-4]

S-2

                                                                                                Orange Rehabilitation Hospital, Inc.
                                                                                                P.M.N.F. Management, Inc.
                                                                                                Pacific Health Care, Inc.
                                                                                                Paradise Rehabilitation Center, Inc.
                                                                                                Pharmacy Factors of California, Inc.
                                                                                                Pharmacy Factors of Florida, Inc.
                                                                                                Pharmacy Factors of Texas, Inc.
                                                                                                PRI, Inc.
                                                                                                Putnam Health Care Corp.
                                                                                                Quality Care Holding Corporation
                                                                                                Quality Nursing Care of
                                                                                                   Massachusetts, Inc.
                                                                                                Regency Health Services, Inc.
                                                                                                Regency High School, Inc.
                                                                                                Regency Rehab Hospitals, Inc.
                                                                                                Regency-North Carolina, Inc.
                                                                                                Regency-Tennessee, Inc.
                                                                                                Retirement Care Associates, Inc.
                                                                                                Rose Rehabilitation Center
                                                                                                Salem Health Care Corp.
                                                                                                San Bernardino Rehabilitation
                                                                                                   Hospital, Inc.
                                                                                                San Joaquin G.P. Corporation
                                                                                                Shandin Hills Rehabilitation Center
                                                                                                Southside Health Care Center, Inc.
                                                                                                Spofford Land, Inc.
                                                                                                SRT, Inc.
                                                                                                Statesboro Health Care Center, Inc.
                                                                                                Stockton Rehabilitation Center, Inc.
                                                                                                Summers Landing, Inc.
                                                                                                Sun Lane Purchase Corporation
                                                                                                SunAlliance Healthcare Services, Inc.
                                                                                                   (successor by merger with SunDelta
                                                                                                   Corporation)
                                                                                                SunBridge G.P. Corporation
                                                                                                SunBridge Healthcare Corporation
                                                                                                SunBridge Healthcare of Colorado,
                                                                                                   Inc.
                                                                                                SunBridge Rehab of Colorado, Inc.
                                                                                                SunBridge, Inc.
                                                                                                SunCare Respiratory Services, Inc.
                                                                                                SunCare Services Corporation
                                                                                                SunChoice Medical Supply, Inc.
                                                                                                SunDance Rehabilitation Corporation
                                                                                                SunDance Services Corporation
                                                                                                SunFactors, Inc.
                                                                                                SunHealth Specialty Services, Inc.
                                                                                             [SIGNATURE APPEARS ON PAGE S-4]

S-3

                                                                                             
                                                                                                SunMark Nevada, Inc.
                                                                                                SunMark of New Mexico, Inc.
                                                                                                SunPlus Home Health Services, Inc.
                                                                                                SunScript Pharmacy Corporation
                                                                                                SunSolution, Inc.
                                                                                                The Mediplex Group, Inc.
                                                                                                U.S. Laboratory Corp.
                                                                                                Vista Knoll Rehabilitation Center, Inc.
                                                                                                West Tennessee, Inc.
                                                                                                Willow Way, Inc.
                                                                                                Worcester Nursing Center, Inc.
                                                                                               
                                                                                               
                                                                                                By:  /s/ Robert K. Schneider             
                                                                                                Name:  Robert K. Schneider
                                                                                                Title:   Vice President and Treasurer

S-4

                                                                                                Accelerated Care Plus, L.L.C.


                                                                                                By:  Cal-Med, Inc.,
                                                                                                       Member of Accelerated Care Plus,
                                                                                                       L.L.C.


                                                                                                By:   /s/ Robert K. Schneider          
                                                                                                Name:  Robert K. Schneider
                                                                                                Title:                                               


                                                                                                By:  HC, Inc.,
                                                                                                        Member of Accelerated Care Plus,
                                                                                                            L.L.C.


                                                                                                By:   /s/ Robert K. Schneider          
                                                                                                Name:  Robert K. Schneider
                                                                                                Title:                                               



                                                                                                SunDance Rehabilitation Texas,
                                                                                                  Limited Partnership


                                                                                                By:  SRT, Inc., its general partner


                                                                                                  By:   /s/ Robert K. Schneider          
                                                                                                Name:  Robert K. Schneider
                                                                                                Title:                                               



                                                                                                West Jersey/Mediplex Rehabilitation
                                                                                                   Limited Partnership


                                                                                                By:  Mediplex of New Jersey, Inc.,
                                                                                                      its general partner


                                                                                                  By:   /s/ Robert K. Schneider          
                                                                                                Name:  Robert K. Schneider
                                                                                                Title:                                               

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                                                                                                HSR Partners, L.P.
                                                                                                Therapists Unlimited - Baltimore/
                                                                                                   Washington, D.C., L.P.
                                                                                                Therapists Unlimited - Chicago, L.P.
                                                                                                   (II)
                                                                                                Therapists Unlimited - Detroit II, L.P.
                                                                                                Therapists Unlimited - Fresno, L.P.
                                                                                                Therapists Unlimited - Indianapolis,
                                                                                                   L.P.
                                                                                                Therapists Unlimited - Seattle, L.P.


                                                                                                By:  CareerStaff Management, Inc.,
                                                                                                          its general partner


                                                                                                  By:   /s/ Robert K. Schneider          
                                                                                                Name:  Robert K. Schneider
                                                                                                Title:                                               

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                                                                                                LENDERS


                                                                                                CITICORP USA, INC.



                                                                                                By:  /s/ James J. McCarthy              
                                                                                                Title:    Director                               
                                                                                                Revolving Loan Commitment:
                                                                                                $50,000,000


                                                                                                HELLER HEALTHCARE FINANCE,
                                                                                                   INC.


                                                                                                By:   /s/                                           
                                                                                                Title:                                               
                                                                                                Revolving Loan Commitment:
                                                                                                $50,000,000

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                                                                                                FOOTHILL INCOME TRUST, L.P.


                                                                                                By:  FIT GP, LLC, Its General Partner


                                                                                                By:   /s/ M. E. Stearns                        

                                                                                                Name:   M. E. Stearns                       
                                                                                                Title:   Managing Member
                                                                                                Revolving Loan Commitment
                                                                                                $25,000,000

S-8

EXHIBITS

A.          Lockbox Agreements
B.          Assignment and Acceptance Agreement
C.          Borrowing Base Certificate
D.          Compliance and Pricing Certificate
E.          Notice of Borrowing
F.          Revolving Note
G.          Inventory Report
H.          Reconciliation Report

SCHEDULES

2.01               Inventory Locations
2.2(A)           Base Rate Margins, LIBOR Margins and Letter of Credit Fees
2.4(A)(1)       Banks with Blocked Accounts
2.7(A)           Commercial Tort Claims
4.1(B)           Capitalization of Borrowers
4.4                 Indebtedness and Liabilities
4.5(D)           List of Chattel Paper
4.5(I)            Intellectual Property
4.5(K)          Bank Accounts
4.5(L)           Bailees
4.6                 Names and Locations
4.9                 Borrowers' Federal Tax Identification Numbers and Returns Under Audit
4.17               Compliance with Laws
4.18               Employee Matters
4.29               Licenses
4.31               Inactive Entities
7.1                 Existing Indebtedness
7.4                 Existing Investments and Loans
7.11               Subsidiaries
11.1(B)         Mortgaged Property
11.1(C)         Liens or Security Interests in Certain Accounts
11.1(D)         Other Liens

SCHEDULE 2.2(A)

Base Rate Margins, LIBOR Margins and Letter of Credit Fees

Fixed Charge Coverage	Base Rate Margin	LIBOR Margin	Letter of Credit Fee
Less than or equal to 1.75	275	375	350
Greater than 1.75 to and including 2.00	250	350	325
Greater than 2.00	225	325	300

RIDERS

A.          Conditions Rider
B.          Reporting Rider
C.          Financial Covenants Rider

CONDITIONS RIDER

          This Conditions Rider is attached to and made a part of that certain Loan and Security Agreement dated as of February 28, 2002 and entered into among Borrowers, the Collateral Agent, the Administrative Agent and Lenders.

          (A)     Closing Deliveries. Agents shall have received, in form and substance satisfactory to the Agents, all documents, instruments and information identified on the Sun Healthcare Loan Closing Checklist, dated as of February 28, 2002 as it may updated and amended from time to time and all other agreements, notes, certificates, orders, authorizations, financing statements, pledges, mortgages, security agreement and other documents which Agents may at any time reasonably request.

          (B)     Security Interests. Collateral Agent shall have received satisfactory evidence that all security interests and liens granted to Collateral Agent for the benefit of Agents and Lenders pursuant to this Agreement or the other Loan Documents have been duly perfected, and to the extent set forth in subsection 4.7, constitute first priority liens on the Collateral, subject only to Permitted Encumbrances.

          (C)      Closing Date Availability. After giving effect to the consummation of the transactions contemplated hereunder on the Closing Date and the payment by Borrowers of all costs, fees and expenses relating thereto, the Maximum Revolving Loan Amount on the Closing Date shall exceed the Revolving Loan by at least $25,000,000

          (D)     Representations and Warranties. The representations and warranties contained herein and in the Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except for any representation or warranty limited by its terms to a specific date and taking into account any amendments to the Schedules or Exhibits as a result of any disclosures made by Borrowers to Agents after the Closing Date and approved by Agents.

          (E)     Fees. With respect to Loans or Lender Letters of Credit to be made or issued on the Closing Date, Borrowers shall have paid all fees due to Agents or any Lender and payable on the Closing Date.

          (F)     No Default. No event shall have occurred and be continuing or would result from funding a Loan or issuing a Lender Letter of Credit requested by any Borrower that would constitute an Event of Default or a Default.

          (G)     Performance of Agreements. Each Borrower shall have performed in all material respects all agreements and satisfied all conditions which any Loan Document provides shall be performed by it on or before the Funding Date.

          (H)     No Prohibition. No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain Agents or any Lender from making any Loans or issuing any Lender Letters of Credit.

          (I)     No Litigation. There shall not be pending or to the knowledge of Borrowers, threatened, any action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration by,

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against or affecting any Borrowers or any property of any Borrower or any of its Subsidiaries that has not been disclosed to Collateral Agent by Borrower in writing, and there shall have occurred no development in any such action, charge, claim, demand, suit, proceeding, petition, governmental investigation or arbitration that could reasonably be expected to have a Material Adverse Effect.

          (J)     Business Condition. Since the December 31, 2001 financial statements, there shall not have been any Material Adverse Change.

          (K)     Lenders' Audit. Lenders shall have completed an audit to determine the liquidity of Borrowers' Accounts and the general financial and operational condition of Borrowers, the results of which are satisfactory to Lenders in their sole and absolute discretion.

          (L)     Reorganization Plan. The Plan (i) shall have been confirmed by a final order of the United States Bankruptcy Court for the District of Delaware without appeal or application for reconsideration, (ii) is acceptable to Lenders in their sole discretion, (iii) shall have become effective, and (iv) the Agents shall be satisfied, in their sole discretion, that documents implementing or related to the Plan, are in form and substance consistent with the Loan Documents.

          (M)     Updated Schedules. Borrower shall have revised, updated and delivered to the Collateral Agent all Schedules to the Loan Documents to (a) reflect updated and accurate information with respect to any new Borrower, and (b) to update all other information as necessary to make the Schedules previously delivered correct. Borrowers hereby represent and warrant that the information set forth on the attached Schedules is true and correct as of the date of this Agreement. The attached Schedules are hereby incorporated into this Agreement as if originally set forth therein.

          (N)     The Borrower Deposit Accounts and the Collection Accounts shall have been established to the satisfaction of the Agents in their sole discretion.

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REPORTING RIDER

          This Reporting Rider is attached and made a part of that certain Loan and Security Agreement, dated as of February 28 , 2002 and entered into among Borrowers, Agents and Lenders.

          (A)     Monthly Financials. As soon as available and in any event within thirty (30) days after the end of each month, The Company will deliver to Agents and Lenders (1) the consolidated balance sheet of the Company and its Subsidiaries as at the end of such month and the related consolidated statements of income and stockholders' equity for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, and (2) a schedule of the outstanding Indebtedness for borrowed money of the Company and its Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan.

          (B)     Quarterly Financials. As soon as available and in any event within fifth-five (55) days of the end of each of the first three calendar quarters of each Fiscal Year, the Company will deliver to Agents and Lenders (1)  the consolidated balance sheet and cash flow sttement of the Company and its Subsidiaries as at the end of each such calendar quarter and the related consolidated statements of income, stockholders' equity and cash flow for each such calendar quarter and for the period from the beginning of the then current Fiscal Year to the end of each such calendar quarter and (2) a reasonably detailed schedule of the Capital Expenditures incurred during such calendar quarter.

          (C)     Year-End Financials. As soon as available and in any event within one hundred five (105) days after the end of each Fiscal Year, the Company will deliver to Agents and Lenders: (1) the consolidated balance sheet and cash flow statement of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income, stockholders' equity and cash flow for such Fiscal Year; (2) a detailed schedule of the Capital Expenditures incurred during such fiscal year; and (3) report with respect to the financial statements from the Company's Accountants, which report shall be unqualified as to going concern and scope of audit of the Company and its Subsidiaries and shall provide in substance that (a) such consolidated financial statements present fairly the consolidated financial position of the Company and its Subsidiaries as at the dates indicated and the results of their operations and cash flow for the periods indicated in conformity with GAAP and (b) that the examination by Company's' Accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; and (5) copies of the consolidating financial statements of Borrowers and their Subsidiaries, including (a) consolidating balance sheets of the Company and its Subsidiaries as at the end of such Fiscal Year showing intercompany elimination's and (b) related consolidating statements of income of Borrowers and their Subsidiaries showing intercompany elimination's.

          (D)     Compliance and Pricing Certificate. Together with the delivery of each set of financial statements referenced in subparagraphs (A), (B) and (C) above, Borrowers will deliver to Agents and Lenders a Compliance and Pricing Certificate, together with copies of the calculations and work-up employed to determine Borrowers' compliance or noncompliance with the financial covenants set forth in the Financial Covenants Rider.

          (E)     Borrowing Base Certificates, Registers and Journals. On no less than a weekly basis, Borrowers shall deliver to Administrative Agent: (1) a Borrowing Base Certificate updated to reflect the most recent sales and collections of Borrowers and an assignment schedule of all of Accounts created by

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Borrowers; (2) an invoice register or sales journal describing all sales of Borrowers, in form and substance satisfactory to Administrative Agent, and, if Administrative Agent so requests, copies of invoices evidencing such sales and proofs of delivery relating thereto; (3) a cash receipts journal; (4) a credit memo journal; and (5) an adjustment journal, setting forth all adjustments to Accounts.

          (F)     Reconciliation Reports, Inventory Reports and Listings and Agings. On the Closing Date and within twenty (20) days after the end of each calendar month and, if an Event of Default shall have occurred and be continuing, from time to time upon the request of Collateral Agent, Borrowers will deliver to Collateral Agent: (1) an aged trial balance of all then existing Accounts; and (2) an Inventory Report duly executed by an officer of each Borrower and substantially in the form of Exhibit G as of the last day of such period. As soon as available and in any event within five (5) Business Days after both the fifteenth and the last day of each month, and from time to time upon the request of Collateral Agent, Borrowers will deliver to Collateral Agent: (1) a Reconciliation Report duly executed by the Financial Officer and substantially in the form of Exhibit H as at the last day of such period; (2) an aged trial balance of all then existing accounts payable; and (3) a detailed inventory listing and cover summary report. All such reports shall be in form and substance satisfactory to Collateral Agent.

          (G)     Management Report. Together with each delivery of financial statements of Borrowers and their Subsidiaries pursuant to subparagraph (A) above, Borrowers will deliver to Agents and Lenders a management report: (1) describing the operations and financial condition of the Borrowers (by business segment) for the month then ended and the portion of the current Fiscal Year then elapsed; (2) setting forth in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the most recent Projections for the current Fiscal Year delivered to Collateral Agent and Lenders pursuant to subparagraph (L) below; and (3) discussing the reasons for any significant variations. The information above shall be presented in reasonable detail and shall be certified by the chief financial officer of the Company to the effect that such information fairly presents the results of operations and financial condition of Borrowers and their Subsidiaries as at the dates and for the periods indicated.

          (H)     Appraisals. From time to time, upon the request of Collateral Agent, Borrowers will obtain and deliver to Collateral Agent, at Borrowers' expense, appraisal reports in form and substance and from appraisers satisfactory to Collateral Agent, stating the then current fair market and orderly liquidation values of all or any portion of the Collateral; provided, however, so long as no Default or Event of Default is continuing, Collateral Agent shall not request an appraisal as to any particular category of Collateral to be performed more than once every Loan Year at Borrowers' expense.

          (I)     Government Notices. Borrowers will deliver to Collateral Agent promptly following receipt copies of all notices, requests, subpoenas, inquiries or other writings received from any governmental agency concerning the violation or alleged violation of ERISA, the violation or alleged violation of any Environmental Laws or the violation or alleged violation of the Fair Labor Standards Act, Borrowers shall deliver to Collateral Agent an update to Schedule 4.9 no less frequently than on a quarterly basis.

          (J)     Notice of Default, etc. Promptly upon a Borrower obtaining knowledge of any of the following events or conditions, such Borrower shall deliver to Administrative Agent a certificate of such Borrower's chief executive officer or a Financial Officer specifying the nature and period of existence of such condition or event and what action such Borrower has taken, is taking and proposes to take with

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respect thereto: (1) any condition or event that constitutes an Event of Default or Default; (2) any notice of default that any Person has given to such Borrower or any of its Subsidiaries, which default if unremedied could reasonably be expected to result in a Material Adverse Effect; or (3) any Material Adverse Effect.

          (K)     Projections. As soon as available and in any event no later than sixty (60) days after the end of each Fiscal Year of the Company, Borrowers, will deliver to Collateral Agent and Lenders consolidated Projections of the Company and its Subsidiaries for the forthcoming three Fiscal Years, year by year, and for the forthcoming Fiscal Year, month by month.

          (L)     Other Information. With reasonable promptness, Borrowers will deliver such other information and data as any Agent or any Lender may reasonably request from time to time.

          (M)     Opening Balance Sheet. As soon as available and in any event within ninety (90) days after the Closing Date, Borrowers will deliver to Agents and Lenders a consolidated Closing Date balance sheet reviewed and reported on by the Company's Accountants.

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FINANCIAL COVENANTS RIDER

          This Financial Covenants Rider is attached and made a part of that certain Loan and Security Agreement, dated as of February 28, 2002 and entered into among Borrowers, Agents and Lenders.

          A.     Tangible Net Worth. The Borrowers, on a consolidated basis, shall maintain Tangible Net Worth of at least the amounts set forth below at the end of each quarter of a Fiscal Year set forth below.

First Quarter	Amount
March 31, 2002	As set forth on Closing Balance Sheet
June 30, 2002	Amount as of March 31, 2002, plus $500,000
September 30, 2002	Amount as of June 30, 2002, plus $3,300,000
December 31, 2002	Amount as of September 30, 2002, plus $5,000,000
Each Quarter Thereafter (e.g. March 31, 2003,    June 30, 2003 and so on)	Amount of as of the end of the immediately prior calendar quarter plus 50% of the Net Income earned for the calendar quarter at issue

          B.     Minimum Operating Cash Flow. The Borroowers, on a consolidated basis, shall at all times maintain a minimum Operating Cash Flow of at least the amounts set forth below at the end of each quarter of a Fiscal Year set forth below.

Fiscal Quarter Ending	Amount
March 31, 2002	$48,000,000
June 30, 2002	$42,000,000
September 30, 2002	$36,800,000
December 31, 2002	$44,600,000
March 31, 2003	$45,200,000
June 30, 2003	$45,900,000
September 30, 2003	$46,600,000
December 31, 2003	$47,300,000
March 31, 2004	$48,500,000
June 30, 2004	$49,800,000
September 30, 2004	$51,000,000
December 31, 2004	$52,200,000

          C.     Capital Expenditure Limits. The aggregate amount of all Capital Expenditures, Capital Leases with respect to fixed assets of Borrowers and their Subsidiaries (which shall be considered to be expended in full on the date such Capital Lease is entered into) and other contracts with respect to fixed assets initially capitalized on the Borrowers' or any of their Subsidiaries' balance sheet prepared in accordance with GAAP (which shall be considered to be expended in full on the date such contract is entered into) (excluding, in each case, expenditures for trade-ins and replacement of assets to the extent

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funded with casualty insurance proceeds) will not exceed the amount set forth below for each period set forth below.

Fiscal Quarter Ending	Amount
March 31, 2002	$11,600,000
June 30, 2002	$11,600,000
September 30, 2002	$11,100,000
December 31, 2002	$10,900,000
March 31, 2003	$12,300,000
June 30, 2003	$12,300,000
September 30, 2003	$12,300,000
December 31, 2003	$12,300,000
March 31, 2004	$13,000,000
June 30, 2004	$13,000,000
September 30, 2004	$13,000,000
December 31, 2004	$13,000,000

          D.     Fixed Charge Coverage. Borrowers, on a consolidated basis, shall not permit its Fixed Charge Coverage for the rolling twelve (12) month period ending on the last day of each fiscal quarter set forth below to be less than the ratio set forth below for such periods.

Fiscal Quarter Ending	Ratio for Rolling Twelve Months
March 31, 2002	2.45
June 30, 2002	1.70
September 30, 2002	1.25
December 31, 2002	1.15
March 31, 2003	1.15
June 30, 2003	1.15
September 30, 2003	1.15
December 31, 2003	1.15
March 31, 2004	1.15
June 30, 2004	1.15
September 30, 2004	1.15
December 31, 2004	1.15

          E.     Indebtedness to EBITDA Ratio. Borrowers, on a consolidated basis, shall not permit the ratio of (a) Indebtedness of the Borrowers, on a consolidated basis, to (b) EBITDA of the Borrowers, on a consolidated basis, each calculated as of the last day of each fiscal quarter set forth below to be greater than the ratio set forth below for such periods:

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Fiscal Quarter Ending	Ratio for Rolling Twelve Months	Ratio for Rolling Twelve Months If SumitomoTransaction Is Not Completed
March 31, 2002	4.50	4.04
June 30, 2002	4.15	3.69
September 30, 2002	3.75	3.32
December 31, 2002	3.00	2.63
March 31, 2003	2.81	2.46
June 30, 2003	2.63	2.29
September 30, 2003	2.44	2.12
December 31, 2003	2.25	1.95
March 31, 2004	2.25	1.95
June 30, 2004	2.25	1.95
September 30, 2004	2.25	1.95
December 31, 2004	2.25	1.95

          F.     Census. Borrowers, on a consolidated basis, shall not allow the Patient census for any period of four (4) consecutive weeks for the skilled nursing and hospital Facilities, when taken as a whole, to fall below eighty-seven percent (87%) of the number of licensed available beds in such Facilities taken as a whole (computed in a manner consistent with reporting practices existing on the date of this Agreement); provided that during the period from December 1^st to January 1^st of each year, the Borrowers shall not allow such census to fall below eighty-six percent (86%).

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EX-10

EXHIBIT 10.10

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

ii

		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 AND DEFAULT PROVISIONS		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.     Exclusion Letter	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.	Stage 2 of the MDS Audit	85
	D.	MDS Audit Report	87
	E.	Annual Report	89
Appendix C			90
	Overpayment Refund Form		90

iv

1.     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:

                            1.     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

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Committee is comprised of not less than three outside directors of Sun. The Board Committee shall be 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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                            2.     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

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annual 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. SectionSection 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 system shall be of a nature to provide the Corporate Compliance

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

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                            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.

                            3.     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 quality indicators for nursing

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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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                            4.     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 timely and effective manner;

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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);

                                                      (C)     Sun's ability to create a corrective action plan;

                                                      (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 other allegations or

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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 interviewed. Nothing in this CIA

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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 findings

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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. SectionSection 483.10 and 483.75(o)(3)). Nothing in the prior sentence, however, shall limit or affect the Monitor's obligation to provide

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information, including information from 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.     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

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engagements in a professionally 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 facilities. The

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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 audit

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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

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described in Section III.D.2.b.ii herein, shall 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 nursing facility data and allocate

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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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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.

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.

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.

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.

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

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be created in accordance with the procedures set forth in Appendix 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

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deficiencies and 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 as from previous years

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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.

                            5.     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.

                            6.     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 staff privileges within six months prior to the

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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. SectionSection 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

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the contractor policies, and, for Medicare contractors, must include the information contained on the 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.

V.     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 individuals

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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 proposed

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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 the

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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

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after the 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 or part,

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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

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to OIG a reasonable timetable for curing the failure to comply.

                    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.

/s/ Mark Wimer	July 26, 2001
Mark Wimer	Date
Chief Executive Officer
Sun Healthcare Group, Inc.

/s/ Chauncey Hunker	July 26, 2001
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

/s/ Lewis Morris	July 11, 2001
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,

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reliable, thorough, and maintained over time.

       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.     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 parameters of Section C.1.b. of this

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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

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submitted, procedure code reimbursed, allowed amount reimbursed by 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, WorkersComp.(Including	16 - Medical Necessity
05 - ModifierAdded/Removed	Black Lung)	17 - Other (Please Specify)
06 - Billed in Error	12 - Veterans Administration
07 - Corrected CPT Code

EX-10

EXHIBIT 10.9

EMPLOYMENT AGREEMENT

               THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into this 28th day of February, 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. In addition to the Base Salary provided for in Section 3(a) above, subject to the approval of a majority of Sun's shareholders, 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.

2

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. Two-fifths of the total number of shares of Common Stock underlying the Restricted Stock Grant will vest on the first anniversary of the Emergence Date and an additional one-fifth on each of the next three 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 equal to $27 per share, subject to approval of the Equity Plan by a majority of the shareholders of Sun on the Emergence Date. Shares of Common Stock available for issuance under the Equity Plan shall be deemed to be outstanding for purposes hereof. 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.

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

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

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

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 Board of Directors, renders Mr. Matros unsuitable for the position of either Chairman or CEO;

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       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):

              (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;

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              (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(f) (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 t 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 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

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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 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.

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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;

       3.     A sale or other disposition by the Company of all or substantially all of the Company's assets;

       4.     During any period of two (2) consecutive years (beginning on or after the Effective Date), individuals who at the beginning of such period constitute the Board of Directors and any new director (other than a director who is a

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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 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

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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 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

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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 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,

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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.

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.

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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 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.

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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.

/s/ Richard Matros	February 28, 2002
Richard Matros	Date
SUN HEALTHCARE GROUP, INC.
By   /s/ Robert F. Murphy	February 28, 2002
Its   Secretary	Date

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EX-10

EXHIBIT 10.3

Sun Healthcare Group, Inc.

2002 Management Equity Incentive Plan

Effective as of February 28, 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

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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).

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               (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

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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

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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.

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               (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.

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               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.

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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)

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EX-10

EXHIBIT 10.4

EXPENSE INDEMNIFICATION AGREEMENT

               THIS EXPENSE INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered as of November 6, 2001, by and between Sun Healthcare Group, Inc., a Delaware corporation (the "Company"), and __________ ("Beneficiary"). Unless otherwise defined, capitalized terms used in this Agreement are defined in Section 13 hereto.

               WHEREAS, Beneficiary is an officer of the Company;

               WHEREAS, Beneficiary and the Company are parties to an Indemnity Agreement, entered into as of April 24, 1998, pursuant to which Beneficiary is entitled to indemnification and advancement of legal expenses as provided therein;

               WHEREAS, Beneficiary is an insured under a certain policy which provides liability insurance for officers and directors of the Company (the "Policy");

               WHEREAS, on October 14, 1999, the Company and certain of its affiliates and subsidiaries commenced cases captioned In re Sun Healthcare Group, et al., 99-03657 (MFW) under title 11 of the United States Code by filing petitions with the United States Bankruptcy Court for the District of Delaware, and continue to operate their businesses as debtors and debtors in possession;

               WHEREAS, pursuant to an order of the United States Bankruptcy Court for the District of Delaware, dated August 10, 2000, the Company is authorized to enter into expense indemnification agreements with its current officers and directors;

               NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Company and Beneficiary do hereby covenant and agree as follows:

               Section 1.     Effectiveness and Termination. This Agreement shall become effective and enforceable against the parties hereto on the Effective Date. This Agreement shall continue until and terminate upon the tenth anniversary of the Effective Date. This Agreement shall be binding upon the Company and its successors and assigns and shall survive the death, disability, or incapacity of the Beneficiary or the termination of the Beneficiary's service as a director or officer of the Company and shall inure to the benefit of Beneficiary and his heirs, executors, and administrators.

               Section 2.     Indemnification of Expenses. Subject to the limitations identified in Sections 3 and 11, and the procedure and determination specified in Section 6, Beneficiary shall be entitled to be indemnified by the Company against all Expenses actually and reasonably incurred by Beneficiary if, in connection with or by reason of an Indemnification Event, Beneficiary (i) is or is being threatened to be made a party to any threatened, pending, or completed Proceeding and (ii) either (A) acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any

criminal Proceeding, had no reasonable cause to believe his conduct was unlawful, or (B) otherwise complied with the standard of conduct required for indemnification by Delaware law, as in effect from time to time. In addition, Beneficiary shall be entitled to be indemnified by the Company against all Expenses actually and reasonably incurred by Beneficiary if, by reason of an Indemnification Event, Beneficiary is a witness (by deposition, at trial or otherwise), is interviewed, or produces documents (whether or not subpoenaed) in a Proceeding with respect to which Beneficiary is not a party.

               Section 3.     Limitation on Aggregate Expenses. The aggregate amount of Expenses the Company is obligated to advance or reimburse to Beneficiary pursuant to this Agreement, in addition to Expenses for which the Company is paid or reimbursed under the Policy, shall not exceed $5,000,000 less the Aggregate Expenses.

               Section 4.     Insurance Policy. As a condition precedent to the effectiveness of this Agreement, the Company has (i) prepaid all applicable premiums on the Policy for the policy period that is in effect on the Effective Date, and (ii) purchased an extension (including payment of the premium applicable thereto) of the discovery period described in Clause 10 of the Policy for a period of ten years.

               Section 5.     Advancement of Expenses and Undertaking to Repay.

               (a)     Within twenty business days after delivery by Beneficiary to the Company of a properly completed Certificate of Indemnification in the form attached hereto as Exhibit A (a Certificate of Indemnification), the Company shall advance to Beneficiary the amount of Expenses specified in such Certificate. A properly completed Certificate of Indemnification shall reasonably evidence the Expenses incurred by Beneficiary and shall include a written undertaking (which shall be accepted by or on behalf of the Company without reference to the financial ability of Beneficiary to make repayment, and without the pledging of any security by Beneficiary to make repayment) by or on behalf of Beneficiary to repay any Expenses advanced if, as, and when it shall ultimately be determined that Beneficiary is not entitled to be indemnified against such Expenses.

               (b)     No determination under Section 6 as to Beneficiary's entitlement to indemnification shall be made in connection with the advancement of Expenses under this Section until (i) the settlement or final adjudication of a civil Proceeding for which Beneficiary has requested indemnification, (ii) the settlement of or conviction in a criminal Proceeding for which Beneficiary has requested indemnification, (iii) notification to Beneficiary that a civil or criminal investigation for which Beneficiary has requested indemnification has been completed or discontinued, or (iv) the conclusion of any other matter for which Beneficiary has requested indemnification. To the extent that a determination is made pursuant to Section 6 hereof that Beneficiary was not entitled to indemnification for certain Expenses advanced to Beneficiary under Section 5(a), Beneficiary shall (subject to the exercise of Beneficiary's rights under Section 8 hereof) repay such Expenses to the Company without interest.

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               Section 6.     Determination of Entitlement to Indemnification.

               (a)     Upon the receipt by the Company of a Certificate of Indemnification, the Secretary of the Company shall promptly advise the Board of Directors in writing that Beneficiary has requested indemnification of Expenses hereunder.

               (b)     Except with respect to Expenses advanced to Beneficiary under Section 5 hereof, upon the receipt by the Company of a Certificate of Indemnification, a determination with respect to Beneficiary's entitlement to indemnification of Expenses shall be made as soon as possible.

                         (i)     Subject to subsection (b)(ii) hereof, if a Change in Control shall have occurred, or if a Change of Control has not occurred but Beneficiary so elects, the determination shall be made by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Beneficiary.

                         (ii)     If a Change of Control has not occurred, or if a Change of Control has occurred but Beneficiary so elects, the determination shall be made (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors, provided, however, that if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable the determination shall be made by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Beneficiary, or (B) by the stockholders of the Company.

                         (iii)     Beneficiary shall cooperate with the person, persons, or entity making such determination, including providing to such person, persons, or entity, upon reasonable advance request, any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Beneficiary and reasonably necessary to such determination.

               (c)     If it is determined in accordance with subsection (b) that Beneficiary is entitled to indemnification, payment to Beneficiary shall be made within twenty business days after such determination (unless such payment shall already have been advanced to Beneficiary pursuant to Section 5 hereof).

               (d)     In the event the determination of entitlement to indemnification against Expenses is to be made by Independent Counsel pursuant to this Section 6, the Independent Counsel shall be selected as follows. If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Beneficiary advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Beneficiary (unless Beneficiary shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Beneficiary shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Beneficiary or the Company, as the case may be, may, within ten business days after such written notice of selection shall have been given, deliver to the Company or to Beneficiary, as the case may be, a

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written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of "Independent Counsel" as defined in this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within twenty business days after submission by Beneficiary of a written request for indemnification pursuant to this Section, no Independent Counsel shall have been selected and not objected to, either the Company or Beneficiary may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made by the Company or Beneficiary to the other's selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under this Section. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to this Section, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section, including, without limitation, those of Beneficiary, regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

               Section 7.     Presumption and Effect of Certain Proceedings.

               (a)     In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Beneficiary is entitled to indemnification under this Agreement if Beneficiary has submitted a properly completed Certificate of Indemnification. The Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons, or entity of any determination contrary to that presumption.

               (b)     The termination of any Proceeding or of any claim, issue, or matter therein, by judgment, order, settlement, or conviction, or upon a plea of nolo-contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Beneficiary to indemnification against Expenses or create a presumption that Beneficiary did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Beneficiary had reasonable cause to believe that his conduct was unlawful.

               (c)     Beneficiary's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan shall be deemed to be conduct that Beneficiary reasonably believed to be in or not opposed to the best interests of the Company.

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               (d)     For purposes of any determination hereunder, Beneficiary shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action was reasonably based on (i) the records or books of account of the Company or another enterprise, including financial statements, (ii) information supplied to him by the officers of the Company or another enterprise in the course of their duties, (iii) the advice of legal counsel for the Company or another enterprise in the course of their duties, (iv) information or records given or reports made to the Company or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Company or another enterprise. The term "another enterprise" as used in this Section shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan, or other enterprise of which Beneficiary is or was serving at the request of the Company as an officer, director, partner, trustee, employee, or agent. The provisions of this Section shall not be deemed to limit in any way the other circumstances in which Beneficiary may be deemed to have met the applicable standard of conduct for indemnification against Expenses.

               Section 8.     Remedies of Beneficiary.

               (a)     In the event that: (i) a determination is made pursuant to Section 6 that Beneficiary is not entitled to indemnification against Expenses under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5, (iii) no determination of entitlement to indemnification against Expenses shall have been made within sixty days after receipt by the Company of a properly completed Certificate of Indemnification, (iv) payment of indemnification of Expenses is not made within twenty business days after a determination has been made that Beneficiary is entitled to such indemnification, Beneficiary shall be entitled to request an adjudication in an appropriate court of the State of Delaware of his entitlement to such indemnification or advancement of Expenses. Beneficiary shall commence such proceeding seeking an adjudication within one year following the date on which Beneficiary first has the right to commence such proceeding pursuant to this Section.

               (b)     In the event that a determination shall have been made pursuant to Section 6 that Beneficiary is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section shall be conducted in all respects as a de novo trial, or arbitration, on the merits, and Beneficiary shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section, the Company shall have the burden of proving that Beneficiary is not entitled to indemnification or advancement of Expenses, as the case may be.

               (c)     If a determination shall have been made pursuant to Section 6 that Beneficiary is entitled to indemnification against or advancement of Expenses, as the case may be, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section.

               (d)     The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to the provisions of this Section that procedures and presumptions of this

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Agreement are not valid, binding, and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.

               Section 9.     Costs. It is the intent of the Company that Beneficiary not be required to incur the expenses associated with the enforcement of his rights under this Agreement by litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to Beneficiary hereunder. Accordingly, the Company shall be solely responsible for paying (i) all the costs of making the determination required by Section 6 hereof, including, but not limited to, the costs of legal counsel, proxy solicitations, and judicial determinations, (ii) any cost or expenses (including attorney fees and disbursements) incurred by Beneficiary in cooperating with the person, persons, or entity making such determination (irrespective of the determination as to the Beneficiary's entitlement to indemnification), (iii) all reasonable expenses incurred by Beneficiary to enforce this Agreement, including, but not limited to, the costs incurred by Beneficiary to obtain court-ordered indemnification pursuant to Section 8, regardless of the outcome of any such application or proceeding (so long as Beneficiary has acted in good faith), and (iv) all costs of defending any suits or investigation or proceedings challenging payments to Beneficiary under this Agreement or challenging the validity of or seeking to declare this Agreement void or unenforceable (so long as Beneficiary has acted in good faith).

               Section 10.     Survival of Rights; Insurance; Subrogation.

               (a)     To the extent that any change is made to Delaware law (whether by legislative action or judicial decision) that permits any greater right to indemnification and/or advancement of expenses than that provided under this Agreement as of the date hereof, Beneficiary shall be deemed to have such greater right pursuant to this Agreement. No amendment, alteration, or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Beneficiary under this Agreement in respect of any action taken or omitted by such Beneficiary in connection with an Indemnification Event prior to such amendment, alteration, or repeal.

               (b)     At the time of the receipt of a notice of a claim pursuant to Section 6 hereof, the Company shall give prompt notice of the assertion of such claim to the insurer or insurers under the Policy in accordance with the procedures set forth in the Policy. The Company shall thereafter take all necessary or desirable action to cause such insurer or insurers to pay, on behalf of Beneficiary, all amounts payable as a result of such claim in accordance with the terms of the Policy.

               (c)     In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Beneficiary, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

               Section 11.     Limitations to Rights of Indemnification and Advancement of Expenses. Except as otherwise provided in Section 9, Beneficiary shall not be entitled to indemnification against or advancement of Expenses under this Agreement:

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               (a)     with respect to any action, suit, or proceeding initiated, brought, or made by Beneficiary against the Company or any other person, unless approved in advance by the Board of Directors;

               (b)     for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) which have been paid directly to Beneficiary by an insurance carrier under the Policy or any other policy of liability insurance maintained by the Company;

               (c)     for expenses or the payment of profits arising from the purchase and sale by Beneficiary of securities in violation of Section 16(b) of the Exchange Act or any similar successor statute;

               (d)     if it is determined by final judgment by a court having jurisdiction in the matter that such indemnification against or advancement of Expenses is not lawful; or

               (e)     to the extent that Beneficiary has otherwise actually received such payment from any other person.

               Section 12.     Mutual Acknowledgement. Both the Company and Beneficiary acknowledge that in certain instances federal law may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Beneficiary acknowledge that the Securities and Exchange Commission has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations.

               Section 13.     Definitions. For purposes of this Agreement:

                         (a)      "Aggregate Expenses" means the aggregate Expenses incurred after the Effective Date by all Eligible Persons which the Company has paid pursuant to an Eligible Agreement.

                         (b)           "Aggregate Expense Limitation" means the limitation specified in Section 3 hereof.

                         (c)      "Board of Directors" means the board of directors of the Company.

                         (d)      "Change of Control" means a change in control of the Company occurring after the Effective Date of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement, provided, however, that without limitation, such a Change in Control shall be deemed to have occurred if after the Effective Date (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of

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the Company representing 20% or more of the combined voting power of the Company's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such person attaining such percentage interest, (ii) there occurs a proxy contest, or the Company is a party to a merger, consolidation, sale of assets, plan of liquidation, or other reorganization as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter, or (iii) during any period of consecutive years, other than as a result of an event described in clause (ii) of this definition, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors.

                         (e)     "Company" means Sun Healthcare Group, Inc.

                         (f)     "Disinterested Director" means a director of the Company who is not and was not a party, or threatened to be made a party, to the Proceeding in respect of which indemnification against Expenses is sought by Beneficiary.

                         (g)     "Effective Date" means the date of this Agreement.

                         (h)     "Eligible Person" means an individual, excluding Beneficiary, who is an officer or director of the Company as of the date of this Agreement.

                         (i)     "Eligible Agreement" means a written agreement by and between the Company and an Eligible Person pursuant which the Company indemnifies or is otherwise obligated to advance or reimburse Expenses incurred by such Person.

                         (j)      "Exchange Act" means the Securities Exchange Act of 1934, as amended.

                         (k)     "Expenses" means all reasonable attorney fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding, together with any and all applicable sales, gross receipts, and similar taxes thereon.

                         (l)     "Indemnification Event" means any event or occurrence prior to October 14, 1999 which related to Beneficiary's status as a director, officer, employee, agent, or fiduciary of the Company, or Beneficiary's status as a director, officer, employee, trustee, agent, or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise at the request or on behalf of the Company, and also means anything done or not done by Beneficiary in or related to any such status, service or capacity.

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                         (m)     "Independent Counsel" means a law firm, or member of a law firm, that is experienced in matters of Delaware corporation law and neither presently is, nor in the immediately proceeding five years has been, retained to represent the Company or Beneficiary in any matter material to either such party or any other party to the Proceeding giving rise to a claim for indemnification of Expenses hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person, who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would be precluded from representing either the Company or the Beneficiary in an action to determine Beneficiary's rights under this Agreement.

                         (n)     "Proceeding" means any action, suit, arbitration, alternative dispute resolution mechanism, inquiry, investigation, administrative hearing, or any other proceeding, whether civil, criminal, administrative, or investigative, whether instituted by the Company or any other party, except one (i) initiated by Beneficiary pursuant to Section 8 to enforce his rights under this Agreement or (ii) initiated by Beneficiary prior to a Change in Control, unless authorized in advance by the Board of Directors of the Company. The term "Proceeding" shall be deemed to include an action in which Beneficiary seeks recovery under the Policy or any other insurance policy maintained by the Company under which Beneficiary is a named insured.

               Section 14.     Quarterly Reports to Beneficiary. Upon the written request of Beneficiary during the term of this Agreement, not more frequently than once per quarter and not later than the fifteenth (15th) day following the last day of a calendar quarter, the Company shall provide to Beneficiary a written report which specifies (i) the Aggregate Expenses and claims paid under the Policy during such calendar quarter, (ii) the Aggregate Expenses and claims pending under the Policy as of the last day of such calendar quarter, and (iii) the amounts available to Beneficiary under each of the Policy and the Aggregate Expense Limitation as of the last day of such calendar quarter.

               Section 15.    Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal, or unenforceable for any reason whatsoever (i) the validity, legality, and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that is not itself invalid, illegal, or unenforceable) shall not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal, or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.

               Section 16.     Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

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               Section 17.     Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

               Section 18.     Modification and Waiver. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by each of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions thereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

               Section 19.     Notification of a Proceeding. Beneficiary agrees to notify the Company in writing within a reasonable time after being served with any summons, citation, subpoena, complaint, indictment, information, or other document relating to any Proceeding or matter which may be subject to indemnification against or advancement of Expenses covered hereunder; provided, however, that the failure by Beneficiary to provide such notice shall not relieve the Company of its obligations under this Agreement unless and to the extent that the Company is prejudiced by such failure.

               Section 20.     Notices. All notices, requests, demands, and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) on the date such notice is delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (ii) on the third business day after such notice shall have been mailed by certified or registered mail with postage prepaid at the following addresses:

                         (a)      If to Beneficiary:

                         (b)     If to the Company:

                                  Sun Healthcare Group, Inc.
                                  Attn: General Counsel
                                 101 Sun Avenue N.E.
                                 Albuquerque, NM 87109

or to such other addresses as may have been furnished for such purpose and in the manner provided in this Section to Beneficiary or the Company.

               Section 21.     Governing Law/Consent to Jurisdiction. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without giving effect to principles of conflict of laws. The Company and Beneficiary each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware, including the United States Bankruptcy Court for the District of Delaware, for all

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purposes in connection with any action, suit, or proceeding which arises out of or relates to this Agreement.

               Section 22.     Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.

               IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.

SUN HEALTHCARE GROUP, INC.
a Delaware corporation

By:                                                           
     Title:

BENEFICIARY

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EXHIBIT A

CERTIFICATE OF INDEMNIFICATION

[Date]

               This Certificate of Indemnification is being provided pursuant to the terms of that certain Expense Indemnification Agreement, dated as of November 6, 2001, by and between Sun Healthcare Group, Inc. and the undersigned (the "Agreement"). Unless otherwise indicated, capitalized terms used herein have the meanings specified in the Agreement. The undersigned hereby certifies that as of the date specified above:

               1.     I have incurred Expenses in the aggregate amount of $____________. Copies of statements substantiating such Expenses are attached hereto.

               2.     I hereby request that such Expenses be advanced to me in accordance with Section 5 of the Agreement.

               3.     I hereby agree to repay the Expenses advanced in accordance with paragraph 2 hereof if, as, and when it shall ultimately be determined pursuant to the Agreement that I am not entitled to be indemnified against such Expenses.

                                                               
[Beneficiary]

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EX-10

EXHIBIT 10.5

[date]

[name and address]

                    Re: Severance Agreement

Dear                    :

               The Creditors' Committee, as defined herein in Section 8, has approved a retention program for you that will apply in the event of the termination of your services (hereinafter referred to as "employment") to the Company. This letter agreement (the "Agreement") sets forth such terms. Capitalized terms not otherwise defined, shall have the meanings specified in Section 8.

               1.  Effectiveness and Term. On execution by the Company and you, this Agreement shall be effective and shall continue so long as you are employed by the Company; provided, however, that you may terminate this Agreement and decline to participate in the Retention Program by delivering written notice to such effect to the Company and to the Creditors' Committee at any time prior to your acceptance of any payment under the Retention Program.

               2.  Prior Severance Agreement. Except as provided herein, any prior agreement, arrangement or understanding between you and the Company, relating to or in connection with the possible payment of severance to you upon termination of your employment, is hereby terminated and superceded in its entirety by this Agreement.

               3.  Effect of Involuntary Termination. In the event of your Involuntary Termination, the Company shall make either the Mitigation Election or the Non-compete Election at the time of such Involuntary Termination.

               (a)  Severance Payment Under Mitigation Option. In the event the Company makes the Mitigation Election and subject to your execution of a release in favor of the Company, the Company shall (i) pay you an amount equal to your annual salary at the rate then in effect and (ii) deposit into the Escrow Account an amount equal to your annual salary at the rate then in effect. You agree to notify the Company in writing

[name]
Page 2
[date]

within ten business days after obtaining any employment during the two years after your Involuntary Termination. On the first anniversary of your Involuntary Termination, the Company shall be entitled to withdraw from the Escrow Account an amount equal to the sum of any signing bonuses and all salary earned by you subsequent to your Involuntary Termination through the first anniversary of such date (regardless of whether such bonuses and/or salary is deferred at the election of either you or your new employer) and any interest earned on that amount in the Escrow Account which is allocable to such amounts. On the last day of each month commencing with the first month after the first anniversary of your Involuntary Termination and ending with the twelfth month after such anniversary, you may receive an amount equal to the Monthly Severance Payment following delivery to the Company of your sworn statement that you are entitled to receive such amount hereunder.

               (b)  Severance Payment Under Non-compete Option. In the event the Company makes the Non-compete Election and subject to your execution of a release in favor of the Company, the Company shall pay you an amount equal to two times your annual salary at the rate then in effect. You shall not be required to mitigate the amount of any payments provided in this subsection by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this subsection be reduced by any compensation earned by you as the result of employment by another employer or by pension benefits paid by the Company or another employer after the date of termination or otherwise.

               (c)  Certain Benefits. In the event of your Involuntary Termination, you and your eligible dependents shall continue to be eligible to participate during the Benefit Continuation Period in the medical, dental, health, life, and other fringe benefit plans and arrangements applicable to you immediately prior to you Involuntary Termination on the same terms and conditions in effect for you and your dependents immediately prior to such Involuntary Termination.

               (d)  Accrued Wages, Etc. In the event of your Involuntary Termination, the Company shall pay you the full amount of any earned but unpaid salary through the date of such termination, plus a cash payment (calculated on the basis of your salary at the rate then in effect) for all unused paid time off which you have earned as of the date of such termination and a cash payment for any unreimbursed expenses.

               4.  Effect of Other Terminations. In the event that your employment with the Company terminates for reasons other than your Involuntary Termination, the Company shall pay you the full amount of any earned but unpaid salary through the date of such termination, plus a cash payment (calculated on the basis of your salary at the rate then in effect) for all unused paid time off which you have earned as of the date of such termination and a cash payment for any unreimbursed expenses. As of the date of such termination, you shall immediately relinquish the right to any additional payments or benefits from the Company under this Agreement.

[name]
Page 3
[date]

               5.  Protection of the Company's Interests.

               (a)  No Competing Employment. You shall not, unless you receive the prior written consent of the Company, directly or indirectly, own an interest in, manage, operate, join, control, lend money, or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant, or otherwise, any individual, partnership, firm, corporation, or other business organization or entity that competes with the Company (other than an entity that began competing with the Company after your termination of employment) (i) as long as you are employed by the Company, (ii) during the Restricted Period in the event of your Involuntary Termination and the Non-compete Election by the Company, and (iii) during the Restricted Period in the event of termination of your employment for any other reason; provided, however, that this Section shall not proscribe your ownership, either directly or indirectly, of less than five percent of any class of securities which are listed on a national securities exchange or quoted on the automated quotation system of the National Association of Securities Dealers, Inc.; provided, further, that this Section shall not proscribe your employment with a competing entity in a capacity which is not responsible for the generation of operating revenue; and provided further, that you shall be released from the foregoing obligations following the Non-compete Election by the Company if the Company fails to timely pay any amount due to you under this Agreement.

               (b)  No Interference. During the Restricted Period, you shall not, whether for your own account or for the account of any other individual, partnership, firm, corporation, or other business organization (other than the Company), intentionally solicit, endeavor to entice away from the Company, or otherwise interfere with the relationship of the Company with any person who is employed by or otherwise engaged to perform services for the Company or any person or entity who is, or was within the then most recent twelve-month period, a customer, client, or supplier of the Company.

               (c)  Confidentiality. You hereby covenant and agree that you will not at any time, except in performance of your obligations to the Company hereunder or with the prior written consent of the Company, directly or indirectly disclose to any person any secret or Confidential Information that you may learn or have learned by reason of your association with the Company.

               (d)  Exclusive Property. You hereby confirm that all Confidential Information is and shall remain the exclusive property of the Company. All business records, papers, and documents kept or made by you in whatever form maintained, whether documentary, computerized, or otherwise, relating to the business of the Company shall be and remain the property of the Company. On termination of your employment with the Company for any reason or upon the request of the Company at any time, you shall promptly deliver to the Company, and shall not without the prior written consent of the Company, retain

[name]
Page 4
[date]

copies of any Confidential Information or records and documents made by you or coming into your possession concerning the business or affairs of the Company.

               (e)  Relief. Without intending to limit the remedies available to the Company, you acknowledge that a breach of any of the covenants contained in this Section may result in material irreparable injury to the Company 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, the Company shall be entitled to obtain a temporary restraining order and/or a preliminary injunction restraining you from engaging in activities prohibited by this Section or such other relief as may be required to specifically enforce any of the covenants of this Section.

               6.  Legal Fees and Expenses. The Company shall pay or reimburse you on an after-tax basis for all costs and expenses (including, without limitation, court costs and reasonable legal fees and expenses which reflect common practice with respect to the matters involved) incurred by you as a result of any claim, action, or proceeding (i) arising out of your termination of employment during the Term, (ii) contesting, disputing, or enforcing any right, benefits, or obligations under this Agreement, or (iii) arising out of or challenging the validity, advisability, or enforceability of this Agreement or any provision thereof; provided, however, that this provision shall not apply if the relevant trier-of-fact determines that your claim or position was frivolous and without reasonable foundation.

               7.  Successors; Binding Agreement. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs), the Company, and any organization which succeeds to substantially all of the business or assets of the Company, whether by means of merger, consolidation, acquisition of all or substantially all of the assets of the Company, or otherwise. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee or, if there is no such designee, to your estate.

               8.  Definitions. The following capitalized terms shall have the meanings specified below:

               (a)   "Benefit Continuation Period" means the period commencing on the date of your Involuntary Termination and ending on the earlier to occur of (i) the second anniversary of the date of your Involuntary Termination or (ii) the date that you and your dependents are eligible and elect coverage under the plans of a subsequent employer which provide substantially equivalent or greater benefits to you and your dependents than the medical, dental, health, life, and other fringe benefit plans and arrangements applicable to you immediately prior to your Involuntary Termination.

[name]
Page 5
[date]

               (b)  "Cause" means a termination of your employment during the Term which is a result of (i) your felony conviction, (ii) a determination by the board of directors of the Company that you have violated any of the protective covenants set forth in Section 5 of this Agreement or (iii) your continued failure substantially to perform the duties reasonably requested by the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure resulting from a resignation by you for Good Reason) after a written demand for substantial performance is delivered to you by the board of directors of the Company, which demand specifically identifies the manner in which the board of directors of the Company believes that you have not substantially performed your duties, and which performance is not substantially corrected by you within 10 days of receipt of such demand.

               (c)  "Confidential Information" means any information not previously disclosed to the public or to the trade by the management of the Company with respect to the Company's services, products, 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 the revenues, costs, or profits associated with any of the Company's products or lines of business), business plans, prospects, or opportunities.

               (d)  "Creditors' Committee" means the statutory committee of creditors appointed in the jointly administered cases filed by the Company on October 14, 1999, with the United States Bankruptcy Court for the District of Delaware pursuant to title 11 of the United States Code.

               (e)  "Disability" means your inability to engage in substantial gainful activity by reason of any medically determinable mental or physical impairment which can be expected to result in death or which has lasted or can be expected to last a continuous period of not less than 12 months.

               (f)  "Escrow Account" means either an interest bearing escrow account or a comparable security device acceptable to you.

               (g)  "Good Reason" means a resignation of your employment as a result of any of the following:

     (A)  a meaningful and detrimental alteration in your position or the nature of your responsibilities, or a meaningful and detrimental change in your reporting responsibilities or titles, as in effect immediately prior to your termination of employment;

     (B)  a reduction by the Company in your annual base salary as in effect immediately prior to your termination of employment; a reduction in your target annual bonus (expressed as a percentage of base salary) as in effect

[name]
Page 6
[date]

immediately prior to your termination of employment; or a failure by the Company to provide you with any other form of compensation or benefit being provided to you immediately prior to your termination of employment;

     (C)  the relocation of your regular office worksite outside of Albuquerque, New Mexico; or

     (D)  a material breach by the Company of the provisions of this Agreement;

provided, however, that an event described in the clauses above shall not constitute Good Reason unless it is communicated by you to the Company in writing and is not corrected by the Company in a manner which is reasonably satisfactory to you (including full retroactive correction with respect to any monetary matter) within 10 days of the Company's receipt of such written notice from you.

               (h)   "Involuntary Termination" means (i) your termination of employment by the Company other than for Cause or Disability or (ii) your resignation of employment with the Company and its subsidiaries during the Term for Good Reason.

               (i)   "Mitigation Election" means the election of the Company, exercised by giving written notice to you, to apply the procedures governing payment of severance specified in subsection 3(a).

               (j)   "Monthly Severance Payment" means one-twelfth of any amount in the Escrow Account remaining after the withdrawal by the Company referred to in Section 3(a), minus the amount of any salary earned by you during such month, plus interest applicable to the Monthly Severance Amount, net of all applicable withholding taxes.

               (k)   "Non-compete Election" means the election of the Company, exercised by giving written notice to you, to apply the procedures governing payment of severance specified in subsection 3(b).

               (l)   "Restricted Period" means a period of two years commencing on the termination of your employment for any reason.

               9.  Notices. For the purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows:

If to the Company:

Sun Healthcare Group, Inc.

[name]
Page 7
[date]

101 Sun Avenue, NE
Albuquerque, NM 87109
     Attention: General Counsel

If to you:

[address]

or to such other address as such person may have furnished to the others in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt.

               10.  Miscellaneous.

               (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. 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. 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.

               (b)  Survival. This Agreement shall survive the entry of an order confirming a chapter 11 plan of reorganization for the Company.

               (c)  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.

               (d)  Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

               (e)  Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding taxes.

               (f)  Source of Payments. Except as expressly provided herein, all payments provided under this Agreement shall be paid in cash from the general funds of the Company, and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. You will have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor

[name]
Page 8
[date]

of the Company whose claim arose on the date such right to receive payments from the Company arose.

               (g)  Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement.

               (h)  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.

               (i)  Governing Law; Choice of Forum. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of New Mexico applicable to contracts entered into and performed in such State. Any judicial action related to the validity, interpretation, construction, performance, enforcement, or breach of this Agreement shall be brought by either party or other interested person before the United States Bankruptcy Court for the District of Delaware if brought prior to the effective date of the Company's plan of reorganization under title 11 of the United States Code or in the State of New Mexico before a Court of competent jurisdiction. The parties to this Agreement each knowingly and voluntarily submit and consent to the Courts of the State of New Mexico exercising personal jurisdiction over each of them in any action or proceeding related to the validity, interpretation, construction, performance, enforcement, or breach of this Agreement.

               If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject.

Sincerely,

SUN HEALTHCARE GROUP, INC.

                                                          
Richard K. Matros
Chief Executive Officer

Agreed to as of this           day of                        .

                                                             
[name]

EX-10

EXHIBIT 10.6

[date]

[name and address]

Re:     Severance Agreement

Dear [name]:

          Sun Healthcare Group Inc. ("SHG") hereby offers you a severance agreement that will apply in the event of the termination of your services (hereinafter referred to as "employment") to SHG (the "Agreement"). Capitalized terms not otherwise defined, shall have the meanings specified in Section 9.

1.     Effectiveness and Term. On execution by SHG and you, this Agreement shall be effective and shall continue so long as you are employed by SHG or one of its subsidiaries.

2.     Prior Severance Agreement. Except as provided herein, any prior agreement, arrangement or understanding between you and SHG, relating to or in connection with the possible payment of severance to you upon termination of your employment, is hereby terminated and superceded in its entirety by this Agreement.

3.     Effect of Involuntary Termination.

       a.     Severance Payment. In the event of your Involuntary Termination, subject to your execution of a release in favor of SHG, SHG shall pay you an amount equal to one times your annual salary at the rate then in effect.

       b.     Certain Benefits. In the event of your Involuntary Termination, your right to participate in any retirement or benefits plans and perquisites shall cease as of the date of termination, except that you and your eligible dependents (as determined under SHG's health plans) shall be entitled to continuing coverage under SHG's health plans on the same basis as active employees until the earlier of (1) the first anniversary of the date of

[name]
Page 2
[date]

termination; or (2) the date you or your eligible dependents become eligible to participate in a plan of a successor employer.

       c.     Accrued Wages, Etc. In the event of your Involuntary Termination, SHG shall pay you the full amount of any earned but unpaid salary through the date of such termination, plus a cash payment (calculated on the basis of your salary at the rate then in effect) for all unused paid time off which you have earned as of the date of such termination and a cash payment for any unreimbursed expenses. As of the date of such termination, you shall immediately relinquish the right to any additional payments or benefits from SHG under this Agreement.

4.     Effect of Change in Control. In the event of your termination as a result of a Change in Control, you shall be entitled to an amount equal to two times your annual salary at the rate then in effect.

5.     Effect of Other Terminations. In the event that your employment with SHG terminates for reasons other than your Involuntary Termination or a Change in Control, SHG shall pay you the full amount of any earned but unpaid salary through the date of such termination, plus a cash payment (calculated on the basis of your salary at the rate then in effect) for all unused paid time off which you have earned as of the date of such termination and a cash payment for any unreimbursed expenses. As of the date of such termination, you shall immediately relinquish the right to any additional payments of benefits from SHG under this Agreement. Your right to participate in any retirement or benefits plans and perquisites shall cease as of the date of termination. You and your eligible dependents may elect to continue coverage under COBRA of any health, dental and vision plans in effect at the time.

6.     Protection of SHG's Interests.

       a.     Confidentiality. You agree that you will not at any time, during or after the term of this Agreement, except in performance of you obligations to SHG hereunder or with the prior written consent of the Chief Executive Officer of SHG, directly or indirectly disclose to any person or organization any secret or "Confidential Information" that you may learn or have learned by reason of your association with SHG. The term "Confidential Information" means any information not previously disclosed to the public or to the trade by SHG's management with respect to SHG'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

[name]
Page 3
[date]

or profits associated with any of SHG's products or lines of business), business plans, prospects or opportunities, compliance and clinical processes, policies and procedures.

       b.     Exclusive Property. You confirm that all Confidential Information is and shall remain the exclusive property of SHG. All business records, papers and documents kept or made by you relating to the business of SHG shall be and remain the property of SHG. Upon the termination of your employment for any reason or upon the request of SHG at any time, you shall promptly deliver to SHG, and shall not without the consent of the Chief Executive Officer of SHG, retain copies of, Confidential Information, or any written materials not previously made available to the public, or records and documents made by you or coming into your possession concerning the business or affairs of SHG.

       c.     Nonsolicitation. You shall not, during your employment under this Agreement, and for two (2) years following the termination of this Agreement, for whatever reason, 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 SHG or any customer, patient or client of SHG to terminate his or her association or contract with SHG, nor in any manner, directly or indirectly, interfere with the relationship between SHG and any of such persons or entities.

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

       e.     Relief. Without intending to limit the remedies available to SHG, you acknowledges that a breach of any of the covenants in Section 6 may result in material irreparable injury to SHG 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, SHG shall be entitled to obtain a temporary restraining order and/or a preliminary or permanent injunction restraining you from engaging in activities prohibited by Section 6 or such other relief as may be required to specifically enforce any of the covenants in Section 6.

[name]
Page 4
[date]

7.     Legal Fees and Expenses. SHG shall pay or reimburse you on an after-tax basis for all costs and expenses (including, without limitation, court costs and reasonable legal fees and expenses which reflect common practice with respect to the matters involved) incurred by you as a result of any claim, action or proceeding (a) contesting, disputing, or enforcing any right, benefits, or obligations under this Agreement, or (b) arising out of or challenging the validity, advisability, or enforceability of this Agreement or any provision thereof; provided, however, that this provision shall not apply if the relevant trier-of-fact- determines that your claim or position was frivolous and without reasonable foundation.

8.     Successors; Binding Agreement. This Agreement shall be binding upon and inure to the benefit of you (and your personal representatives and heirs), SHG, and any organization which succeeds to substantially all of the business or assets of SHG, or otherwise. This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee, or other designee or, if there is no such designee, to your estate.

9.     Definitions. The following capitalized terms shall have the meanings specified below:

       a.     "Good Cause" 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 Chief Executive Officer of SHG, renders you unsuitable as an officer or employee of SHG.

            (2)     Your continued failure to substantially perform the duties reasonably requested by the Chief Executive Officer of SHG and commensurate with your position as Vice President of Compliance (other than any such failure resulting from your incapacity due to your physical or mental condition) after a written demand for substantial performance is delivered to you by the Chief Executive Officer of SHG, which demand specifically identifies the manner in which the Chief Executive Officer of SHG believes that you have not substantially performed your duties, and which performance is not substantially corrected by your within ten (10) days of receipt of such demand; and

[name]
Page 5
[date]

            (3)     Any material workplace misconduct or willful failure to comply with SHG's general policies and procedures as they may exist from time to time by you which, in the good faith determination of the Chief Executive Officer of SHG, renders you unsuitable as an officer or employee.

       b.     "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 SHG (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 SHG;

            (2)     A merger or consolidation of SHG with any other corporation, other than a merger or consolidation which would result in the voting securities of SHG 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 SHG or surviving entity outstanding immediately after such merger or consolidation;

            (3)     A sale or other disposition by SHG of all or substantially all of SHG's assets;

            (4)     During any period of two (2) consecutive years, 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 SHG'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 SHG ("Chapter 11 Plan"), or a liquidation under the Bankruptcy Code constitute a Change in

[name]
Page 6
[date]

Control. In addition, notwithstanding Sections 9(b)(1), 9(b)(2), 9(b)(3) and 9(b)(4), a Change in Control shall not be deemed to have occurred in the event of a sale or conveyance in which SHG continues as a holding company of an entity or entities that conduct the business or businesses formerly conducted by SHG, or any transaction undertaken for the purpose of reincorporating SHG under the laws of another jurisdiction, if such transaction does not materially affect the beneficial ownership of SHG's capital stock. Your 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. A termination of your employment without Good Cause (other than by reason of your 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.     "Disability" means your inability to engage in substantial gainful activity by reason of any medically determinable mental or physical impairment which can be expected to result in death or which has lasted or can be expected to last for a period of 120 substantially consecutive calendar days.

       d.     "Good Reason" means a resignation of your employment as a result of any of the following: (1) a meaningful and detrimental alteration in your position or the nature of your responsibilities, or a meaningful and detrimental change in your reporting responsibilities or titles, as in effect immediately prior to your termination of employment; (2) a reduction by SHG in your annual base salary as in effect immediately prior to your termination of employment, a reduction in your target annual bonus (expressed as a percentage of base salary) as in effect immediately prior to your termination of employment, or a failure by SHG to provide you with any other form of compensation or benefit being provided to you immediately prior to your termination of employment; (3) the relocation of your regular office worksite outside of Albuquerque, New Mexico; or (4) a material breach by SHG of the provisions of this Agreement.

Provided, however, that an event described in the clauses above shall not constitute Good Reason unless it is communicated by you to SHG in writing and is not corrected by SHG in a manner which is reasonably satisfactory to you (including full retroactive correction with respect to any monetary matter) within 10 days of SHG's receipt of such written notice from you.

       e.     "Involuntary Termination" means (1) your termination of employment by SHG other than for Good Cause or Disability; or (2) your resignation of employment with SHG for Good Reason.

[name]
Page 7
[date]

       f.     "SHG" means Sun Healthcare Group, Inc. and any and all of its direct and indirect subsidiaries.

10.     Notices. For purpose of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed as follows:

          If to SHG:

          Sun Healthcare Group, Inc.
          Attention: General Counsel
          101 Sun Avenue N.E.
          Albuquerque, New Mexico 87109

          If to you:

           [address]

11.     Miscellaneous.

       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. 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. 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.

       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.     Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

       d.     Withholding. Amounts paid to you hereunder shall be subject to all applicable federal, state and local withholding taxes.

[name]
Page 8
[date]

       e.     Source of Payments. Except as expressly provided herein, all payments provided under this Agreement shall be paid in cash from the general funds of SHG and no special or separate fund shall be established, and no other segregation of assets made, to assure payment. You will have no right, title, or interest whatsoever in or to any investments which SHG may make to aid in it meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from SHG hereunder, such right shall be not greater than the right of an unsecured creditor of SHG whose claim arose on the date such right to receive payments from SHG arose.

       f.     Headings. The headings contained in this Agreement are intended solely for convenience of reference and shall not affect the rights of the parties to this Agreement.

       g.     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.

       h.     Governing Law; Choice of Forum. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New Mexico applicable to contracts entered into and performed in such State. Any judicial action related to the validity, interpretation, construction, performance, enforcement or breach of this Agreement shall be brought by either party or other interested party in the State of New Mexico before a court of competent jurisdiction. The parties to this Agreement each knowingly and voluntarily submit and consent to the courts of the State of New Mexico exercising personal jurisdiction over each of them in any action or proceeding related to the validity, interpretation, construction, performance, enforcement or breach of this Agreement.

If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to SHG the enclosed copy of this letter which will then constitute our agreement on this subject.

[name]
Page 9
[date]

Sincerely,

SUN HEALTHCARE GROUP, INC.

Richard K. Matros
Chief Executive Officer

Agreed to as of this       day of                        .

[name]

EX-10

EXHIBIT 10.2

TERM LOAN AND NOTE PURCHASE AGREEMENT

among

SUN HEALTHCARE GROUP, INC.
and
EACH OTHER PERSON LISTED ON SCHEDULE 1A HERETO,
Borrowers

U.S. BANK NATIONAL ASSOCIATION,
Administrative Agent

and

THE LENDERS AND PURCHASERS NAMED HEREIN,
Holders

$20,000,000 Term Loan
$23,675,000 Stated Principal Amount of Discount Notes

Dated as of February 28, 2002

TABLE OF CONTENTS

		Page
SECTION 1	DEFINITIONS AND TERMS	1
1.1	Definitions	1
1.2	Number and Gender of Words; Other References	15
1.3	Accounting Principles	16
SECTION 2	BORROWING PROVISIONS	16
2.1	Term Loan Tranche	16
2.2	Term Debt Increase	16
2.3	Purchase of Discount Notes	17
SECTION 3	TERMS OF PAYMENT	17
3.1	Loan Accounts, Notes and Payments	17
3.2	Interest and Principal Payments	18
3.3	Prepayments	19
3.4	Interest Options	20
3.5	Quotation of Rates	21
3.6	Default Rate	21
3.7	Interest Recapture	21
3.8	Interest Calculations	21
3.9	Maximum Rate	21
3.10	Interest Periods	22
3.11	Conversions	22
3.12	Order of Application	22
3.13	Sharing of Payments, Etc.	23
3.14	Offset	23
3.15	Booking Borrowings	23
SECTION 4	CHANGE IN CIRCUMSTANCES	24
4.1	Increased Cost and Reduced Return	24
4.2	Limitation on Types of Loans	25
4.3	Illegality	25
4.4	Treatment of Affected Loans	25
4.5	Compensation	26
4.6	Taxes	26
SECTION 5	FEES	28
5.1	Treatment of Fees	28
5.2	Fees of Administrative Agent	28
5.3	Fees of Highland Capital	28
5.4	Termination Fee	28
5.5	Upfront Fees	28
SECTION 6	SECURITY; GUARANTIES	29
6.1	Collateral	29
6.2	Future Liens	29
6.3	Release of Collateral	29
6.4	Negative Pledge	30
SECTION 7	CONDITIONS PRECEDENT	30
7.1	Conditions Precedent to Closing	30
SECTION 8	Representations, Warranties, and Certain Covenants	30
8.1	Organization, Powers, Capitalization	30
8.2	Authorization of Borrowing, No Conflict	31

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8.3	Financial Condition	31
8.4	Indebtedness and Liabilities	31
8.5	Title to Properties; Liens	32
8.6	Litigation; Adverse Facts	32
8.7	Payment of Taxes	32
8.8	Performance of Agreements	33
8.9	Employee Plans	33
8.10	Broker's Fees	33
8.11	Environmental Compliance	33
8.12	Solvency	33
8.13	Disclosure	33
8.14	Insurance	33
8.15	Compliance with Laws; Authorizations; Consents	34
8.16	Employee Matters	35
8.17	Governmental Regulation	35
8.18	Access to Accountants and Management	35
8.19	Inspection	35
8.20	Borrowers' Receipt of Payments	35
8.21	Reports	35
8.22	Compliance with Health Care Laws	36
8.23	Funds from Restricted Grants	36
8.24	HIPAA Compliance	37
8.25	Licenses	37
8.26	Certificates of Need	37
8.27	Inactive Entities	37
8.28	Supplemental Schedules	37
8.29	Amendment to Senior Loan Agreement	37
SECTION 9	REPORTING AND OTHER AFFIRMATIVE COVENANTS	38
9.1	Financial Statements and Other Reports	38
9.2	Endorsement; Insurance Claims	38
9.3	Maintenance of Properties	38
9.4	Further Assurances	38
9.5	Mortgages; Title Insurance; Surveys	38
9.6	Use of Proceeds and Margin Security	39
9.7	Licensure; Medicaid/Medicare Cost Reports	39
9.8	Termination/Default of Contracts	39
9.9	Notice of Event of Default and Other Matters	39
9.10	Inactive Entities	39
9.11	Payment of the Obligation	40
SECTION 10	FINANCIAL COVENANTS	40
10.1	Tangible Net Work	40
10.2	Minimum Operating Cash Flow	40
10.3	Capital Expenditure Limits	41
10.4	Fixed Charge Coverage	41
10.5	Debt to EBITDA Ratio	42
10.6	Census	42
SECTION 11	NEGATIVE COVENANTS	42
11.1	Debt	42
11.2	Guaranties	43
11.3	Transfers, Liens, and Related Matters	43

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11.4	Investments and Loans	44
11.5	Restricted Junior Payments	44
11.6	Restriction on Fundamental Changes	44
11.7	Changes Relating to Senior Loan Documents	45
11.8	Transactions with Affiliates	45
11.9	Conduct of Business	45
11.10	Tax Consolidations	45
11.11	Subsidiaries	45
11.12	Fiscal year; Tax Designation	45
11.13	Use of Holders' Name	45
11.14	IRS Form 8821	45
11.15	Certificates of Need	46
11.16	Sale Lease-back Transactions	46
11.17	Plan and Confirmation Order	46
SECTION 12	DEFAULT, RIGHTS, AND REMEDIES	46
12.1	Event of Default	46
12.2	Remedies Upon Default	49
12.3	Borrower Waivers	49
12.4	Performance by Administrative Agent	50
12.5	Delegation of Duties; Reliance	50
12.6	Not in Control	50
12.7	Course of Dealing	51
12.8	Cumulative Rights	51
12.9	Application of Proceeds	51
12.10	Certain Proceedings	51
12.11	Expenditures by Holders	51
12.12	Indemnification	52
SECTION 13	AGREEMENT AMONG HOLDERS	52
13.1	Administrative Agent	52
13.2	Expenses	54
13.3	Proportionate Absorption of Losses	54
13.4	[Intentionally Omitted]	54
13.5	Limitation of Liability	54
13.6	Default; Collateral	55
13.7	Limitation of Liability	56
13.8	Relationship of Holders	57
13.9	Benefits of Agreement	57
13.10	Obligations Several	57
SECTION 14	MISCELLANEOUS	57
14.1	Headings	57
14.2	Nonbusiness Days	57
14.3	Communications	57
14.4	Form and Number of Documents	58
14.5	Survival	58
14.6	Governing Law	58
14.7	Invalid Provisions	59
14.8	Entirety	59
14.9	Jurisdiction; Venue; Service of Process; Jury Trial	59
14.10	Amendments, Consents, Conflicts, and Waivers	60
14.11	Multiple Counterparts	60

iii

14.12	Successors and Assigns; Assignments and Participations	61
14.13	Decisions by Borrowers	62
14.14	Confidentiality	63
14.15	Publication	63
14.16	Company as Agent	63
14.17	Intercreditor Agreement	63
14.18	Discharge Only Upon Payment in Full; Restatement in Certain Circumstances	64

iv

SCHEDULES AND EXHIBITS

Schedule 1A	-	Borrowers
Schedule 1B	-	Mortgaged Property
Schedule 1C	-	Liens in Certain Accounts
Schedule 1D	-	Other Liens
Schedule 2.1A	-	Lenders and Commitments
Schedule 2.1B	-	Purchasers and Discount Note Amounts
Schedule 7.1	-	Conditions Precedent to Closing
Schedule 8.1	-	Capitalization of Borrowers
Schedule 8.4	-	Debt and Liabilities
Schedule 8.7	-	Federal Tax Identification Numbers and Returns Under Audit
Schedule 8.15	-	Compliance with Laws
Schedule 8.16	-	Employee Matters
Schedule 8.25	-	Authorizations
Schedule 8.27	-	Inactive Entities
Schedule 11.1	-	Existing Debt
Schedule 11.4	-	Existing Investments and Loans
Schedule 11.11	-	Subsidiaries
Reporting Rider
Exhibit A-1	-	Form of Term Loan Note
Exhibit A-2	-	Form of Discount Note
Exhibit B	-	Form of Conversion Notice
Exhibit C	-	Form of Security Agreement
Exhibit D	-	Form of Assignment and Assumption Agreement
Exhibit E	-	Form of Reconciliation Report
Exhibit F	-	Form of Compliance Certificate

v

TERM LOAN AND NOTE PURCHASE AGREEMENT

          THIS TERM LOAN AND NOTE PURCHASE AGREEMENT is entered into as of February 28, 2002, among SUN HEALTHCARE GROUP, INC., a Delaware corporation (the "Company"), and each direct or indirect Subsidiary (hereinafter defined) of the Company listed on Schedule 1 hereto (individually, a "Borrower," and all Borrowers, including the Company, collectively, the "Borrowers"), Holders (hereinafter defined), and U.S. Bank National Association, as Administrative Agent (hereinafter defined), for itself and the other Holders.

RECITALS

          A.     On October 14, 1999, Borrowers filed voluntary petitions under Chapter 11 of the Bankruptcy Code and became debtors in jointly administered Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") as Case No. 99-3657 (MFW) (Jointly Administered) (each, a "Case" and, collectively, the "Cases");

          B.     After a hearing held by the Bankruptcy Court on February 4-5, 2002 (the "Confirmation Hearing"), and by its "Findings Of Fact, Conclusions Of Law, And Order Under 11 U.S.C. Section1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming Debtors' Joint Plan Of Reorganization" dated February __, 2002 (the "Confirmation Order"), the Bankruptcy Court confirmed the "Debtors' Joint Plan Of Reorganization Under Chapter 11 Of The Bankruptcy Code", dated as of December 8, 2001 (as amended) (as confirmed by the Confirmation Order, the "Plan");

          C.     Borrowers have requested that (i) Lenders extend credit to Borrowers and (ii) Purchasers purchase notes from Borrowers in the form and on the terms of this Term Loan and Note Purchase Agreement (this "Agreement") to enable Borrowers to fund their obligations under the Plan and to provide working capital financing funds for other general corporate purposes;

          D.     To secure Borrowers' obligations under the Loan Documents (hereinafter defined), Borrowers shall grant to Administrative Agent, for the benefit of Holders, a security interest in and lien upon all of the Borrowers' personal property and certain of the Borrowers' real property.

          Accordingly, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:

SECTION 1     DEFINITIONS AND TERMS.

          1.1     Definitions. As used herein:

          Adjusted Eurodollar Rate means, for any Eurodollar Rate Borrowing for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by Administrative Agent to be equal to the quotient obtained by dividing (a) the Eurodollar Rate for such Eurodollar Rate Borrowing for such Interest Period by (b) 1 minus the Reserve Requirement for such Eurodollar Rate Borrowing for such Interest Period; provided however, that in no event shall the Adjusted Eurodollar Rate be less than 2.15%.

          Administrative Agent means U.S. Bank National Association, and its permitted successors and assigns as "Administrative Agent" for Holders under the Loan Documents.

          Affiliate of any Person means any other individual or entity (i) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such Person, provided, however, that no individual shall be an Affiliate of any Person solely by reason of his or her being a director, officer, or employee of such Person, or (ii) 10% or more of the voting stock (or in the case of an entity which is not a corporation, 10% or more of the voting equity interest) of which is beneficially owned or held by such Person; and, for purposes of this definition only, "control," "controlled by," and "under common control with" mean possession, directly or indirectly, of the power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract, or otherwise); provided that, for purposes of this Agreement neither Administrative Agent nor any Holder shall be deemed to be an Affiliate of any Borrower and no Borrower shall be deemed to be an Affiliate of any other Borrower.

          Aggregate Discount Note Amount means, on any date of determination, the sum of the Stated Principal Amount of all outstanding Discount Notes.

          Aggregate Principal Debt means the sum of the Aggregate Discount Note Amount plus the Term Loan Principal Debt.

          Agreement means this Term Loan and Note Purchase Agreement (as the same may hereafter be amended, modified, supplemented, or restated from time to time).

          Applicable Lending Office means, for each Holder and for each Type of Borrowing, the "Lending Office" of such Holder (or an affiliate of such Holder) designated on Schedule 2.1A or Schedule 2.1B, as applicable, attached hereto or such other office that such Holder (or an affiliate of such Holder) may from time to time specify to Administrative Agent and Borrowers by written notice in accordance with the terms hereof.

          Applicable Margin means (a) for the Term Loan Tranche (other than Term Loan Principal Debt as a result of the Term Debt Increase if required by clause (b) hereof), 4.00% for Base Rate Borrowings and 6.85% for Eurodollar Rate Borrowings, (b) to the extent required as a result of the application of any Debtor Relief Law, for the Term Loan Principal Debt attributable to the Term Debt Increase, the "Base Rate Margin" under the Senior Loan Agreement (as of the date of the Option Closing (as defined in the Intercreditor Agreement)) for Base Rate Borrowings and the "LIBOR Margin" under the Senior Loan Agreement (as of the date of the Option Closing (as defined in the Intercreditor Agreement)) for Eurodollar Rate Borrowings, and (c) for the Note Purchase Tranche, 0.00% for Base Rate Borrowings and 0.50% for Eurodollar Rate Borrowings.

          Asset Disposition means the disposition, whether by sale, lease, transfer, loss, damage, destruction, condemnation, or otherwise, of any or all of the assets of any Borrower or any of its Subsidiaries other than (a) sales of inventory in the ordinary course of business, (b) disposition of worn out or obsolete equipment, (c) transfers or other dispositions of assets or property by a Borrower to another Borrower, (d) Permitted Divestitures, (e) the Campus Transaction, and (f) the THCI Turnover.

          Assignment and Assumption meansan assignment and assumption entered into by a Holder and an Eligible Assignee (with the consent of any party whose consent is required by Section 14.12), and accepted by Administrative Agent, in substantially the form of Exhibit D or any other form approved by Administrative Agent.

          Authorizations means all material filings, recordings, and registrations with, and all material validations or exemptions, approvals, orders, authorizations, consents, franchises, licenses, certificates, certificates of compliance, grants of authority, and permits from, any Governmental Authority.

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          Base Rate means, for any day, the rate per annum equal to the higher of (a) the Federal Funds Rate for such day plus 0.5% and (b) the Prime Rate for such day. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Rate.

          Base Rate Borrowing means a Borrowing bearing interest at the per annum rate equal to the greater of (a) the sum of the Base Rate plus the Applicable Margin for Base Rate Borrowings and (b) 9% per annum.

          Borrower and Borrowers are defined in the preamble to this Agreement.

          Borrowing means any amount disbursed (a) by one or more Holders under the Term Loan Tranche or the Note Purchase Tranche pursuant to the terms of this Agreement or any other Loan Document, whether such amount constitutes an original disbursement of funds or the continuation of an amount outstanding, or (b) by any Holder in accordance with, and to satisfy the obligations of any Borrower under, any Loan Document.

          Business Day means (a) for all purposes, any day other than Saturday, Sunday, and any other day on which commercial banking institutions are required or authorized by Law to be closed in Dallas, Texas, Minneapolis, Minnesota, or New York, New York, and (b) in addition to the foregoing, in respect of any Eurodollar Rate Borrowing, a day on which dealings in United States dollars are conducted in the London interbank market and commercial banks are open for international business in London.

          Campus Transaction means the sale of the headquarters office complex of the Company, located in Albuquerque, New Mexico pursuant to the Plan.

          Capital Expenditures shall mean, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities during such period and excluding that portion of Capital Leases (except any cash down payment) which is capitalized on the consolidated balance sheet of the Company and its Subsidiaries) net of cash amounts received by the Borrowers from other Persons during such period in reimbursement of Capital Expenditures made by the Borrowers, excluding interest capitalized during construction by the Borrowers during such period, that, in conformity with GAAP, are required to be included in or reflected by the property, plant, equipment, or intangibles or similar fixed asset accounts reflected in the consolidated balance sheet of the Company and its Subsidiaries (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by any Borrower to the extent of the gross amount of such purchase price less the book value of the equipment being traded in at such time), but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or the damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation or eminent domain of such assets being replaced.

          Capital Lease means any lease of any property (whether real, personal or mixed) that, in conformity with GAAP, should be accounted for as a capital lease.

          Cash Equivalents means:

               (a)     Readily marketable, direct, full faith and credit obligations of the United States of America or any agency thereof, or obligations guaranteed by the full faith and credit of the United States of America, maturing within not more than six (6) months from the date of acquisition;

3

               (b)     Commercial paper maturing no more than six (6) months from the date of issuance and rated, at the time of acquisition, at least P-1 from Moody's Investors Service, Inc. ("Moody's") or at least A-1 from Standard and Poor's Rating Group (a division of McGraw-Hill, Inc., "S&P");

               (c)     Short term certificates of deposit or banker's acceptances maturing within six (6) months from the date of issuance issued by, or overnight reverse purchase agreements from any commercial bank organized under the Laws of the United States of America, or any state thereof or the District of Columbia, having combined capital and surplus of not less than $250,000,000 and not subject to set off rights in favor of such bank; and

               (d)     any money market fund registered under the Investment Company Act of 1940, as amended, investing in the above-described securities or commercial paper if such fund holds investments in excess of $100,000,000 and Borrowers' aggregate investment in such funds is less than 10% of the total amount invested in such fund.

          Closing Date means the date upon which this Agreement has been executed by Borrowers, Holders, and Administrative Agent and all conditions precedent specified in Section 7 have been satisfied or waived.

          Code means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated thereunder.

          Collateral means all of the items and types of property described as "Collateral" in now existing or hereafter created Collateral Documents and all cash and non-cash proceeds thereof.

          Collateral Documents means all security agreements, pledge agreements, financing statements, assignments of partnership interests, guaranties, Mortgages, assignments of rents, and any other collateral documents at any time delivered to Administrative Agent to create or evidence Liens securing the Obligation, together with all reaffirmations, amendments, and modifications thereof or supplements thereto.

          Commitment Percentage means, for any Lender, at any date of determination occurring prior to the initial Borrowing, the proportion (stated as a percentage) that its Committed Sum bears to the aggregate Committed Sums of all Lenders.

          Committed Sum means, at any date of determination occurring prior to the initial Borrowing, the amount stated beside such Holder's name on the most-recently amended Schedule 2.1A to this Agreement (which amount is subject to increase, reduction, or cancellation in accordance with the Loan Documents).

          Company means Sun Healthcare Group, Inc.

          Company's Accountants means the independent certified public accountants selected by the Company and its Subsidiaries and reasonably acceptable to Administrative Agent, which selection shall not be modified during the terms of this Agreement (except if the Company retains another of the so-called "Big Five" accounting firms) without the Collateral Agent's prior written consent, which consent shall not be unreasonably withheld.

          Confirmation Hearing is defined in the Recitals to this Agreement.

4

          Confirmation Order is defined in the Recitals to this Agreement.

          Consequential Loss means any loss or expense which any Holder may reasonably incur in respect of a Eurodollar Rate Borrowing as a consequence of any event described in Section 4.5.

          Conversion Notice means a request pursuant to Section 3.11, substantially in the form of Exhibit B.

          Corporate Integrity Agreement means the agreement dated as of July 12, 2001, between the Office of the Inspector General of the Department of Health and Human Services and the Company.

          Debt means (without duplication), for any Person (a) all indebtedness for borrowed money; (b) obligations under leases which in accordance with GAAP constitute Capital Leases; (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (d) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six months from the date the obligation is incurred or is evidenced by a note or similar written instrument; (e) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person; (f) obligations in respect of Letters of Credit; (g) any advances under any factoring arrangement; and (h) obligations under the Settlement Agreement.

          Debtor Relief Laws means the Bankruptcy Code of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, fraudulent transfer or conveyance, suspension of payments, or similar Laws from time to time in effect affecting the Rights of creditors generally.

          Default is defined in Section 12.

          Default Rate means, (i) with respect to any Borrowing under the Term Loan Tranche, on any date, a per annum rate of interest equal from day to day to the lesser of (a) the non-Default interest rate applicable to such Borrowing, plus 2% and (b) the Maximum Rate, and (ii) with respect to any other Obligation under the Loan Documents, the lesser of (a) the Base Rate plus the then-effective Applicable Margin for Base Rate Borrowings for the Term Loan Tranche plus 2% and (b) the Maximum Rate.

          Discount Note means an original issue discount promissory note substantially in the form of Exhibit A-2 and all renewals and extensions of all or any part thereof.

          Dollars and the symbol $ means lawful money of the United States of America.

          EBITDA means, for any period, without duplication, the total of the following for the Borrowers on a consolidated basis, each calculated for such period: (a) net income determined in accordance with GAAP; plus, (b) to the extent included in the calculation of net income, the sum of (i) income and franchise taxes paid or accrued; (ii) interest expenses, net of interest income, paid or accrued; (iii) amortization and depreciation; and (iv) other non-cash charges (excluding accruals for cash expenses made in the ordinary course of business); less, (c) to the extent included in the calculation of net income, the sum of (i) the income of any Person in which any Borrower has a direct or indirect ownership interest except to the extent such income is received by such Borrower in a cash distribution during such period; (ii) gains or losses from sales or other dispositions of assets (other than inventory in the normal course of business); and (iii) extraordinary or non-recurring gains and non-recurring losses.

5

          Eligible Assignee means (a) a commercial bank organized under the Laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the Laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; (c) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses, including but not limited to, insurance companies, mutual funds, and lease financing companies, (d) a Related Fund, and (e) a Person that is primarily engaged in the business of lending that is (i) a Subsidiary of a Holder, (ii) a Subsidiary of a Person of which a Holder is a Subsidiary, or (iii) a Person of which a Holder is a Subsidiary; provided, however, that no Affiliate of any Borrower shall be an Eligible Assignee.

          Employee Plan means, at any time, each Single-Employer Plan and each Multiemployer Plan.

          Environmental Law means any applicable Law that relates to (a) the quality or protection of air, groundwater, surface water, soil, other environmental media, or natural resources, (b) the Release or threatened Release of Hazardous Substances, (c) the regulation of any pollutants, contaminants, wastes, substances, and Hazardous Substances, or (d) health or safety, including without limitation, employee safety in the workplace, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601 et seq.) ("CERCLA"), the Clean Air Act (42 U.S.C. Section 7401 et seq.), the Federal Water Pollution Control Act, as amended by the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), the Emergency Planning and Community Right to Know Act of 1986 (42 U.S.C. Section 11001 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. Section 1801 et seq.), the National Environmental Policy Act of 1969 (42 U.S.C. Section 4321 et seq.), the Oil Pollution Act (33 U.S.C. Section 2701 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Rivers and Harbors Act (33 U.S.C. Section 401 et seq.), the Safe Drinking Water Act (42 U.S.C. Section 201 and Section 300f et seq.), the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984 (42 U.S.C. Section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 et seq., and analogous state and local Laws, as any of the foregoing may have been and may be amended or supplemented from time to time, and any analogous future enacted or adopted Law.

          ERISA means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and rulings thereunder.

          ERISA Affiliate means any Borrower or trade or business (whether or not incorporated) which, for purposes of Title IV of ERISA, is, or has been within the past six years, a member of any Borrower's controlled group or which is, or has been within the past six years, under common control with any Borrower within the meaning of Section 414(b), (c), (m), or (o) of the Code.

          Eurodollar Rate means, for any Eurodollar Rate Borrowing for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Dow Jones Markets Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar Rate Borrowing for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to

6

such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest 1/100 of 1%).

          Eurodollar Rate Borrowing means a Borrowing bearing interest at the sum of the Adjusted Eurodollar Rate plus the Applicable Margin for Eurodollar Rate Borrowings.

          Exhibit means an exhibit to this Agreement unless otherwise specified.

          Facilities means any hospital, outpatient clinic, long term care facility, nursing home or rehabilitation center and related medical office building or other facility owned or used by any Borrower in its business.

          Federal Funds Rate means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined (which determination shall be conclusive and binding, absent manifest error) by Administrative Agent to be equal to the weighted average of the rates on overnight Federal funds transactions with member banks of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Administrative Agent (in its individual capacity) on such day on such transactions as determined by Administrative Agent (which determination shall be conclusive and binding, absent manifest error).

          Financial Statements means balance sheets, statements of operations, statements of shareholders' equity, and statements of cash flows prepared in accordance with GAAP, which statements of operations and statements of cash flows shall be in comparative form to the corresponding period of the preceding fiscal year, and which balance sheets and statements of shareholders' equity shall be in comparative form to the prior fiscal year-end figures.

          Fiscal Year means each twelve (12) month period ending on the last day of December in each year.

          Fixed Charge Coverage means, for any period of determination, Operating Cash Flow divided by Fixed Charges.

          Fixed Charges means, for any period, and each calculated for such period (without duplication), (a) Interest Expense of the Company and its Subsidiaries; plus (b) scheduled payments of principal with respect to all Debt of the Company and its Subsidiaries payable during such period; plus (c) any provision for (to the extent it is greater than zero) income or franchise taxes included in the determination of net income, excluding any provision for deferred taxes; plus (d) payment of deferred Taxes accrued in any prior period; plus (e) Restricted Junior Payments made in cash.

          GAAP means generally accepted accounting principles of the Accounting Principles Board of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board which are applicable from time to time.

          Governmental Authority means any (a) state, county, city, town, village, or other local, state, or federal judicial, executive, regulatory, or legislative instrumentality, (b) private arbitration board or panel, or (c) central bank.

7

          Hazardous Substance means all or any of the following: (a) substances that are defined or listed in, or otherwise classified pursuant to, any Environmental Laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, or toxicity; (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, or synthetic gas, and drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources; (c) any flammable substances, explosives, or any radioactive materials; (d) asbestos in any form or electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls; and (e) mold of any form or type arising from any moisture source.

          Healthcare Laws is defined in Section 8.22.

          HIPAA means the Health Insurance Portability and Accountability Act of 1996 and the federal standard for privacy of individually identifiable health information promulgated thereunder, and any and all rules or regulations promulgated from time to time thereunder including the regulations set forth at 45 CFR parts 160 and 164 as such provisions are currently drafted and, if applicable, updated, amended, or revised.

          Holders means, on any date of determination, collectively, all Lenders and all Purchasers.

          Inactive Entity means each entity listed on Schedule 8.27.

          Insurer means a Person that (a) insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or (b) has an agreement with any Borrower to compensate such Borrower for providing services to a Patient.

          Intangible Assets means all intangible assets (determined in conformity with GAAP) including, without limitation, goodwill, intellectual property, software, licenses, organizational costs, deferred amounts, covenants not to compete, unearned income, and restricted funds.

          Intercreditor Agreement means that certain Intercreditor Agreement dated of even date herewith by and among the Borrowers, Administrative Agent and Senior Agent.

          Interest Expense means, without duplication, for any period, for Borrowers and their Subsidiaries each calculated for such period, interest expenses deducted in the determination of net income (excluding (a) the amortization of fees and costs with respect to the transactions contemplated by this Agreement and the Senior Loan Agreement which have been capitalized as transaction costs in accordance with GAAP; and (b) interest paid in kind).

          Interest Period is determined in accordance with Section 3.10.

          Laws means all applicable statutes, laws, treaties, ordinances, tariff requirements, rules, regulations, orders, writs, injunctions, decrees, judgments, opinions, or interpretations of any Governmental Authority.

          Lenders means, on any date of determination, the financial institutions named on Schedule 2.1A, and subject to the terms and conditions of this Agreement, their respective successors and assigns, but not any Participant who is not otherwise a party to this Agreement as a Lender.

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          Liabilities has the meaning given that term in accordance with GAAP and includes Debt.

          Lien means any lien, mortgage, security interest, pledge, assignment, charge, title retention agreement, or encumbrance of any kind, and any other Right of or arrangement with any creditor (other than under or relating to subordination or other intercreditor arrangements) to have its claim satisfied out of any property or assets, or the proceeds therefrom, prior to the general creditors of the owner thereof.

          Litigation means any action by or before any Governmental Authority.

          Loan Documents means (a) this Agreement, the Notes, and the Collateral Documents, (b) all agreements, documents, or instruments in favor of Administrative Agent or Holders delivered concurrently herewith or at any time hereafter pursuant to this Agreement or otherwise in connection with all or any part of the Obligation, and (c) any and all future renewals, extensions, restatements, reaffirmations, or amendments of, or supplements to, all or any part of the foregoing.

          Material Adverse Event means any set of one or more circumstances or events which, individually or collectively, results in any (a) material adverse effect on the ability of Borrowers (taken as a whole) to perform any obligations under any Loan Document or the ability of Administrative Agent or any Holder to enforce any such obligations or any of their respective Rights under the Loan Documents, or (b) material and adverse effect on the business, operations, prospects, properties, assets, or condition (financial or otherwise) of Borrowers (taken as a whole).

          Material Contracts means a contract or agreement (including, without limitation, a provider agreement) the default (or event of default) under, termination of, or expiration of which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Event.

          Maximum Amount and Maximum Rate respectively mean, for each Holder, the maximum non-usurious amount and the maximum non-usurious rate of interest which, under applicable Law, such Holder is permitted to contract for, charge, take, reserve, or receive on the Obligation.

          Medical Services means medical and health care services provided to a Patient, including, but not limited to, medical, pharmacy, and health care services performed by any Borrower which are covered by a policy of insurance issued by an Insurer, and includes physician services, nurse and therapist services, dental services, hospital services, skilled nursing facility services, comprehensive outpatient rehabilitation services, home health care services, residential and out-patient behavioral healthcare services, and medicine or health care equipment provided by any Borrower to a Patient for a necessary or specifically requested valid and proper medical or health purpose.

          Mortgage means each of the mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, collateral assignments of leases, or other real estate security documents delivered by any Borrower to Administrative Agent, on behalf of Holders, with respect to the Mortgaged Property, all in form and substance satisfactory to Administrative Agent.

          Mortgaged Property means that certain real property owned by certain Borrowers and described on Schedule 1(B).

          Multiemployer Plan means a multiemployer plan as defined in Sections 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code to which any Borrower, any Subsidiary thereof, or any ERISA Affiliate of any Borrower is making, has made, is accruing, or has accrued, an obligation to make contributions or has, within any of the preceding five plan years, made or accrued an obligation to make contributions.

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          Net Income means, as of any date, net income calculated in accordance with GAAP.

          Net Worth means, as of any date of determination, for the Company and its Subsidiaries on a consolidated basis, the sum of the capital stock and additional paid-in capital plus retained earnings (or less accumulated deficit) calculated in conformity with GAAP.

          Note Purchase Tranche means the obligation to purchase and sell the Discount Notes as described in and subject to the limitations set forth in Section 2.3 hereof.

          Notes means, at the time of any determination thereof, all outstanding and unpaid Term Loan Notes and Discount Notes.

          Obligation means all present and future indebtedness, liabilities, and obligations, and all renewals and extensions thereof, or any part thereof, now or hereafter owing, due, or payable to Administrative Agent, any Holder, or any Affiliate of any Holder by any Borrower arising from, by virtue of, or pursuant to any Loan Document, including, without limitation, any increase in the Term Loan Principal Debt as the result of the exercise of the Partial Purchase Option pursuant to Section 2.2, together with all interest accruing thereon, fees, costs, and expenses (including, without limitation, all reasonable attorneys' fees and expenses incurred in the enforcement or collection thereof) payable under the Loan Documents.

          Operating Cash Flow means, for any period of determination, (a) EBITDA; plus (b) the net change in the accrued general and professional insurance liability as set forth in the cash flow statement delivered from time to time by the Company; minus (c) Capital Expenditures.

          Option Price has the meaning assigned to that term in the Intercreditor Agreement.

          Partial Purchase Option has the meaning giving such term in the Intercreditor Agreement.

          Participant is defined in Section 14.12(d).

          Patient means any Person receiving Medical Services from any Borrower and all Persons legally liable to pay any Borrower for such Medical Services other than Insurers.

          PBGC means the Pension Benefit Guaranty Corporation, or any successor thereof, established pursuant to ERISA.

          Permitted Divestitures means the disposition on commercially reasonable terms and conditions of (i) the mobile x-ray business formerly known as TLC Mobile Medical and operated by SunAlliance Healthcare Services, Inc. and (ii) the respiratory services supplies and equipment business operated by SunCare Respiratory Services, each of which shall have occurred on or before May 31, 2002.

          Permitted Liens means the following types of Liens: (a) Liens (other than Liens relating to Environmental Claims or ERISA) for Taxes not yet due and payable; (b) statutory Liens of landlords, carriers, warehousemen, mechanics, materialmen, and other similar Liens imposed by Law, which are incurred in the ordinary course of business for sums not more than 30 days delinquent; (c) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, and other types of social security, statutory obligations, surety, and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds, and other similar obligations (exclusive of obligations for the payment of borrowed money); (d) easements, rights-of-way, restrictions, and other similar charges or

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encumbrances not interfering in any material respect with the ordinary conduct of the business of any Borrower; (e) Liens for purchase money obligations, provided that (i) the purchase of the asset subject to any such Lien is permitted under Sections 10.4 and 11.1(d), (ii) the Debt secured by any such Lien is permitted under Section 11.1, and (iii) such Lien encumbers only the asset so purchased; (f) Liens in respect of Debt permitted under Section 11.1(d); provided that such Liens encumber only the asset which is subject to a Capital Lease; (g) Liens in favor of Administrative Agent, on behalf of itself and the other Holders securing the Obligation; (h) Liens on or security interests in certain accounts granted by a Borrower to the lessor of certain nursing home Facilities, all as set forth on Schedule 1(C) or otherwise consented to in writing by Required Holders; (i) Liens granted to the Senior Agent pursuant to the Senior Loan Documents securing Senior Debt and in accordance with the Intercreditor Agreement, (j) Liens with respect to, or hereafter incurred in connection with, the Sumitomo Transaction and the SunTrust Transaction, in each case, as set forth on Schedule 1(D), and (k) Liens existing on the Closing Date to the extent set forth on Schedule 1(D).

          Person means any individual, entity, or Governmental Authority.

          Plan is defined in the Recitals to this Agreement.

          Potential Default means the occurrence of any event or existence of any circumstance which, after the giving of notice or lapse of time or both, would become a Default.

          Prime Rate means the per annum rate of interest established from time to time by Administrative Agent, as its prime rate, which rate may not be the lowest rate of interest charged by Administrative Agent to its customers.

          Pro Forma means the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the Closing Date after giving effect to the transactions contemplated by this Agreement.

          Projections means Borrowers' forecasted consolidated: (a) balance sheets; (b) capitalization statements; (c) cash flow statements; and (d) profit and loss statements, all prepared on a division by division and Subsidiary by Subsidiary basis consistent with the Company's historical Financial Statements and based upon good faith estimates and assumptions by Borrowers believed to be reasonable at the time made, together with appropriate supporting details and a statement of underlying assumptions.

          Pro Rata or Pro Rata Part, for each Holder, means on any date of determination, the proportion which the portion of the Term Loan Principal Debt or the Aggregate Discount Note Amount owed to such Holder (as applicable) bears to the Aggregate Principal Debt owed to all Holders at the time in question.

          Purchasers means, on any date of determination, the Persons named on Schedule 2.1B, and subject to the terms and conditions of this Agreement, their respective successors and assigns, but not any Participant who is not otherwise a party to this Agreement as a Purchaser.

          Register is defined in Section 14.12(c).

          Regulation D means Regulation D of the Board of Governors of the Federal Reserve System, as amended.

          Regulation U means Regulation U of the Board of Governors of the Federal Reserve System, as amended.

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          Related Fund means, with respect to any Holder, a fund or other investment vehicle that invests in commercial loans and is managed by such Holder or by the same investment advisor that manages such Holder or by an Affiliate of such Holder or investment advisor.

          Release means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposal, deposit, dispersal, migrating, or other movement into the air, ground, or surface water, or soil.

          Representatives means representatives, officers, directors, employees, attorneys, and agents.

          Required Holders means, on any date of determination, those Holders holding 50.1% or more of the Aggregate Principal Debt.

          Reserve Requirement means, at any time, the maximum rate at which reserves (including, without limitation, any marginal, special, supplemental, or emergency reserves) are required to be maintained under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) by member banks of the Federal Reserve System against, in the case of Eurodollar Rate Borrowings, "Eurocurrency liabilities" (as such term is used in Regulation D). Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks with respect to (a) any category of liabilities which includes deposits by reference to which the Adjusted Eurodollar Rate is to be determined, or (b) any category of extensions of credit or other assets which include Eurodollar Rate Borrowings. The Adjusted Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in the Reserve Requirement.

          Restricted Junior Payment means: (a) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of the Company, any other Borrower, or any of their Subsidiaries now or hereafter outstanding, except a dividend payable solely with shares of the class of stock on which such dividend is declared; (b) any redemption, conversion, exchange, retirement, defeasance, sinking fund, or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of stock of the Company or any of its Subsidiaries now or hereafter outstanding, or the issuance of a notice of an intention to do any of the foregoing; (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of any Borrower or any of its Subsidiaries now or hereafter outstanding; and (d) any payment by any Borrower or any of its Subsidiaries of any management, consulting, or similar fees to any Affiliate, whether pursuant to a management agreement or otherwise.

          Rights means rights, remedies, powers, privileges, and benefits.

          Schedule means, unless specified otherwise, a schedule attached to this Agreement, as the same may be supplemented and modified from time to time in accordance with the terms of the Loan Documents.

          Securities Act means the Securities Act of 1933, as the same may be amended, modified or supplemented from time to time, and any successor statute thereto, and any and all rules or regulations promulgated from time to time thereunder.

          Security Agreement means (a) a Pledge, Assignment, and Security Agreement in substantially the form and upon the terms of Exhibit C, executed by any Person pursuant to the requirements of the Loan Documents; and (b) any amendments, modifications, supplements, restatements, ratifications, or reaffirmations of any Security Agreement made in accordance with the Loan Documents.

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          Senior Agent means collectively the "Administrative Agent" and the "Collateral Agent" as defined in the Senior Loan Agreement.

          Senior Lenders means, on any date of determination, the Lenders under the Senior Loan Agreement.

          Senior Loan Agreement means the Loan and Security Agreement dated as of February ____, 2002, executed by Borrowers, Citicorp USA, Inc., as Administrative Agent, Heller HealthCare Finance, Inc., as Collateral Agent, and the Senior Lenders, as it may be further modified, amended, renewed, extended, refunded, refinanced, replaced, or restated from time to time in accordance with the terms thereof and subject to the terms of the Intercreditor Agreement.

          Senior Loan Documents means the "Loan Documents" as defined in the Senior Loan Agreement.

          Settlement Agreement means the "Settlement Agreement Entered Into Among the United States Of America, acting through the United States Department of Justice and Centers for Medicare and Medicaid Services, the TRICARE Management Activity Support Office, Sun Healthcare Group, Inc. and its subsidiaries who filed bankruptcy in the District of Delaware on October 14, 1999, and Stephen Beaujon, Renee Lundgren, Thomas DeLay, David Junga, K.G. Simmons, Judith R. Barry, Saul Epstein, Vida M. Melton and Diane Lind", date on or about February 1, 2002, which is the subject of Sections 4.3 and 5.12 of the Plan and which was incorporated into the Plan and approved by the Bankruptcy Court as part of the Confirmation Order.

          SHS means Shared Healthcare Systems, Inc., a Delaware corporation.

          Single-Employer Plan means an employee pension benefit plan covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and established or maintained by any Borrower, Subsidiary thereof, or ERISA Affiliate of any Borrower, but not including any Multiemployer Plan.

          Social Security Act shall mean the Social Security Act as codified at 42 U.S.C. Section 1395 et seq., as amended.

          Solvent means, as to a Person, that (a) the aggregate fair saleable value of such Person's assets exceeds its liabilities (whether contingent, subordinated, unmatured, unliquidated, or otherwise), (b) such Person does not intend to incur and does not believe that it will incur Debt beyond its ability to pay such Debt as it becomes due, and (c) such Person does not have unreasonably small capital to conduct such Person's businesses as presently conducted or contemplated.

          Stated Principal Amount means, as to each Discount Note for each Purchaser, the "Stated Principal Amount at Maturity" of such Discount Note, as set forth on Schedule 2.1B.

          Subsidiary of any Person means (a) any entity of which an aggregate of more than 50% (in number of votes) of the stock, membership interests, or other equity interests is owned of record or beneficially, directly or indirectly, by such Person, or (b) any partnership (limited or general) of which such Person shall at any time be the controlling general partner determined in accordance with GAAP or own more than 50% of the issued and outstanding partnership interests.

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          Sumitomo Transaction means the conversion of the Sumitomo synthetic leases to mortgages as described in Schedule 1D.

          SunScript means SunScript Pharmacy Corporation, SunFactors, Inc., Pharmacy Factors of Florida, Inc., Pharmacy Factors of Texas, Inc., Pharmacy Factors of California, Inc., Advantage Health Services, Inc., HoMed Convalescent Equipment, Inc., SunScript/HRA LLC, First Class Pharmacy, Inc., and Executive Pharmacy Services, Inc.

          SunScript Assets means all of the real and personal assets of SunScript.

          SunScript Stock means the stock or other equity interests issued by SunScript.

          SunTrust Transaction means the conversion of the SunTrust synthetic leases to mortgages as described in Schedule 1D.

          Tangible Net Worth of any Person means as of any date of determination, an amount equal to: (a) Net Worth of such Person; less (b) Intangible Assets of such Person; less (c) prepaid expenses of such Person; less (d) all obligations owed to such Person by any Affiliate of such Person or any of its Subsidiaries (determined in each case in conformity with GAAP).

          Taxes means, for any Person, taxes, assessments, or other governmental charges or levies imposed upon such Person, its income, or any of its properties, franchises, or assets.

          Term Debt Increase means the increase in the Term Loan Principal Debt as a result of the exercise of the Partial Purchase Option as provided in Section 2.2 and in compliance with the Intercreditor Agreement.

          Termination Date means the earlier of (a) February 28, 2005, and (b) the effective date of any other termination, cancellation, redemption, or acceleration of the Term Loan Tranche or the Note Purchase Tranche.

          Termination Fee means, with respect to the payment of any Term Loan Principal Debt, an amount equal to the amount of such payment times the Termination Fee set forth below that corresponds to the date such payment is made:

Period during which payment occurs	Termination Fee
Prior to February 28, 2003	2.0%
On or after February 28, 2003, but prior to (and not including) February 28, 2005	1.0%

          Term Loan Tranche means the credit facility as described in and subject to the limitations set forth in Section 2.2 hereof.

          Term Loan Note means a promissory note substantially in the form of Exhibit A-1, and all renewals and extensions of all or any part thereof.

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          Term Loan Principal Debt means, on any date of determination, the aggregate unpaid principal balance of all Borrowings under the Term Loan Tranche, including, without limitation, any Term Debt Increase.

          THCI Transfer Facilities means, collectively, the following nursing home facilities: (a) Mediplex Rehab. of Denver, located in Denver, Colorado, (b) Mediplex of Stamford, located in Stamford, Connecticut, (c) SunBridge Care and Rehabilitation for Brookline, located in Brookline, Massachusetts, and (d) SunBridge Care and Rehabilitation for East Boston, located in East Boston, Massachusetts. THCI Turnover means the going concern transfer of the THCI Transfer Facilities by Borrowers to THCI Mortgage Company Holdings LLC.

          Total Assets means the "Total Assets" as reflected on the Consolidated Legal Entities report, dated February 11, 2002 (11:18 AM) prepared by the Company and previously provided to Administrative Agent.

          Total Revenues means the "4^th Qtr Total Revenue" as reflected on the Consolidated Legal Entities report, dated February 11, 2002 (11:18 AM) prepared by the Company and previously provided to Administrative Agent.

          Tranches means, collectively, the Term Loan Tranche and the Note Purchase Tranche; Tranche means either the Term Loan Tranche or the Note Purchase Tranche.

          TRICARE means, collectively, a program of medical benefits covering former and active members of the uniformed services and certain of their dependents, financed and administered by the United States Departments of Defense, Health and Human Services and Transportation, which program was formerly known as the "Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)".

          Type means any type of Borrowing determined with respect to the interest option applicable thereto.

          1.2     Number and Gender of Words; Other References. Unless otherwise specified in the Loan Documents, (a) where appropriate, the singular includes the plural and vice versa, and words of any gender include each other gender, (b) heading and caption references may not be construed in interpreting provisions, (c) monetary references are to currency of the United States of America, (d) section, paragraph, annex, schedule, exhibit, and similar references are to the particular Loan Document in which they are used, (e) references to "telecopy," "facsimile," "fax," or similar terms are to facsimile or telecopy transmissions, (f) references to "including" mean including without limiting the generality of any description preceding that word, (g) the rule of construction that references to general items that follow references to specific items are limited to the same type or character of those specific items is not applicable in the Loan Documents, (h) references to any Person include that Person's heirs, personal representatives, successors, trustees, receivers, and permitted assigns, (i) references to any Law include every amendment or supplement to it, rule and regulation adopted under it, and successor or replacement for it, and (j) references to any Loan Document or other document include every renewal and extension of it, amendment and supplement to it, and replacement or substitution for it.

          1.3     Accounting Principles. Except as otherwise expressly provided herein, all accounting and financial terms used in the Loan Documents and the compliance with each financial covenant therein shall be determined in accordance with GAAP, and, all accounting principles shall be applied on a consistent basis so that the accounting principles in a current period are comparable in all material

15

respects to those applied during the preceding comparable period. If Borrowers or Required Holders determine that a change in GAAP from that in effect on the date hereof has altered the treatment of certain financial data to its detriment under this Agreement, such party may, by written notice to the others and Administrative Agent not later than ten days after the effective date of such change in GAAP, request renegotiation of the financial covenants affected by such change. If Borrowers and Required Holders have not agreed on revised covenants within 30 days after delivery of such notice, then, for purposes of this Agreement, GAAP will mean generally accepted accounting principles on the date just prior to the date on which the change that gave rise to the renegotiation occurred.

SECTION 2     BORROWING/PURCHASE PROVISIONS.

          2.1     Term Loan Tranche. Each Lender severally, but not jointly, agrees to lend to Borrowers in a single advance on the Closing Date such Lender's Commitment Percentage of $20,000,000. If all or any portion of the Term Loan Principal Debt is paid or prepaid, then the amount so repaid may not be reborrowed.

          2.2     Term Debt Increase.

          (a)     Lenders' Decision Regarding Partial Purchase Option. Administrative Agent shall notify Lenders promptly upon receipt of notice of a Senior Payment Default or any Proceeding by or involving any Borrower (in each case as defined in the Intercreditor Agreement). Any Lender may, at its option, consent to the exercise of the Partial Purchase Option (the "Option Exercise") by giving written notice to Administrative Agent within three Business Days after of the receipt of notice from Administrative Agent (such date, the "Response Date") of its desire to increase its Term Loan Principal Debt in an aggregate amount equal to its ratable portion of the Option Price. If all Lenders consent to the Option Exercise on or before the Response Date, Administrative Agent shall notify Senior Agent of Lenders' intent to the exercise the Partial Purchase Option and the provisions of clause (b) shall apply. If any Lender fails to give notice of consent to the Option Exercise to Administrative Agent on or before the Response Date, such Lender shall be deemed to have not approved the Option Exercise and the provisions of clause (c) shall apply.

          (b)     Exercise Option. If all Lenders consent to the Option Exercise on or before the Response Date, Administrative Agent shall notify Senior Agent of Lenders' intent to exercise the Partial Purchase Option. If Administrative Agent gives notice of Lenders' intent to exercise the Partial Purchase Option pursuant to this Section 2.2, each Lender consenting to the Option Exercise (each, an "Accepting Lender") shall remit to Administrative Agent the portion of the Option Price attributable to such Accepting Lender and Administrative Agent, on behalf of Lenders, shall consummate the Partial Purchase Option. Upon the consummation of the Partial Purchase Option, the Option Price shall be treated for all purposes under this Agreement (including, without limitation, amortization) as Term Loan Principal Debt, subject to each provision of the Loan Documents.

          (c)     Additional Procedures Regarding the Option Exercise. If any Lender fails to give notice to Administrative Agent of its consent to the Option Exercise as provided in clause (a) (each Lender not consenting to the Option Exercise, a "Rejecting Lender"), then Administrative Agent shall promptly notify (the "Rejected Amount Notice Date") the Accepting Lenders of the aggregate Option Price that would otherwise be attributable to Rejecting Lenders (the "Rejected Amount"). Each Accepting Lender shall have the Right, but not the obligation, to elect to increase its portion of the Option Price by an amount not to exceed the Rejected Amount, and shall notify Administrative Agent of that election on or before two Business Days after the Rejected Amount Notice Date, specifying the proposed amount of the increase in such Accepting Lender's portion of the Option Price. If the aggregate amount of the proposed increases of all Accepting Lenders making an election to increase their respective portions of the Option

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Price is less than the Rejected Amount, then Administrative Agent shall not exercise the Partial Purchase Option. If the aggregate amount of the proposed increases of all Accepting Lenders making an election to increase their respective portions of the Option Price is equal to or greater than the Rejected Amount, Administrative Agent shall notify Senior Agent of Lenders' intent to exercise the Partial Purchase Option and the provisions of clause (b) shall apply. If the aggregate amount of the proposed increases of all Accepting Lenders making an election to increase their respective portions of the Purchase is greater than the Rejected Amount, then the Rejected Amount shall be allocated ratably among such Accepting Lenders based on the respective amounts of the proposed increases elected by such Accepting Lenders.

          2.3      Purchase of Discount Notes. Each Purchaser severally, but not jointly, agrees to purchase from Borrowers (and Borrowers agree to sell to Purchasers), on the Closing Date, the Stated Principal Amount of Discount Notes set forth opposite the name of such Purchaser on Schedule 2.1B for the purchase price set forth opposite the name of the Purchaser on Schedule 2.1B. Borrowers and each Purchaser agree that for purposes of Sections 1271 through 1275 of the Code, the aggregate original purchase price of the Discount Notes is as set forth under the heading "Purchase Price" on Schedule 2.1B and such price will be appropriately used by Borrowers and such Purchaser for financial reporting and income Tax purposes.

SECTION 3     TERMS OF PAYMENT.

          3.1     Loan Accounts, Notes, and Payments.

          (a)     Loan Accounts; Noteless Transaction. The Term Loan Principal Debt owed to each Lender shall be evidenced by one or more loan accounts or records maintained by such Lender in the ordinary course of business. The loan accounts or records maintained by Administrative Agent (including, without limitation, the Register) and each Lender shall be prima facie evidence absent manifest error of the Term Loan Principal Debt owned by Borrowers to each Lender and the interest and principal payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of Borrowers under the Loan Documents to pay any amount owing with respect to the Obligation.

          (b)     Term Loan Notes. Upon the request of any Lender, made through Administrative Agent, the Term Loan Principal Debt owed to such Lender may be evidenced by a Term Loan Note. In such event, Borrowers shall promptly prepare, execute, and deliver to such Lender such Term Loan Note payable to the order of such Lender. Upon the occurrence of the Term Debt Increase, Borrowers shall promptly prepare, execute, and deliver any additional Term Loan Notes requested by any Lender to reflect such Term Debt Increase. In the event Borrowers are unable or unwilling to issue any additional Term Loan Notes to reflect the Term Debt Increase, any Term Loan Notes delivered hereunder shall be deemed to be automatically amended to reflect the Term Debt Increase.

          (c)     Discount Notes. On the Closing Date, Borrowers will deliver to each Purchaser a Discount Note in the name of such Purchaser and in the Stated Principal Amount as set forth on Schedule 2.1B. Upon any assignment of any portion of any Purchaser's Discount Notes, Borrowers shall issue new Discount Notes to both the assigned Purchaser and the assignee to reflect such assignment.

          (d)     Payment. All payments of principal, interest, and other amounts to be made by Borrowers under this Agreement and the other Loan Documents shall be made to Administrative Agent at its principal office in Minneapolis, Minnesota in Dollars and in funds which are or will be available for immediate use by Administrative Agent by 1:00 p.m. central time on the day due, without setoff,

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deduction, or counterclaim. Payments made after 1:00 p.m. central time shall be deemed made on the Business Day next following. Administrative Agent shall pay to each Holder any payment of principal, interest, or other amount to which such Holder is entitled hereunder on the same day Administrative Agent shall have received the same from Borrowers; provided such payment is received by Administrative Agent prior to 1:00 p.m. central time, and otherwise before 1:00 p.m. central time on the Business Day next following.

          (e)     Payment Assumed. Unless Administrative Agent has received notice from Borrowers prior to the date on which any payment is due under this Agreement that Borrowers will not make that payment in full, Administrative Agent may assume that Borrowers have made the full payment due and Administrative Agent may, in reliance upon that assumption, cause to be distributed to the appropriate Holder on that date the amount then due to such Holders. If and to the extent Borrowers do not make the full payment due to Administrative Agent, each Holder shall repay to Administrative Agent on demand the amount distributed to that Holder by Administrative Agent together with interest for each day from the date that Holder received payment from Administrative Agent until the date that Holder repays Administrative Agent (unless such repayment is made on the same day as such distribution), at an annual interest rate equal to the Federal Funds Rate.

          3.2     Interest and Principal Payments.

          (a)     Interest. Accrued interest on each Eurodollar Rate Borrowing is due and payable on the last day of its respective Interest Period and on the Termination Date. Accrued interest on each Base Rate Borrowing shall be payable monthly in arrears on the first day of each month, commencing March 31, 2002, and on the Termination Date.

          (b)     Term Loan Principal Debt. The Term Loan Principal Debt is due and payable in quarterly installments of $840,000 each (a "quarterly installment"), commencing on June 1, 2002, and continuing thereafter on the first Business Day of each March, June, September, and December, with the final installment of $9,920,000 (the "final installment"); provided that, if the Term Debt Increase has occurred, the amortization shall be recalculated such that each quarterly installment principal installment shall be increased by an amount equal to 4.2% of the Term Debt Increase and the final installment shall be equal to all Term Loan Principal Debt outstanding on such date.

          (c)     Discount Notes. The Aggregate Discount Note Amount on all outstanding Discount Notes is due and payable on the Termination Date.

          3.3     Prepayments.

          (a)     Optional Prepayments.

          (i)     Except as set forth herein, after giving Administrative Agent advance written notice of the intent to prepay, Borrowers may voluntarily prepay all or any part of the Aggregate Principal Debt, from time to time and at any time, in whole or in part; provided that: (A) such notice must be received by Administrative Agent by 11:00 a.m. central time, three Business Days preceding the date of prepayment; (B) each such partial prepayment must be in a minimum amount of at least $1,000,000 or such lesser amount as may be outstanding under the applicable Tranche; (C) any Eurodollar Rate Borrowing may only be prepaid at the end of an applicable Interest Period (unless Borrowers pay the amount of any Consequential Loss); (D) Borrowers shall pay any

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related Consequential Loss within ten days after demand therefor; (E) Borrower shall pay the applicable Termination Fee on the amount of any Term Loan Principal Debt being prepaid; and (F) concurrently with the delivery of such notice, Borrowers shall deliver to Administrative Agent evidence satisfactory to Administrative Agent that such prepayment is permitted by the terms of the Senior Loan Agreement and the Intercreditor Agreement. Conversions under Section 3.11 are not prepayments. Each notice of prepayment shall specify the prepayment date, the Tranche hereunder being prepaid, and the Type of Borrowing(s) and amount(s) of such Borrowing(s) to be prepaid and shall constitute a binding obligation of Borrowers to make a prepayment on the date stated therein, together with (unless such prepayment is made with respect to a Base Rate Borrowing) accrued and unpaid interest to the date of such payment on the aggregate principal amount prepaid.

          (ii)     Application of Voluntary Prepayment. If no Default or Potential Default then exists or arises as a result therefrom (whereupon the provisions of Section 3.12(b) shall apply), any voluntary prepayment of the Term Loan Principal Debt shall be applied (A) first, to the Term Loan Principal Debt not attributable to the Term Debt Increase in inverse order of maturity and (B) second, to the Term Loan Principal Debt attributable to the Term Debt Increase in inverse order of maturity. All voluntary prepayments of Term Loan Principal Debt shall be allocated Pro Rata to each Lender. All voluntary prepayments of the Discount Notes shall be allocated Pro Rata to each Purchaser.

          (b)     Mandatory Prepayments from Proceeds from the Sale of SunScript Stock or SunScript Assets. Until such time as the Obligation has been repaid in full, the Obligation shall be permanently prepaid immediately upon receipt by any Borrower or any of its Subsidiaries of proceeds of any Asset Disposition of all or any portion of the SunScript Stock or, after the Term Debt Increase, the SunScript Assets (in one or a series of related transactions) in an amount equal to such proceeds. Each prepayment under this Section 3.3(b) shall be applied first, to the Term Loan Principal Debt in inverse order of maturity, and second, to the Aggregate Discount Note Amount. All mandatory prepayments of the Term Loan Principal Debt shall be allocated Pro Rata to each Lender and all mandatory prepayments of the Aggregate Discount Note Amount shall be allocated Pro Rata to each Purchaser.

          (c)     Mandatory Prepayments from Proceeds. Until such time as the Obligation has been repaid in full, the Obligation shall be permanently prepaid in the amounts and upon the occurrence of any of the following events:

          (i)     Immediately upon receipt by any Borrower or any of its Subsidiaries of proceeds of any Asset Disposition (other than an Asset Disposition covered by Section 3.3(b)) (in one or a series of related transactions), which proceeds exceed $2,000,000 (it being understood that if the proceeds exceed $2,000,000, the entire amount and not just the portion above $2,000,000 shall be subject to this Section 3.3(c)(i)), Borrowers shall prepay the Obligation in the order and manner specified herein in an amount equal to such proceeds. Notwithstanding anything to the contrary in the foregoing, Borrowers shall not be required to prepay the Obligation in the event that any Borrower receives proceeds in respect of the Campus Transaction or the THCI Turnover.

          (ii)    Immediately upon the receipt by Borrowers of the proceeds of the issuance of equity securities in excess of $1,000,000 individually or in the aggregate (other than the issuance of equity securities in connection with any conversion of Debt under and in accordance with the Plan or Confirmation Order), Borrowers shall prepay the Obligation in the order and manner

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specified herein in an amount equal to such excess proceeds, net of underwriting discounts and commissions and other reasonable costs associated therewith.

          (iii)   Immediately upon the receipt by any Borrower or any of their Subsidiaries of the proceeds of any federal, state, or local Tax refund in excess of $1,000,000 individually or in the aggregate, Borrowers shall prepay the Obligation in the order and manner specified herein in an amount equal to such excess proceeds.

          (iv)    Immediately upon receipt by Borrowers of any insurance proceeds arising from damage or casualty, or any proceeds arising from ay condemnation, which proceeds exceed $1,000,000 individually or in the aggregate, Borrowers shall prepay the Obligation in the order and manner specified herein in an amount equal to such proceeds in excess of $1,000,000 individually or in the aggregate, net of any reasonable costs incurred in connection therewith.

Each prepayment under this Section 3.3(c) shall be applied first, to the Senior Debt until paid in full to the extent permitted by the Intercreditor Agreement, second, to the Term Loan Principal Debt not attributable to the Term Debt Increase in inverse order of maturity, third, to the Term Loan Principal Debt attributable to the Term Debt Increase in inverse order of maturity, and fourth, to the Aggregate Discount Note Amount. All mandatory prepayments of the Term Loan Principal Debt shall be allocated Pro Rata to each Lender and all mandatory prepayments of the Aggregate Discount Note Amount shall be allocated Pro Rata to each Purchaser.

          (d)     Mandatory Prepayments of Interest/Consequential Loss. All prepayments under Section 3.3 shall be made, together with accrued interest to the date of such prepayment on the principal amount prepaid, together with any Consequential Loss arising as a result thereof.

          3.4     Interest Options. Except that the Eurodollar Rate may not be selected when a Default or Potential Default exists and except as otherwise provided in this Agreement, Borrowings bear interest at a rate per annum equal to (a) for Base Rate Borrowings (i) under the Term Loan Tranche the lesser of (x) the greater of (A) the Base Rate plus the Applicable Margin for Base Rate Borrowings or (B) 9% per annum and (y) the Maximum Rate and (ii) under the Note Purchase Tranche the lesser of (x) the greater of (A) the Base Rate plus the Applicable Margin for Base Rate Borrowings or (B) 2.65% per annum and (y) the Maximum Rate and (b) for Eurodollar Rate Borrowings the lesser of (i) the Adjusted Eurodollar Rate plus the Applicable Margin for Eurodollar Rate Borrowings and (ii) the Maximum Rate. Each change in the Base Rate or the Maximum Rate, subject to the terms of this Agreement, will become effective, without notice to Borrowers or any other person, upon the effective date of such change.

          3.5     Quotation of Rates. It is hereby acknowledged that an appropriately designated officer of the Company may call Administrative Agent on or before the date on which a Conversion Notice is to be delivered by Borrowers in order to receive an indication of the rates then in effect, but such indicated rates shall neither be binding upon Administrative Agent or Holders nor affect the rate of interest which thereafter is actually in effect when the Borrowing Notice is given or on the Borrowing Date.

          3.6     Default Rate. At the option of Required Holders and to the extent permitted by Law, all past-due Aggregate Principal Debt and past due interest accruing on any of the Obligation shall bear interest from maturity (stated or by acceleration) at the Default Rate until paid; provided that, the Default Rate shall automatically apply in the case of Section 12.4 where the Default Rate is specified.

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          3.7     Interest Recapture. If the designated rate applicable to any Borrowing exceeds the Maximum Rate, the rate of interest on such Borrowing shall be limited to the Maximum Rate, but any subsequent reductions in such designated rate shall not reduce the rate of interest thereon below the Maximum Rate until the total amount of interest accrued thereon equals the amount of interest which would have accrued thereon if such designated rate had at all times been in effect. In the event that at maturity (stated or by acceleration), or at final payment of the Aggregate Principal Debt, the total amount of interest paid or accrued is less than the amount of interest which would have accrued if such designated rates had at all times been in effect, then, at such time and to the extent permitted by Law, Borrowers shall pay an amount equal to the difference between (a) the lesser of the amount of interest which would have accrued if such designated rates had at all times been in effect and the amount of interest which would have accrued if the Maximum Rate had at all times been in effect, and (b) the amount of interest actually paid or accrued on the Aggregate Principal Debt.

          3.8     Interest Calculations. Interest will be calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed but computed as if each calendar year consisted of 360 days (unless the calculation would result in an interest rate greater than the Maximum Rate, in which event interest will be calculated on the basis of a year of 365 or 366 days, as the case may be). All interest rate determinations and calculations by Administrative Agent are conclusive and binding absent manifest error.

          3.9     Maximum Rate. Regardless of any provision contained in any Loan Document, neither Administrative Agent nor any Holder shall ever be entitled to contract for, charge, take, reserve, receive, or apply, as interest on all or any part of the Obligation, any amount in excess of the Maximum Rate, and, if Holders ever do so, then such excess shall be deemed a partial prepayment of principal and treated hereunder as such and any remaining excess shall be refunded to Borrowers. In determining if the interest paid or payable exceeds the Maximum Rate, Borrowers and Holders shall, to the maximum extent permitted under applicable Law, (a) treat all Borrowings as but a single extension of credit (and Holders and Borrowers agree that such is the case, (b) characterize any nonprincipal payment as an expense, fee, or premium rather than as interest, (c) exclude voluntary prepayments and the effects thereof and any Termination Fee payable as a result thereof, and (d) amortize, prorate, allocate, and spread the total amount of interest throughout the entire contemplated term of the Obligation. However, if the Obligation is paid and performed in full prior to the end of the full contemplated term thereof, and if the interest received for the actual period of existence thereof exceeds the Maximum Amount, Holders shall refund such excess, and, in such event, Holders shall not, to the extent permitted by Law, be subject to any penalties provided by any Laws for contracting for, charging, taking, reserving, or receiving interest in excess of the Maximum Amount. For purposes of determining the "Maximum Rate" or the "Maximum Amount," then those terms mean the "weekly ceiling" from time to time in effect under Texas Finance Code Section 303.009, as amended. Borrowers agrees that Chapter 346 of the Texas Finance Code, as amended (which regulates certain revolving credit loan accounts and revolving tri-party accounts), does not apply to the Obligation.

          3.10    Interest Periods. When Borrowers request any Eurodollar Rate Borrowing, Borrowers may elect the interest period (each an "Interest Period") applicable thereto, which shall be, at Borrowers' option, one, two, or three months; provided, however, that: (a) the initial Interest Period for a Eurodollar Rate Borrowing shall commence on the date of such Borrowing (including the date of any conversion thereto), and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period applicable thereto expires; (b) if any Interest Period for a Eurodollar Rate Borrowing begins on a day for which there is no numerically corresponding Business Day in the calendar month at the end of such Interest Period, then such Interest Period shall end on the last Business Day in the calendar month at the end of such Interest Period; (c) no Interest Period may be chosen with respect to any portion of the Aggregate Principal Debt which would extend beyond

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the scheduled repayment date (including any dates on which mandatory prepayments are required to be made) for such portion of the Aggregate Principal Debt; and (d) no more than an aggregate of four (4) Interest Periods shall be in effect at one time.

          3.11    Conversions. Borrowers may (a) convert a Eurodollar Rate Borrowing on the last day of the applicable Interest Period to a Base Rate Borrowing, (b) convert a Base Rate Borrowing at any time to a Eurodollar Rate Borrowing, and (c) elect a new Interest Period (in the case of a Eurodollar Rate Borrowing), by giving a Conversion Notice of such intent to Administrative Agent no later than 11:00 a.m. central time on the third Business Day prior to the date of conversion or the last day of the Interest Period, as the case may be (in the case of a conversion to a Eurodollar Rate Borrowing or an election of a new Interest Period), and no later than 11:00 a.m. central time one Business Day prior to the last day of the Interest Period (in the case of a conversion to a Base Rate Borrowing); provided that, the principal amount converted to, or continued as, a Eurodollar Rate Borrowing shall be in an amount not less than $1,000,000 or a greater integral multiple of $100,000 (or such lesser amount as may be outstanding). Administrative Agent shall timely notify each Holder with respect to each Conversion Notice. Absent Borrowers' Conversion Notice or election of a new Interest Period, a Eurodollar Rate Borrowing shall be deemed converted to a Base Rate Borrowing effective as of the expiration of the Interest Period applicable thereto. No Eurodollar Rate Borrowing may be either made or continued as a Eurodollar Rate Borrowing, and no Base Rate Borrowing may be converted to a Eurodollar Rate Borrowing, if the interest rate for such Eurodollar Rate Borrowing would exceed the Maximum Rate. The right to convert from a Base Rate Borrowing to a Eurodollar Rate Borrowing, or to continue as a Eurodollar Rate Borrowing shall not be available during the occurrence of a Default or Potential Default.

          3.12    Order of Application.

          (a)     No Default. If no Default or Potential Default exists and if no order of application is otherwise specified in Section 3.3 or otherwise in the Loan Documents, payments and prepayments shall be applied in the order and manner as Borrowers may direct.

          (b)     Default. If a Default or Potential Default exists (or if Borrowers fail to give directions as permitted under Section 3.12(a)), any payment or prepayment (including proceeds from the exercise of any Rights) shall be applied to the Obligation in the following order: (i) to the ratable payment of all fees, expenses, and indemnities for which Administrative Agent or Holders have not been paid or reimbursed in accordance with the Loan Documents (as used in this Section 3.12(b)(i), a "ratable payment" for any Holder or Administrative Agent shall be, on any date of determination, that proportion which the portion of the total fees, expenses, and indemnities owed to such Holder or Administrative Agent bears to the total aggregate fees and indemnities owed to all Holders and Administrative Agent on such date of determination); (ii) to the ratable payment of accrued and unpaid interest on the Aggregate Principal Debt (as used in this Section 3.12(b)(ii), "ratable payment" means, for any Holder, on any date of determination, that proportion which the accrued and unpaid interest on the Aggregate Principal Debt owed to such Holder bears to the total accrued and unpaid interest on the Aggregate Principal Debt owed to all Holders); (iii) to the ratable payment of the Aggregate Principal Debt (as used in this Section 3.12(b)(iii), "ratable payment" means, for any Holder, on any date of determination, that proportion which the Aggregate Principal Debt owed to such Holder bears to the Aggregate Principal Debt owed to all Holders); and (iv) to the payment of the remaining Obligation in the order and manner Required Holders deem appropriate.

Subject to the provisions of Section 13 and provided that Administrative Agent shall not in any event be bound to inquire into or to determine the validity, scope, or priority of any interest or entitlement of any Holder and may suspend all payments or seek appropriate relief (including, without limitation,

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instructions from Required Holders or an action in the nature of interpleader) in the event of any doubt or dispute as to any apportionment or distribution contemplated hereby, Administrative Agent shall promptly distribute such amounts to each Holder in accordance with the Agreement and the related Loan Documents.

          3.13     Sharing of Payments, Etc. If any Holder shall obtain any payment or prepayment with respect to the Obligation (whether voluntary, involuntary, or otherwise, including, without limitation, as a result of exercising its Rights under Section 3.14) which is in excess of its share of any such payment in accordance with the relevant Rights of the Holders under the Loan Documents, then such Holder shall purchase from the other Holders such participations as shall be necessary to cause such purchasing Holder to share the excess payment with each other Holder in accordance with the relevant Rights under the Loan Documents. If all or any portion of such excess payment is subsequently recovered from such purchasing Holder, then the purchase shall be rescinded and the purchase price restored to the extent of such recovery. Borrowers agree that any Holder purchasing a participation from another Holder pursuant to this Section may, to the fullest extent permitted by Law, exercise all of its Rights of payment (including the Right of offset) with respect to such participation as fully as if such Holder were the direct creditor of Borrowers in the amount of such participation.

          3.14     Offset. If a Default exists, each Holder shall be entitled to exercise (for the benefit of all Holders in accordance with Section 3.13) the Rights of offset and/or banker's Lien against each and every account and other property, or any interest therein, which any Borrower may now or hereafter have with, or which is now or hereafter in the possession of, such Holder to the extent of the full amount of the Obligation.

          3.15     Booking Borrowings. To the extent permitted by Law, any Holder may make, carry, or transfer its Borrowings at, to, or for the account of any of its branch offices or the office of any of its Affiliates; provided that, no Affiliate of any Holder shall be entitled to receive any greater payment under Section 4 than the transferor Holder would have been entitled to receive with respect to such Borrowings.

SECTION 4     CHANGE IN CIRCUMSTANCES.

          4.1     Increased Cost and Reduced Return.

          (a)     Changes in Law. If, after the date hereof, the adoption of any applicable Law or any change in any applicable Law or any change in the interpretation or administration thereof by any Governmental Authority, or compliance by any Holder (or its Applicable Lending Office) with any request or directive (whether or not having the force of Law) of any such Governmental Authority:

          (i)     shall subject such Holder (or its Applicable Lending Office) to any Tax or other charge with respect to any Eurodollar Rate Borrowing or its obligation to loan Eurodollar Rate Borrowings, or change the basis of taxation of any amounts payable to such Holder (or its Applicable Lending Office) under the Loan Documents in respect of any Eurodollar Rate Borrowings (other than Taxes imposed on the overall net income of such Holder by the jurisdiction in which such Holder has its principal office or such Applicable Lending Office);

          (ii)     shall impose, modify, or deem applicable any reserve, special deposit, assessment, or similar requirement (other than the Reserve Requirement utilized in the determination of the Adjusted Eurodollar Rate) relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, such Holder

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(or its Applicable Lending Office), including the commitment of such Holder hereunder; or

          (iii)     shall impose on such Holder (or its Applicable Lending Office) or the London interbank market any other condition affecting the Loan Documents or any of such extensions of credit or liabilities or commitments;

and the result of any of the foregoing is to increase the cost to such Holder (or its Applicable Lending Office) of making, converting into, continuing, or maintaining any Eurodollar Rate Borrowings or to reduce any sum received or receivable by such Holder (or its Applicable Lending Office) under the Loan Documents with respect to any Eurodollar Rate Borrowing, then Borrowers shall pay to such Holder on demand such amount or amounts as will compensate such Holder for such increased cost or reduction. If any Holder requests compensation by Borrowers under this Section 4.1(a), Borrowers may, by notice to such Holder (with a copy to Administrative Agent), suspend the obligation of such Holder to loan or continue Borrowings of the Type with respect to which such compensation is requested, or to convert Borrowings of any other Type into Borrowings of such Type, until the event or condition giving rise to such request ceases to be in effect (in which case the provisions of Section 4.4 shall be applicable); provided, that such suspension shall not affect the Right of such Holder to receive the compensation so requested.

          (b)     Capital Adequacy. If, after the date hereof, any Holder shall have determined that the adoption of any applicable Law regarding capital adequacy or any change therein or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of Law) of any such Governmental Authority has or would have the effect of reducing the rate of return on the capital of such Holder or any corporation controlling such Holder as a consequence of such Holder's obligations hereunder to a level below that which such Holder or such corporation could have achieved but for such adoption, change, request, or directive (taking into consideration its policies with respect to capital adequacy), then from time to time upon demand Borrowers shall pay to such Holder such additional amount or amounts as will compensate such Holder for such reduction.

          (c)     Changes in Applicable Lending Office. Compensation Statement. Each Holder shall promptly notify Borrowers and Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Holder to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Holder, be otherwise disadvantageous to it. Any Holder claiming compensation under this Section shall furnish to Borrowers and Administrative Agent a statement setting forth the additional amount or amounts to be paid to it hereunder which shall be conclusive in the absence of manifest error. In determining such amount, such Holder may use any reasonable averaging and attribution methods.

          4.2     Limitation on Types of Loans. If on or prior to the first day of any Interest Period for any Eurodollar Rate Borrowing:

          (a)     Inability to Determine Eurodollar Rate. Administrative Agent determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or

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          (b)     Cost of Funds. Required Holders determine (which determination shall be conclusive) and notify Administrative Agent that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to the Holders of funding Eurodollar Rate Borrowings for such Interest Period;

then Administrative Agent shall give Borrowers prompt notice thereof specifying the relevant amounts or periods, and so long as such condition remains in effect, the Holders shall be under no obligation to fund additional Eurodollar Rate Borrowings, continue Eurodollar Rate Borrowings, or to convert Base Rate Borrowings into Eurodollar Rate Borrowings, and Borrowers shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Rate Borrowings, either prepay such Borrowings or convert such Borrowings into Base Rate Borrowings in accordance with the terms of this Agreement.

          4.3     Illegality. Notwithstanding any other provision of the Loan Documents, in the event that it becomes unlawful for any Holder or its Applicable Lending Office to make, maintain, or fund Eurodollar Rate Borrowings hereunder, then such Holder shall promptly notify Borrowers thereof and such Holder's obligation to make or continue Eurodollar Rate Borrowings and to convert other Base Rate Borrowings into Eurodollar Rate Borrowings shall be suspended until such time as such Holder may again make, maintain, and fund Eurodollar Rate Borrowings (in which case the provisions of Section 4.4 shall be applicable).

          4.4     Treatment of Affected Loans. If the obligation of any Holder to fund Eurodollar Rate Borrowings or to continue, or to convert Base Rate Borrowings into Eurodollar Rate Borrowings, shall be suspended pursuant to Sections 4.1, 4.2, or 4.3 hereof, such Holder's Eurodollar Rate Borrowings shall be automatically converted into Base Rate Borrowings on the last day(s) of the then current Interest Period(s) for Eurodollar Rate Borrowings (or, in the case of a conversion required by Section 4.3 hereof, on such earlier date as such Holder may specify to Borrowers with a copy to Administrative Agent) and, unless and until such Holder gives notice as provided below that the circumstances specified in Sections 4.1, 4.2, or 4.3 hereof that gave rise to such conversion no longer exist:

          (a)     to the extent that such Holder's Eurodollar Rate Borrowings have been so converted, all payments and prepayments of principal that would otherwise be applied to such Holder's Eurodollar Rate Borrowings shall be applied instead to its Base Rate Borrowings; and

          (b)     all Borrowings that would otherwise be made or continued by such Holder as Eurodollar Rate Borrowings shall be made or continued instead as Base Rate Borrowings, and all Borrowings of such Holder that would otherwise be converted into Eurodollar Rate Borrowings shall be converted instead into (or shall remain as) Base Rate Borrowings.

If such Holder gives notice to Borrowers (with a copy to Administrative Agent) that the circumstances specified in Sections 4.1, 4.2, or 4.3 hereof that gave rise to the conversion of such Holder's Eurodollar Rate Borrowings pursuant to this Section 4.4 no longer exist (which such Holder agrees to do promptly upon such circumstances ceasing to exist) at a time when Eurodollar Rate Borrowings made by other Holders are outstanding, such Holder's Base Rate Borrowings shall be automatically converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding Eurodollar Rate Borrowings, to the extent necessary so that, after giving effect thereto, all Eurodollar Rate Borrowings held by the Holders and by such Holder are held pro rata (as to principal amounts, Types, and Interest Periods) in accordance with their ratable shares of the Aggregate Principal Debt. If Borrowers are required to pay or will be required to pay additional amounts to or for the account of any Holder pursuant to this Section 4.4, then such Holder will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending

25

Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Holder, is not otherwise disadvantageous to such Holder.

          4.5     Compensation. Upon the request of any Holder, Borrower shall pay to such Holder such amount or amounts as shall be sufficient (in the reasonable opinion of such Holder) to compensate it for any loss, cost, or expense (including loss of anticipated profits) incurred by it as a result of:

          (a)     any payment, prepayment, or conversion of a Eurodollar Rate Borrowing for any reason (including, without limitation, the acceleration of the loan pursuant to Section 11.1) on a date other than the last day of the Interest Period for such Borrowing; or

          (b)     any failure by Borrower for any reason to borrow, convert, continue, or prepay a Eurodollar Rate Borrowing on the date for such borrowing, conversion, continuation, or prepayment specified in the relevant notice of prepayment, continuation, or conversion under this Agreement.

          4.6     Taxes.

          (a)     General. Any and all payments by Borrowers to or for the account of any Holder or Administrative Agent hereunder or under any other Loan Document shall be made free and clear of and without deduction for any and all present or future Taxes, excluding, in the case of each Holder and Administrative Agent, Taxes imposed on its income and franchise Taxes imposed on it by the jurisdiction under the Laws of which such Holder (or its Applicable Lending Office) or Administrative Agent (as the case may be) is organized, or any political subdivision thereof. If Borrowers shall be required by Law to deduct any Taxes from or in respect of any sum payable under any Loan Document to any Holder or Administrative Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 4.6) such Holder or Administrative Agent receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrowers shall make such deductions, (iii) Borrowers shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable Law, and (iv) Borrowers shall furnish to Administrative Agent, the original or a certified copy of a receipt evidencing payment thereof.

          (b)     Stamp and Documentary Taxes. In addition, Borrowers agree to pay any and all present or future stamp or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution or delivery of, or otherwise with respect to, any Loan Document (hereinafter referred to as "Other Taxes").

          (c)     Indemnification for Taxes. Borrowers agree to indemnify each Holder and Administrative Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 4.6) paid by such Holder or Administrative Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto.

          (d)     Withholding Tax Forms. Each Holder organized under the Laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Holder listed on the signature pages hereof and on or prior to the date on which it becomes a Holder in the case of each other Holder, and from time to time thereafter, including, without limitation, upon the expiration or obsolescence of any previously delivered

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form or upon the written request of Borrower or Administrative Agent (but only so long as such Holder remains lawfully able to do so) shall provide Borrower and Administrative Agent with (i) two duly completed copies of Internal Revenue Service Form W-BEN, W-8ECI, W-8IMY, W-9, or other applicable form, as the case may be, certifying in each case that such Holder is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States, or certifying that such Holder is entitled to an exemption from or a reduced rate of tax on payment pursuant to the "portfolio interest" exception under section 871(h) or 881(c) of the Code, (ii) if applicable, a statement indicating that such Holder is entitled to the "portfolio interest" exception under Section 871(h) or 881(c)(3) of the Code, and (iii) any other governmental forms or certificates which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate withholding tax, which has been reasonably requested by Borrower or Administrative Agent. If an event (including without limitation any change in treaty, law, or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Holder from duly completing and delivering any such form with respect to it and such Holder advises Borrower and Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, such Holder shall not be required to deliver such forms. If the form provided by a Holder at the time such Holder first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding at such rate shall be considered excluded from "Taxes".

          (e)     Failure to Provide Withholding Forms; Changes in Tax Laws. For any period with respect to which a Holder has failed to provide Borrowers and Administrative Agent with the appropriate form pursuant to Section 4.6(d) (unless such failure is due to a change in Law occurring subsequent to the date on which a form originally was required to be provided), such Holder shall not be entitled to indemnification under Section 4.6(a) or 4.6(b) with respect to Taxes imposed by the United States; provided, however, that should a Holder, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, Borrowers shall take such steps as such Holder shall reasonably request to assist such Holder to recover such Taxes.

          (f)     Changes in Applicable Lending Office. If Borrowers are required to pay or will be required to pay additional amounts to or for the account of any Holder pursuant to this Section 4.6, then such Holder will agree to use reasonable efforts to change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Holder, is not otherwise disadvantageous to such Holder.

          (g)     Tax Payment Receipt. Within 30 days after the date of any payment of Taxes, Borrowers shall furnish to Administrative Agent the original or a certified copy of a receipt evidencing such payment.

          (h)     Survival. Without prejudice to the survival of any other agreement of Borrowers hereunder, the agreements and obligations of Borrowers contained in this Section 4.6 shall survive the payment in full of the Obligation.

SECTION 5     FEES.

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          5.1     Treatment of Fees. Except as otherwise provided by Law, the fees described in this Section 5: (a) do not constitute compensation for the use, detention, or forbearance of money, (b) are in addition to, and not in lieu of, interest and expenses otherwise described in the Loan Documents, (c) shall be payable in accordance with Section 3.1(c), (d) shall be non-refundable, (e) shall, to the fullest extent permitted by Law, bear interest, if not paid when due, at the Default Rate, and (f) shall be calculated on the basis of actual number of days (including the first day but excluding the last day) elapsed, but computed as if each calendar year consisted of 365 or 366 days, as the case may be.

          5.2     Fees of Administrative Agent. Borrowers shall pay to Administrative Agent (for its own account) the fees described in the certain fee letter with Administrative Agent.

          5.3     Fees of Highland Capital. Borrowers shall pay to Highland Capital Management, L.P. (for its own account) the fees described in the certain fee letter with Highland Capital Management, L.P.

          5.4     Termination Fee. With respect to any voluntary prepayment of the Term Loan Principal Debt, Borrowers shall pay to Administrative Agent, for the benefit of Lenders, the Termination Fee required pursuant to Section 3.3.

          5.5     Upfront Fees. On the Closing Date, Borrowers shall pay to Administrative Agent, for the benefit of Lenders, an upfront fee equal to $400,000.

SECTION 6     SECURITY.

          6.1     Collateral. To secure the full and complete payment and performance of the Obligation or the Closing Date, each Borrower shall enter into Collateral Documents (in form and substance acceptable to Administrative Agent) pursuant to which, among other things, each such entity shall, to the extent permitted by applicable Law, grant, pledge, assign, and create first priority Liens (except to the extent Permitted Liens (including, without limitation, the Liens of Senior Agent under the Senior Loan Documents and in accordance with the Intercreditor Agreement) affect such priority) in favor of Administrative Agent for the ratable benefit of Holders) in and to: (a) 100% of each such entity's Rights, titles, and interests in the issued and outstanding stock, equity, or other investment securities of each Subsidiary of such entity; (b) all Rights, titles, and interests in all other personal property of each Borrower; and (c) all Rights, titles, and interests in certain real property of each Borrower.

          6.2     Future Liens. Promptly after (a) the acquisition of any material assets (real, personal, tangible, or intangible) by any Borrower, (b) the removal, termination, or expiration of any prohibitions upon the granting of a Lien in any asset (real, personal, tangible, or intangible) of any Borrower, or (c) upon the designation, formation, or acquisition of any new Subsidiary of any Borrower (the assets described in clauses (a) through (c) hereof are referred to herein as the "Additional Assets"), such Borrower shall (or shall cause the appropriate new Subsidiary to) execute and deliver to Administrative Agent all further instruments and documents (including, without limitation, Collateral Documents, and all certificates and instruments representing shares of stock or evidencing Debt and any realty appraisals as Administrative Agent may require with respect to any such Additional Assets), and shall take all further action that may be necessary or desirable, or that Administrative Agent may reasonably request, to grant, perfect, and protect Liens in favor of Administrative Agent for the benefit of Holders in such Additional Assets; it being expressly understood that the granting of such additional security for the Obligation is a material inducement to the execution and delivery of this Agreement by each Holder. Upon satisfying the terms and conditions hereof, such Additional Assets shall be included in the "Collateral" for all purposes under the Loan Documents, and all references to the "Collateral" in the Loan Documents shall include the Additional Assets. Notwithstanding the foregoing, no Borrower shall be required to grant Liens to Administrative Agent for the benefit of Holders in Additional Assets except to the extent Senior Lenders

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have been granted Liens in such Additional Assets, in which event Administrative Agent for the benefit of Holders shall take a second priority Lien in such Additional Assets subject to the terms of the Intercreditor Agreement.

          6.3     Release of Collateral.

          (a)     Upon Sale or Disposition of Collateral. Upon any sale, transfer, or disposition of Collateral which is expressly permitted pursuant to the Loan Documents (or is otherwise authorized by requisite Holders), and promptly upon written request by Borrowers (which request must be accompanied by true and correct copies of (i) all documents of transfer or disposition, including any contract of sale, and (ii) all requested release instruments), Administrative Agent shall (and is hereby irrevocably authorized by Holders to) execute such documents as may be necessary to evidence the release of Liens granted to Administrative Agent for the benefit of Holders pursuant hereto in such Collateral.

          (b)     Intercreditor Agreement. To the extent any Liens are required to be released by the terms of the Intercreditor Agreement, Administrative Agent is hereby irrevocably authorized by Holders to execute such documents as may be necessary to evidence the release of Liens granted to Administrative Agent for the benefit of Holders pursuant hereto in such Collateral.

          (c)     General Provisions. The actions of Administrative Agent under this Section 6.3 are subject to the following: (i) unless such release is required by the terms of the Intercreditor Agreement, no such release of Liens shall be granted if any Default or Potential Default has occurred and is continuing, including, without limitation, the failure to make certain mandatory prepayments in accordance with Sections 3.3(b) and 3.3(c) in conjunction with the sale or transfer of such Collateral; (ii) Administrative Agent shall not be required to execute any such document on terms which, in Administrative Agent's opinion, would expose Administrative Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty; and (iii) such release shall not in any manner discharge, affect, or impair the Obligation or Liens upon all interests retained by Borrowers.

          6.4      Negative Pledge. The Borrowers hereby covenant and agree not to directly create, incur, grant, suffer, or permit to be created or incurred any Lien on any assets of Borrowers, other than Permitted Liens and other Liens incurred in connection with Debt permitted under clauses (f), (g), and (h) of Section 11.1; it being expressly understood that the provisions of this negative pledge are a material inducement to the execution and delivery of this Agreement by each Holder.

SECTION 7     CONDITIONS PRECEDENT TO CLOSING.

          7.1     Conditions Precedent to Closing. This Agreement shall not become effective, and Lenders shall not be obligated to advance any Term Loan Principal Debt and Purchasers shall not be obligated to purchase any Discount Notes, unless Administrative Agent has received all of the agreements, documents, instruments, and other items described on Schedule 7.1 (other than each item, if any, listed on Schedule 7.1A, which items are hereby permitted to be delivered after the Closing Date but not later than the respective date for delivery of each such item specified on Schedule 7.1A or such later date as agreed to by Required Holders). Each condition precedent in this Agreement is material to the transactions contemplated in this Agreement, and time is of the essence in respect of each thereof.

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SECTION 8.     REPRESENTATIONS, WARRANTIES, AND CERTAIN COVENANTS

          To induce Administrative Agent and each Holder to enter into the Loan Documents, to advance any Term Loan Principal Debt or purchase any Discount Notes, as applicable, the Company represents, warrants, and covenants on behalf of itself and the other Borrowers (and each of the other Borrowers, jointly and severally, accepts responsibility for such representations and warranties) to Administrative Agent and Holders that the following statements are and will be true, correct, and complete and, unless specifically limited, shall remain so until indefeasible payment in full, in cash, of the Obligation:

          8.1     Organization, Powers, Capitalization.

          (a)     Organization and Powers. Each Borrower is an entity duly organized, validly existing, and in good standing under the laws of its jurisdiction of organization and qualified to do business in each jurisdiction where such qualification is required except where failure to be so qualified could not reasonably be expected to be a Material Adverse Event. Each Borrower has all requisite power and authority to own and operate its properties, to carry on its business as now conducted, and proposed to be conducted and to enter into each Loan Document to which it is a party.

          (b)     Capitalization. Except as set forth on Schedule 8.1, each Borrower (other than the Company) is a direct or indirect Subsidiary of the Company. The authorized and the issued capital stock of each Borrower and each of their respective Subsidiaries (except the Inactive Entities) is as set forth on Schedule 8.1, including all preemptive or other outstanding rights, options, warrants, conversion rights, or similar agreements or understandings for the purchase or acquisition from any Borrower of any shares of capital stock or other securities of any such entity. All issued and outstanding shares of capital stock of each Borrower are duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens other than (1) Liens securing the Obligation and Liens granted in favor of Senior Agent for the benefit of Senior Agent and Senior Lenders and (2) as to the Company only, any pledge of the Company's capital stock by its shareholders, and such shares were issued in compliance with all applicable state and federal laws concerning the issuance of securities. Each Borrower will promptly notify Holders of any change in its ownership or corporate structure.

          8.2     Authorization of Borrowing, No Conflict. Each Borrower has the power and authority to incur the Obligation and to grant security interests in the Collateral. On the Closing Date, the execution, delivery, and performance of the Loan Documents by each Borrower signatory thereto will have been duly authorized by all necessary corporate and shareholder action. The execution, delivery, and performance by each Borrower of each Loan Document to which it is a party and the consummation of the transactions contemplated thereby do not contravene any applicable Law, the corporate charter or bylaws, or other organizational documents of any Borrower or any material agreement or order by which any Borrower, or any Borrower's property, is bound. This Agreement and the other Loan Documents are the legal, valid, and binding obligations of the applicable Borrowers respectively, each enforceable against Borrowers, as applicable, in accordance with their respective terms.

          8.3     Financial Condition. All Financial Statements concerning the Company and its Subsidiaries (a) furnished on or before the Closing Date to Administrative Agent or any Holder by the Company in connection with this Agreement (except for the Financial Statements or financial reports dated February 11, 2002), and (b) furnished subsequent to the Closing Date to Administrative Agent or any Holder pursuant to this Agreement have been prepared in accordance with GAAP consistently applied throughout the periods involved (except as disclosed therein) and present fairly the financial condition of Persons covered thereby as at the dates thereof and the results of their operations for the periods then ended. The

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Pro Forma was prepared by Borrowers based on the unaudited consolidated balance sheet of Borrowers dated as of October 31, 2001. The Projections delivered by Borrowers will be prepared in light of the past operations of the business of Borrowers and their Subsidiaries, and such Projections will represent the good faith estimate of Borrowers concerning the most probable course of their business as of the date such Projections are delivered.

          8.4     Debt and Liabilities. As of the Closing Date, except as set forth on Schedule 8.4, no Borrower has any (a) Debt or other obligations for borrowed money except as reflected on the Pro Forma; or (b) Liabilities other than as reflected on the Pro Forma or otherwise as incurred in the ordinary course of business following the date of the Pro Forma. The Company, or if applicable the other Borrowers, shall promptly deliver copies of all notices given or received by any Borrower with respect to noncompliance with any term or condition of (i) any Debt (other than the Senior Debt) in a principal amount in excess of $5,000,000 or (ii) the Senior Loan Documents, and shall promptly notify Administrative Agent of any default or event of default with respect to (x) any Debt in a principal amount in excess of $5,000,000 which default or event of default gives the holders of such Debt the right to accelerate the maturity thereof or (y) any Senior Loan Document.

          8.5     Title to Properties; Liens. Each Borrower has good, sufficient, and legal title to all of the Collateral (and any other material properties and assets, if any) and will have good, sufficient, and legal title of all after-acquired Collateral (and any other after-acquired material properties and assets, if any), in each case, free and clear of all Liens except for Permitted Liens. Administrative Agent for the benefit of Holders has a valid, perfected, and first priority Lien in the SunScript Stock and, after the exercise of the Partial Purchase Option, the SunScript Assets, and a valid, perfected, and second priority Liens on the other Collateral (subject only to Permitted Liens), securing the payment of the Obligation, and such Liens are entitled to all of the Rights, priorities, and benefits afforded by the UCC or other applicable Law as enacted in any relevant jurisdiction which relates to perfected Liens.

          8.6     Litigation; Adverse Facts. There are no judgments outstanding against any Borrower or affecting any property of any Borrower nor are there any actions, suits, proceedings, governmental investigations, or arbitrations now pending or, to the best knowledge of any Borrower after due inquiry, threatened against or affecting any Borrower or any of its property which, if adversely determined, could reasonably be expected to result in a Material Adverse Event. Promptly upon any Borrower obtaining knowledge of (a) the institution of any action, suit, proceeding, governmental investigation, or arbitration against or affecting any Borrower or any of its property, not previously disclosed by Borrowers to Administrative Agent, which if adversely determined could reasonably be expected to be a Material Adverse Event or (b) any development in any action, suit, proceeding, governmental investigation, or arbitration at any time pending or affecting any Borrower or any of its property which could reasonably be expected to be a Material Adverse Event, Borrowers will promptly give notice thereof to Administrative Agent and provide such other information as may be reasonably available to enable Administrative Agent and its counsel to evaluate such matter.

          8.7     Payment of Taxes. Except as disclosed on Schedule 8.7, all material Tax returns and reports of each Borrower required to be filed by any of them have been timely filed and are complete and accurate in all material respects. All Taxes which are due and payable by each Borrower have been paid when due (except as otherwise permitted by the terms of the Plan, in which case Borrowers have complied with and shall comply with the Plan in all material respects); provided that no such Tax need be paid if such Borrower is contesting same in good faith by appropriate proceedings promptly instituted and diligently conducted and if such Borrower has established appropriate reserves as required in conformity with GAAP. As of the Closing Date, except as set forth in Schedule 8.7, none of the income Tax returns of any Borrower is under audit. Other than tax liens filed prior to October 14, 1999 and other than those tax liens filed after October 14, 1999 and prior to the date of this Agreement, that have or will be

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discharged pursuant to the Plan, no other tax liens have been filed against any Borrower with respect to payroll taxes, and to Borrowers' knowledge, no other tax liens have been filed against any Borrower since October 14, 1999 that are in excess of $250,000, individually or in the aggregate. The charges, accruals, and reserves on the books of each Borrower in respect of any Taxes are in accordance with GAAP. Each Borrower has executed United States of America Internal Revenue Service ("IRS") Form 8821 designating Administrative Agent as such Borrower's appointee to receive directly from the IRS, on an on-going basis, certain Tax information, notices, and other written communication and each Borrower authorizes Administrative Agent to file such Form 8821 with the IRS. Each Borrower's federal tax identification number is listed on Schedule 8.7.

          8.8      Performance of Agreements. No Borrower is in default in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any Material Contract, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default.

          8.9     Employee Plans. Each of the Borrowers, their Subsidiaries, and their ERISA Affiliates are in compliance, and will continue to remain in compliance, in all material respects with all applicable provisions of ERISA, the Code, and all other applicable Laws and the regulations and interpretations thereof with respect to all Employee Plans. No material liability has been incurred by the Borrowers, their Subsidiaries, or their ERISA Affiliates which remains unsatisfied for any funding obligation, Taxes, or penalties with respect to any Employee Plan. No Borrower, nor any of its Subsidiaries, shall establish any new Employee Plan or amend any existing Employee Plan if the liability or increased liability resulting from such establishment or amendment is material.

          8.10     Broker's Fees. No broker's or finder's fee or commission will be payable with respect to this Agreement.

          8.11     Environmental Compliance. Each Borrower is and shall continue to remain in compliance with all applicable Environmental Laws except where failure to be in such compliance could not reasonably be expected to result in a Material Adverse Event. To Borrowers' knowledge, there are no claims, liabilities, Liens, investigations, litigation, administrative proceedings, whether pending or threatened, judgments, or orders relating to any Hazardous Substance asserted or threatened against any Borrower or relating to any real property currently or formerly owned, leased or operated by any Borrower.

          8.12     Solvency. From and after the date of this Agreement, the Company and its Subsidiaries, on a consolidated basis, are Solvent.

          8.13     Disclosure. No representation or warranty of any Borrower contained in this Agreement, the other Loan Documents, or any other document, certificate, or written statement furnished to Administrative Agent or any Holder by or on behalf of any such Person for use in connection with the Loan Documents contains any untrue statement of a material fact or omitted, omits, or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. There is no material fact known to any Borrower that is or could reasonably be expected to be a Material Adverse Event and that has not been disclosed herein or in such other documents, certificates, and statements furnished to Administrative Agent or any Holder for use in connection with the transactions contemplated hereby.

          8.14     Insurance. Each Borrower and each of its Subsidiaries maintains and shall continue to maintain adequate insurance policies and shall provide Administrative Agent with evidence of such insurance coverage for public liability, professional liability, property damage, and product liability with

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respect to its business and properties and the business and properties of its Subsidiaries against loss or damage commensurate with the kinds and amounts customarily carried or maintained by corporations of similar size, established reputation, and engaged in similar businesses and in amounts acceptable to Administrative Agent in its reasonable discretion. Each Borrower shall cause Administrative Agent at all times to be named as additional loss payee, as its interests may appear, on all property damage insurance policies and shall cause Administrative Agent at all times to be named as additional insured under all general and professional liability policies relating to the Collateral, in each case pursuant to appropriate endorsements in form and substance satisfactory to Administrative Agent. No notice of cancellation has been received with respect to such policies and each Borrower and each of its Subsidiaries is in compliance with all material conditions contained in such policies. Any proceeds received from any policies of insurance relating to any Collateral shall be applied to the Obligation as set forth in Section 3.3(c). Each Borrower shall provide Administrative Agent evidence of the insurance coverage and of the assignments and endorsements required by this Agreement promptly upon request by Administrative Agent and upon renewal of any existing policy. If any Borrower elects to change insurance carriers, policies, or coverage amounts, such Borrower shall notify Administrative Agent and provide Administrative Agent with evidence of the updated insurance coverage and of the assignments and endorsements required by this Agreement, except that such notice shall not be required (a) if such change does not materially reduce the coverage amounts or materially and adversely affect the terms or provisions of the coverage in existence on the Closing Date or (b) if such change does materially reduce the coverage amounts or does materially and adversely affect the terms or provisions of such coverage in existence on the Closing Date, such Borrower shall have obtained the highest amount of coverage and the most favorable terms and provisions that are then commercially available. In the event such Borrower fails to provide Administrative Agent with evidence of the insurance coverage required by this Agreement, Administrative Agent may, but is not required to, purchase insurance at such Borrower's expense to protect Administrative Agent's and Holder's interests in the Collateral. This insurance may, but need not, protect such Borrower's interests. The coverage purchased by Administrative Agent may not pay any claim made by such Borrower or any claim that is made against such Borrower in connection with the Collateral. Such Borrower may later cancel any insurance purchased by Administrative Agent, but only after providing Administrative Agent with evidence that such Borrower has obtained insurance as required by this Agreement. If Administrative Agent purchases insurance for the Collateral, such Borrower will be responsible for the costs of that insurance, including interest thereon and other charges imposed on Administrative Agent in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance, and such costs may be added to the Obligation. The costs of the insurance may be more than the cost of insurance such Borrower is able to obtain on its own.

          8.15      Compliance with Laws; Authorizations; Consents. Except as set for on Schedule 8.15, no Borrower is in violation of any Law under (a) any Governmental Authority in all jurisdictions in which such Borrower or any of its Subsidiaries is now doing business, (b) the Corporate Integrity Agreement, and (c) any Governmental Authority otherwise having jurisdiction over the conduct of such Borrower or any of its Subsidiaries or any of its respective businesses, or the ownership of any of its respective properties, which violation would subject such Borrower or any of its Subsidiaries, or any of their respective officers to criminal liability or, in each case, could reasonably be expected to result in a Material Adverse Event and, to Borrowers' knowledge, no such violation has been alleged. Borrowers will and will cause each of their Subsidiaries to comply with the requirements of all applicable Laws of (i) any Governmental Authority as now in effect and which may be imposed in the future in all jurisdictions in which any Borrower or any of its Subsidiaries is now doing business or may hereafter be doing business, (ii) any Governmental Authority otherwise having jurisdiction over the conduct of any Borrower or any of its Subsidiaries or any of its respective businesses, or the ownership of any of its respective properties, (iii) the Corporate Integrity Agreement, except to the extent the noncompliance with which could not reasonably be expected to be a Material Adverse Event. No Authorization, approval or

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other action by, and no notice to or filing with, any domestic or foreign Governmental Authority or regulatory body or consent of any other Person is required for (x) the grant by any Borrower of the Liens granted hereby or for the execution, delivery, or performance of this Agreement or the other Loan Documents by any Borrower; (y) the perfection of the Liens granted hereby and pursuant to any other Loan Documents (except for  filing UCC financing statements with the appropriate jurisdiction, any filings with the U.S. Patent and Trademark Office or the U.S. Copyright Office, and filings of the Mortgages, if any); or (z) the exercise by Administrative Agent or any Holder of its Rights and remedies hereunder (except as may have been taken by or at the direction of any Borrower or Administrative Agent).

          8.16     Employee Matters. Except as set forth on Schedule 8.16, (a) no Borrower nor any of such Borrower's employees is subject to any collective bargaining agreement, (b) no petition for certification or union election is pending with respect to the employees of any Borrower, and no union or collective bargaining unit has sought such certification or recognition with respect to the employees of any Borrower and (c) there are no strikes, slowdowns, work stoppages, or controversies pending or, to the knowledge of any Borrower after due inquiry, threatened between any Borrower and its respective employees, other than employee grievances arising in the ordinary course of business, which could reasonably be expected to be, either individually or in the aggregate, a Material Adverse Event. Except as set forth on Schedule 8.16, no Borrower is party to an employment contract or collective bargaining agreement.

          8.17     Governmental Regulation. No Borrower is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940, or to any other Law limiting its ability to incur Debt.

          8.18     Access to Accountants and Management. Borrowers authorize Administrative Agent and Holders to discuss the financial condition and Financial Statements of any Borrower and its Subsidiaries with the Company's Accountants upon reasonable notice to the Company (and if no Default has occurred and is continuing, in the Company's presence, either in person, or if Administrative Agent or Holders elect, by telephone), authorizes the Company's Accountants to respond to all of Administrative Agent's and Holders' inquiries. Administrative Agent and each Holder may confer with each Borrower's management directly regarding such Borrower's business, operations, and financial condition.

          8.19     Inspection. Subject to Section 13.16, Borrowers shall permit Administrative Agent, any Holder, and any authorized Representatives designated by Administrative Agent or any Holder to visit and inspect any of the properties of any Borrower or any of its Subsidiaries, including their financial and accounting records, and, in conjunction with such inspection, to make copies and take extracts therefrom, and to discuss their affairs, finances, and business with their officers and the Company's Accountants, at such reasonable times during normal business hours and as often as may be reasonably requested but no more than six times per year; provided, however, that upon the occurrence and during the continuance of a Default, the number of visits and inspections per year shall not be limited. Each Holder may accompany Administrative Agent on any such visit or inspection. All actual out-of-pocket expenses of Administrative Agent in connection with such visits and inspections shall be paid by Borrowers.

          8.20     Borrowers' Receipt of Payments. If any Borrower, or any of its Subsidiaries, Affiliates, employees, agents, or any other Persons acting for or in concert with any Borrower, shall receive any monies, checks, notes, drafts, or any other payments relating to and/or proceeds of any Collateral (other than pursuant to an Asset Disposition or other dispositions permitted hereunder as to which Borrowers are expressly permitted to retain such payments and proceeds for its own account), such Borrower or such Person shall hold such instrument or funds in trust for Administrative Agent, and, immediately upon receipt thereof, shall remit the same or cause the same to be remitted, in kind, to Administrative Agent

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unless such payment or proceeds have been paid or will be paid by such Borrower or such Person to the Senior Agent pursuant to the requirements of the Senior Agreement or the other Senior Loan Documents in compliance with the Intercreditor Agreement.

          8.21     Reports. Borrowers have timely filed or caused to be timely filed all cost reports and other reports of every kind whatsoever required by Law or by written or oral contracts or otherwise to have been filed or made with respect to the Facilities, except for such reports of which the failure to file individually or in the aggregate, could not reasonably be expected to be a Material Adverse Event. There are no claims, actions, or appeals pending (and no Borrower has filed any claims or reports which should result in any such claims, actions, or appeals) before any commission, board, or agency including without limitation any intermediary or carrier, the Provider Reimbursement Review Board, or the Administrator of the Centers for Medicare and Medicaid Services, with respect to any state or federal Medicare or Medicaid cost reports or claims filed by any Borrower, or any disallowance by any commission, board, or agency in connection with any audit of such cost reports, which, individually or in the aggregate, could reasonably be expected to be a Material Adverse Event. As of the Closing Date, and thereafter, no validation review or program integrity review related to any Borrower, or the consummation of the transactions contemplated herein, or related to the Facilities or the Collateral, all being conducted by any commission, board, or agency in connection with the Medicare or Medicaid programs, and to the knowledge of Borrowers, no such reviews are scheduled, pending, or threatened against or affecting any of the providers, or any of the Facilities or the Collateral, or the consummation of the transactions contemplated hereby, except those reviews that could not reasonably be expected to result in a Material Adverse Event.

          8.22     Compliance With Health Care Laws. Without limiting the generality of Section 8.15 or any other representation or warranty made herein, to Borrowers' knowledge, each of the Facilities, and each of its licensed employees and contractors (other than contracted agencies) in the exercise of their respective duties on behalf of each of the Facilities, is in compliance with all applicable statutes, laws, ordinances, rules, and regulations of any Governmental Authority (including without limitation Section 1128B(b) of the Social Security Act, as amended, 42 U.S.C. Section 1320a-7(b) (Criminal Penalties Involving Medicare or State Health Care Programs), commonly referred to as the "Federal Anti-Kickback Statute," and the Section 1877 of the Social Security Act (Prohibition Against Certain Referrals), commonly referred to as "Stark Statute" (collectively, "Healthcare Laws")). Borrowers have maintained in all material respects all records required to be maintained by the Joint Commission on Accreditation of Healthcare Organizations, the Food and Drug Administration, the Drug Enforcement Agency, the State Boards of Pharmacy, and, to the extent required by the Healthcare Laws, the federal and state Medicare, Medicaid, and TRICARE programs, and, to the knowledge of Borrowers, there are no presently existing circumstances which would result or likely would result in material violations of the Healthcare Laws. Each Borrower and its Affiliates and the owners of the Facilities and other businesses managed by any Borrower or its Affiliates have such Authorizations of all Governmental Authorities as are necessary under applicable Law to own their respective properties and to conduct their respective business (including without limitation such Authorizations as are required under federal, state and other health care Laws, and under such HMO or similar licensure Laws and such insurance Laws and regulations applicable thereto), and with respect to those Facilities and other businesses that participate in Medicare, Medicaid, and/or TRICARE to receive reimbursement under Medicare, Medicaid, and TRICARE. To Borrowers' knowledge, there currently exist no restrictions, deficiencies, required plans of corrective actions, or other such remedial measures with respect to federal and state Medicare, Medicaid, and TRICARE certifications or licensure that could reasonably be expected to result in a Material Adverse Event.

          8.23     Funds from Restricted Grants. None of the Facilities or other Collateral is subject to, and Borrowers shall indemnify and hold Holders harmless from and against, any liability in respect of

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amounts received by Borrower or others for the purchase or improvement of the Facilities or other Collateral or any part thereof under restricted or conditioned grants or donations, including, without limitation, monies received under the Public Health Service Act, 42 U.S.C. Section 291 et seq.

          8.24     HIPAA Compliance. To the extent that and for so long as any Borrower is a "covered entity" within the meaning of HIPAA, such Borrower (a) has undertaken or will promptly undertake all necessary surveys, audits, inventories, reviews, analyses, and/or assessments (including any necessary risk assessments) of all areas of its business and operations required by HIPAA and/or that could be adversely affected by the failure of such Borrower to be HIPAA Compliant (as defined below); (b) has developed or will promptly develop a detailed plan and time line for becoming HIPAA Compliant (a "HIPAA Compliance Plan"); and (c) has implemented or will implement those provisions of such HIPAA Compliance Plan in all material respects necessary to ensure that such Borrower is or becomes HIPAA Compliant. For purposes hereof, "HIPAA Compliant" shall mean that such Borrower is or will be in compliance with each of the applicable requirements of the so-called "Administrative Simplification" provisions of HIPAA on and as of each date that any part thereof, or any final rule or regulation thereunder, becomes effective in accordance with its or their terms, as the case may be, except where failure to be in compliance could not reasonably be expected to result in a Material Adverse Event or otherwise materially adversely affect the rights and remedies of Administrative Agent and Holders hereunder.

          8.25     Licenses. Except as disclosed in Schedule 8.25, each Borrower has all necessary Authorizations, certificates of need, and rights to participate in (or the benefit of valid agreements to participate in) Medicare, Medicaid, TRICARE, and other material third party payor programs participated in by it, and has all Medicaid, TRICARE, and Medicare provider numbers, provider agreements, and other rights necessary for the generation of its Accounts and otherwise for the conduct of its business and for the intended use of its properties and assets to the extent necessary or appropriate to ensure no material interruption in cash flow.

          8.26     Certificates of Need. Borrowers are the lawful owner of any certificates of need or other required Authorization for the operation of each of the Facilities.

          8.27     Inactive Entities. Schedule 8.27 contains a complete and accurate list of all Inactive Entities as of the Closing Date. Except as set forth on Schedule 8.27, as of the Closing Date, none of the Inactive Entities (a) has Total Assets valued at greater than $260,000, (b) had Total Revenues during the fourth calendar quarter of 2001 in excess of $3,000, or (c) is currently conducting any business operations.

          8.28     Supplemental Schedules. Borrowers may amend any one of more of the Schedules referred in this Section 8 by notice to Administrative Agent. Any representation, warranty, or covenant contained herein which refers to any such Schedule shall from and after the date of any such amendment refer to such Schedule as so amended; provided, however, that in no event shall the amendment of any such Schedule constitute a waiver by Administrative Agent or Holders of any Default that has occurred and is continuing at the time of such amendment unless such Default has been cured by the amendment of such Schedule and has been expressly waived by Required Holders.

          8.29     Amendment to Senior Loan Agreement. Borrowers agree to give Administrative Agent prior notice of any amendment or modification to the Senior Loan Agreement (or any other Senior Loan Documents) and, to the extent permitted by the Intercreditor Agreement, further agrees to execute any amendments to the Loan Documents as Required Holders may request to retain consistency between the provisions of the Loan Documents and the provisions of the Senior Loan Agreement (or any other Senior Loan Documents).

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SECTION 9.     REPORTING AND OTHER AFFIRMATIVE COVENANTS

          Each Borrower covenants and agrees that, until indefeasible payment in full, in cash, of the Obligation, each Borrower shall perform and shall cause each of its Subsidiaries to perform, all covenants in this Section 9.

          9.1     Financial Statements and Other Reports. The Company will deliver to Administrative Agent and each Lender (unless specified to be delivered solely to Administrative Agent) the Financial Statements and other reports contained in the Reporting Rider attached hereto.

          9.2     Endorsement; Insurance Claims. Borrowers hereby constitute and appoint Administrative Agent and all Persons designated by Administrative Agent for that purpose as Borrowers' true and lawful attorney-in-fact, with power in the place and stead of each Borrower and in the name of each Borrower (a) to endorse such Borrower's name to any of the items of payment or proceeds described in Section 8.20 and all proceeds of Collateral that come into Administrative Agent's possession or under Administrative Agent's control, and (b) during the continuance of a Default, to obtain, adjust, and settle insurance claims, which are required to be paid to Administrative Agent or Holders. Borrowers hereby ratify and approve all acts of Administrative Agent or Holders made or taken in accordance with this Section 9.2. Both the appointment of Administrative Agent as Borrowers' attorney and Administrative Agent's Rights and powers hereunder are coupled with an interest and are irrevocable.

          9.3     Maintenance of Properties. Borrowers will maintain or cause to be maintained in good repair, working order, and condition all material properties used in the business of Borrowers and its Subsidiaries and will make or cause to be made all appropriate repairs, renewals, and replacements thereof.

          9.4     Further Assurances. Borrowers shall from time to time, execute such financing or continuation statements, documents, security agreements, reports, and other documents or deliver to Administrative Agent such instruments, certificates of title, mortgages, deeds of trust, or other documents as Administrative Agent at any time may reasonably request to evidence, perfect or otherwise implement the security for repayment of the Obligation provided for in the Loan Documents.

          9.5     Mortgages; Title Reports; Reports.

          (a)     Title Reports. Concurrently with any delivery to Senior Agent or any Senior Lender, but in any event within 60 days following the Closing Date, Borrower shall deliver or cause to be delivered to Administrative Agent copies of such title reports or title commitments that are required to be delivered pursuant to the Senior Loan Agreement so that Administrative Agent can determine that the Mortgages shall create second priority mortgage liens on the respective Mortgaged Property, free and clear of all mortgages, deeds of trust, and other Liens arising from Debt other than Liens in favor of Senior Lenders.

          (b)     Mortgages. Borrowers shall, concurrently with any delivery to Senior Agent or Senior Lenders, (and in any event within 60 days after the Closing Date) deliver to Administrative Agent fully executed Mortgages, in form and substance satisfactory to Administrative Agent.

          (c)     Other Real Property. If Borrowers intend to acquire any real property after the Closing Date (i) Borrowers shall comply with all provisions of this Agreement, (ii) Borrowers shall grant to Administrative Agent a first priority mortgage or deed of trust upon such real

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property subject only to Permitted Liens, and (iii) Borrowers shall obtain such lender's title insurance, ALTA surveys, environmental reports, structural and engineering inspection reports and other documents in form and substance satisfactory to Administrative Agent.

          9.6     Use of Proceeds and Margin Security. Borrowers shall use the proceeds of all Borrowings for proper business purposes (as described in the recitals to this Agreement) consistent with all applicable Laws. No portion of the proceeds of any Borrowing under any Tranche shall be used for the purpose of purchasing or carrying margin stock within the meaning of Regulation U, or in any manner that might cause the borrowing or the application of such proceeds to violate Regulations T, U, or X, or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Act.

          9.7     Licensure; Medicaid/Medicare Cost Reports. Borrowers will maintain all certificates of need, provider numbers, provider agreements, and Authorizations necessary to conduct their business as currently conducted. Borrowers will take any steps required to comply with any new or additional requirements that may be imposed on providers of medical products and Medical Services except where failure to maintain or comply could not reasonably be expected to result in a Material Adverse Event. All Medicaid, Medicare, and TRICARE cost reports required by Law and all claims for reimbursement will be properly filed.

          9.8     Termination/Default of Contracts. Borrowers shall notify Administrative Agent of any (a) default or event of default under, (b) termination of, (c) modification or amendment of, or (d) failure of any party to renew, any Material Contract as soon as reasonably possible (other than with respect to any notice of default, termination, or failure to renew that originates with Borrowers, which notice shall be sent concurrently to Administrative Agent). Notwithstanding anything in this Section 9.8 to the contrary, no provision in this Section 9.8 shall modify, reduce, or otherwise affect Administrative Agent's or any Holder's Rights hereunder or under any other Loan Document.

          9.9     Notice of Default and Other Matters. Promptly after any of the following, give notice of:

          (a)     any Default;

          (b)     any change in the business, assets, liabilities, financial condition, results of operations, or business prospects of Borrowers taken as a whole which has had or could reasonably, individually, or in the aggregate, be expected to result in a Material Adverse Event; and

          (c)     any material amendment of the articles of incorporation or by-laws of any Borrower or any of its Subsidiaries which could reasonably be expected to materially adversely affect the interests and Rights of Administrative Agent or Holders under this Agreement.

          9.10      Inactive Entities. Each Inactive Entity shall be merged into or consolidated with a Borrower (or with another Inactive Entity that is promptly merged into or consolidated with a Borrower) as promptly as practicable and in any event by January 31, 2003, or such later date to which Required Holders may consent in writing; provided, however, that any Inactive Entity that has Total Assets valued at greater than zero and less than $10,000 may be dissolved without being merged or consolidated into a Borrower; provided that prior notice of such dissolution is given to Administrative Agent. The Financial Statements relating to each Inactive Entity shall be maintained in accordance with GAAP, including the financial records relating to the merger or consolidation of such Inactive Entity as required hereunder. In the event that any Inactive Entity shall remain in existence after January 31, 2003 (or such later date to

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which Required Holders have consented in writing), (i) a Default pursuant to this Section 9.10 shall immediately occur without further action or notice by Administrative Agent or Holders unless by that date, Borrowers have caused such Inactive Entity to become a Borrower.

          9.11     Payment of the Obligation. Borrowers shall pay the Obligation in accordance with the terms and provisions of the Loan Documents. Each Borrower shall be jointly and severally liable for the Obligation.

SECTION 10.     FINANCIAL COVENANTS

          Each Borrower covenants and agrees that until indefeasible payment in full, in cash, of the Obligation, Borrowers shall comply with, and shall cause each of their Subsidiaries to comply with, the following financial covenants:

          10.1     Tangible Net Worth. The Borrowers, on a consolidated basis, shall maintain Tangible Net Worth of at least the amounts set forth below at the end of each quarter of a Fiscal Year set forth below.

First Quarter	Amount
March 31, 2002	As set forth on Closing Balance Sheet
June 30, 2002	Amount as of March 31, 2002, plus $500,000
September 30, 2002	Amount as of June 30, 2002, plus $3,300,000
December 31, 2002	Amount as of September 30, 2002, plus $5,000,000
Each Quarter Thereafter (e.g. March 31, 2003,         June 30, 2003 and so on)	Amount of as of the end of the immediately prior calendar quarter plus 50% of the Net Income earned for the calendar quarter at issue

          10.2     Minimum Operating Cash Flow. The Borrowers, on a consolidated basis, shall at all times maintain a minimum Operating Cash Flow of at least the amounts set forth below at the end of each quarter of a Fiscal Year set forth below.

Fiscal Quarter Ending	Amount
March 31, 2002	$48,000,000
June 30, 2002	$42,000,000
September 30, 2002	$36,800,000
December 31, 2002	$44,600,000
March 31, 2003	$45,200,000
June 30, 2003	$45,900,000
September 30, 2003	$46,600,000
December 31, 2003	$47,300,000
March 31, 2004	$48,500,000
June 30, 2004	$49,800,000
September 30, 2004	$51,000,000
December 31, 2004	$52,200,000

          10.3     Capital Expenditure Limits. The aggregate amount of all Capital Expenditures, Capital Leases with respect to fixed assets of Borrowers and their Subsidiaries (which shall be considered to be expended in full on the date such Capital Lease is entered into) and other contracts with respect to fixed assets initially capitalized on the Borrowers' or any of their Subsidiaries' balance sheet prepared in

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accordance with GAAP (which shall be considered to be expended in full on the date such contract is entered into) (excluding, in each case, expenditures for trade-ins and replacement of assets to the extent funded with casualty insurance proceeds) will not exceed the amount set forth below for each period set forth below.

Fiscal Quarter Ending	Amount
March 31, 2002	$11,600,000
June 30, 2002	$11,600,000
September 30, 2002	$11,100,000
December 31, 2002	$10,900,000
March 31, 2003	$12,300,000
June 30, 2003	$12,300,000
September 30, 2003	$12,300,000
December 31, 2003	$12,300,000
March 31, 2004	$13,000,000
June 30, 2004	$13,000,000
September 30, 2004	$13,000,000
December 31, 2004	$13,000,000

          10.4     Fixed Charge Coverage. Borrowers, on a consolidated basis, shall not permit its Fixed Charge Coverage for the rolling twelve (12) month period ending on the last day of each fiscal quarter set forth below to be less than the ratio set forth below for such periods.

Fiscal Quarter Ending	Ratio for Rolling Twelve Months
March 31, 2002	2.45
June 30, 2002	1.70
September 30, 2002	1.25
December 31, 2002	1.15
March 31, 2003	1.15
June 30, 2003	1.15
September 30, 2003	1.15
December 31, 2003	1.15
March 31, 2004	1.15
June 30, 2004	1.15
September 30, 2004	1.15
December 31, 2004	1.15

          10.5     Debt to EBITDA Ratio Borrowers, on a consolidated basis, shall not permit the ratio of (a) Debt of the Borrowers, on a consolidated basis, to (b) EBITDA of the Borrowers, on a consolidated basis, each calculated as of the last day of each fiscal quarter set forth below to be greater than the ratio set forth below for such periods:

Fiscal Quarter Ending	Ratio for Rolling Twelve Months	Ratio for Rolling Twelve Months If SumitomoTransaction Is Not Completed
March 31, 2002	4.50	4.04

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Fiscal Quarter Ending	Ratio for Rolling Twelve Months	Ratio for Rolling Twelve Months If SumitomoTransaction Is Not Completed
June 30, 2002	4.15	3.69
September 30, 2002	3.75	3.32
December 31, 2002	3.00	2.63
March 31, 2003	2.81	2.46
June 30, 2003	2.63	2.29
September 30, 2003	2.44	2.12
December 31, 2003	2.25	1.95
March 31, 2004	2.25	1.95
June 30, 2004	2.25	1.95
September 30, 2004	2.25	1.95
December 31, 2004	2.25	1.95

          10.6     Census. The Borrowers, on a consolidated basis, shall not allow the Patient census for any period of four (4) consecutive weeks for the skilled nursing and hospital Facilities, when taken as a whole, to fall below eighty-seven percent (87%) of the number of licensed available beds in such Facilities taken as a whole (computed in a manner consistent with reporting practices existing on the date of this Agreement); provided that during the period from December 1^st to January 1^st of each year, the Borrowers shall not allow such census to fall below eighty-six percent (86%).

SECTION 11.     NEGATIVE COVENANTS

          Each Borrower covenants and agrees that until indefeasible payment in full, in cash, of the Obligation, Borrowers shall not and will not permit any of their Subsidiaries to:

          11.1     Debt. Directly or indirectly create, incur, assume, guaranty, or otherwise become or remain directly or indirectly liable, on a fixed or contingent basis, with respect to any Debt except: (a) the Obligation; (b) intercompany Debt among Borrowers, incurred in the ordinary course of business; (c) Debt owing by SHS to the Company or another Borrower in an aggregate principal amount not to exceed the sum of (i) the principal balance of such Debt as of the Closing Date and (ii) $1,500,000; (d) Debt incurred after the Closing Date in connection with Capital Leases or purchases secured by purchase money Liens, in both cases together not to exceed $5,000,000 in outstanding principal amount in the aggregate; (e) Debt under the Senior Loan Documents, but only to the extent permitted under the terms of the Intercreditor Agreement; (f) Debt existing on the Closing Date and identified on Schedule 11.1; (g) Debt incurred in connection with refinancing of those certain mortgages existing on the date hereof that encumber certain real property owned by the Borrowers on the date hereof, as set forth in Schedule 11.1, which Debt shall not exceed the principal balance secured by such mortgages on the Closing Date; (h) Debt incurred in connection with the Sumitomo Transaction and the SunTrust Transaction; and (i) unsecured Indebtedness not to exceed $2,000,000 in outstanding principal amount in the aggregate. No Borrower will, and will not permit any of its Subsidiaries to, incur any Liabilities except Debt permitted herein and trade payables and normal accruals in the ordinary course of business not yet due and payable or with respect to which any Borrower or any of its Subsidiaries is contesting in good faith the amount or validity thereof by appropriate proceedings and then only to the extent that such Borrower or any of its Subsidiaries has established adequate reserves therefor under GAAP.

          11.2     Guaranties. Except for endorsements of instruments or items of payment for collection in the ordinary course of business, guaranty, endorse, or otherwise in any way become or be responsible for

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any obligations of any other Person (unless such obligation constitutes Debt permitted by Section 11.1), whether directly or indirectly by agreement to purchase the Debt of any other Person or through the purchase of goods, supplies, or services, or maintenance of working capital or other balance sheet covenants or conditions, or by way of stock purchase, capital contribution, advance, or loan for the purpose of paying or discharging any Debt or obligation of such other Person or otherwise; provided, however, that any Borrower may guarantee any obligation of any other Borrower so long as such obligation is otherwise not prohibited under this Agreement.

          11.3     Transfers, Liens, and Related Matters.

          (a)     Transfers. Sell, assign (by operation of Law or otherwise), or otherwise dispose of, or grant any option (other than the Partial Purchase Option contemplated in the Intercreditor Agreement) with respect to any of the Collateral, except that (i) Borrowers may permit the Inactive Entities to sell or transfer their respective assets in connection with any dissolution or liquidation permitted under Section 9.10, and (ii) Borrowers may (x) sell inventory to a buyer in the ordinary course of business and license a general intangible to a licensee in the ordinary course of business; (y) other than as set forth in clause (iii) below, make Asset Dispositions (other than any Asset Dispositions of all or any portion of the SunScript Stock or the SunScript Assets, which Asset Dispositions shall be prohibited without the prior written consent of the Holders), if all of the following conditions are met: (A) if the market value of assets sold or otherwise disposed of in any single transaction or series of related transactions does not exceed $2,000,000 or, if such market value exceeds $2,000,000, (1) Borrowers shall have complied with Section 3.3(c), and (2) at least 90% of the consideration received is in the form of (x) cash, (y) an assumption of then-existing Debt, or (z) a combination of cash and assumption of then-existing Debt; (B) the consideration received is at least equal to the fair market value of such assets; (C) after giving effect to the sale or other disposition of the assets included within the Asset Disposition and the repayment of the Obligation with the proceeds thereof, Borrowers are in compliance on a pro forma basis with the covenants set forth in Section 10 recomputed for the most recently ended calendar quarter for which information is available as if such Asset Disposition occurred at the beginning of such calendar quarter and are in compliance with all other terms and conditions contained in this Agreement, as determined by Administrative Agent in its reasonable discretion upon receipt of information it deems adequate for such purposes; and (D) no Default or Potential Default shall then exist or result from such sale or other disposition; (2) enter into sale-leaseback transactions expressly permitted by Section 11.16; and (iii) if no Default shall then exist or result from such sale or disposition, consummate the Permitted Divestitures, the Campus Transaction, and/or the THCI Turnover.

          (b)     Liens. Except for Permitted Liens and Liens incurred in connection with Debt permitted under clauses (f), (g), and (h) of Section 11.1 (provided that such Liens shall not encumber accounts or inventory unless the grantee in respect of such Liens have entered into a subordination agreement in form and substance satisfactory to Administrative Agent), directly or indirectly create, incur, assume, or permit to exist any Lien on or with respect to any of the Collateral or any proceeds, income, or profits therefrom.

          (c)     No Negative Pledges. Except for the Senior Loan Agreement and agreements in connection with Debt permitted under clauses (f), (g), and (h) of Section 11.1 (provided that such agreements shall not restrict encumbrances on accounts or inventory unless the parties benefiting from such agreements have entered into subordination agreements or other agreements in form and substance satisfactory to Administrative Agent), enter into or assume any agreement (other than the Loan Documents and the Senior Loan Documents) prohibiting the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired

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except if such agreement is entered into or assumed in connection with Capital Leases, or purchases secured by purchase money Liens, in either case permitted by Section 11.1.

          (d)     No Restrictions on Borrower Distributions to Borrowers. Except as provided herein, in the Senior Loan Documents, directly or indirectly create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Borrower to: (i) pay dividends or make any other distribution on any of such Borrower's capital stock owned by any Borrower; (ii) pay any Debt owed to any Borrower; (iii) make loans or advances to any Borrower; or (iv) transfer any of its property or assets to any Borrower, other than property or assets subject to Capital Leases or purchase money Liens permitted by the Agreement.

          11.4     Investments and Loans. Make or permit to exist investments in, loans to, or distributions to any other Person, except: (a) Cash Equivalents held by a Borrower; (b) loans and advances to employees of Borrowers for moving, entertainment, travel, and other similar expenses in the ordinary course of business in an aggregate outstanding amount not in excess of $250,000 at any time; (c) loans in respect of intercompany Debt permitted in Section 11.1; (d) investments by any Borrower in the capital stock of any of its Subsidiaries that is a Borrower on the Closing Date or in any Person that has become a Subsidiary and a Borrower after the Closing Date in accordance with the terms of Section 11.11 or otherwise with the prior written consent of Required Holders; (e) investments after the Closing Date by the Company or any other Borrower in SHS in an aggregate amount not to exceed $1,500,000; and (f) the investments disclosed on Schedule 11.4 existing on the Closing Date. Notwithstanding any contrary provision contained in this Agreement (including, without limitation, the provisions of Section 11.2), Borrowers shall not permit any Inactive Entity to acquire any assets, incur any Debt or Liabilities of any kind, conduct any business, perform any operations (other than those specifically required for liquidation or dissolution), receive any distributions from any Borrower or from any Subsidiary of any Borrower, make any investments or issue any stock or other equity interests.

          11.5     Restricted Junior Payments. Directly or indirectly declare, order, pay, make or set apart any sum for any Restricted Junior Payment.

          11.6     Restriction on Fundamental Changes. (a) Enter into any transaction of merger or consolidation; (b) liquidate, wind-up, or dissolve itself (or suffer any liquidation or dissolution); (c) convey, sell, lease, sublease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, or the capital stock of any of its Subsidiaries, whether now owned or hereafter acquired; or (d) acquire by purchase or otherwise all or any substantial part of the business or assets of, or stock or other beneficial ownership of, any Person; provided, however, that notwithstanding anything in the foregoing to the contrary, so long as no Default shall have occurred and be continuing (or otherwise with the prior written consent of Administrative Agent (which consent shall not be unreasonably withheld)), the following shall be permitted under this Agreement upon notice to the Administrative Agent: (x) the merger, consolidation, or dissolution of any Inactive Entity in accordance with Section 9.10 and (y) the mergers and consolidations of Borrowers with other Borrowers.

          11.7     Changes Relating to Senior Loan Documents. Without the prior written consent of Required Holders, change or amend the terms of the Senior Loan Documents in a manner prohibited by the Intercreditor Agreement.

          11.8     Transactions with Affiliates. Directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, or exchange of property or the rendering of any service) with any Affiliate or with any officer, director, or employee of any Borrower, except for transactions in the

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ordinary course of business and upon fair and reasonable terms which are fully disclosed to Administrative Agent and which are no less favorable to Borrowers than they would obtain in a comparable arm's length transaction with an unaffiliated Person.

          11.9     Conduct of Business. From and after the Closing Date, engage in any business other than businesses of the type engaged in by Borrowers or their Subsidiaries on the Closing Date.

          11.10     Tax Consolidations. File or consent to the filing of any consolidated income tax return with any Person other than any of its Subsidiaries.

          11.11     Subsidiaries. Other than the Subsidiaries set forth on Schedule 11.11, establish, create, or acquire, subject to Section 11.4, any new Subsidiaries without the written consent of Required Holders. Notwithstanding anything in this Section 11.11 to the contrary, Borrowers may, without the consent of Administrative Agent, establish any new domestic Subsidiary that, immediately upon its establishment, becomes a Borrower hereunder and thus becomes obligated in the same manner and to the same extent of any other Borrower under this Agreement and the other Loan Documents. Borrowers shall cause each new Subsidiary to execute and deliver any and all agreements or modifications, revisions, or amendments to the Loan Documents necessary to evidence the addition of such new Subsidiary as a Borrower.

          11.12     Fiscal Year; Tax Designation. Change its Fiscal Year; or elect to be designated as an entity other than a C corporation as defined in the Code.

          11.13     Use of Holders' Name. Borrowers will not and will not permit its Affiliates to, in the future, issue any press release or other public disclosure using the name of any Holder or any of their respective Affiliates or referring to this Agreement or the other Loan Documents without at least two Business Days prior written notice to Holders and without the prior written consent of Holders unless (and only to the extent that) such Borrower or Affiliate are required to so disclose under Law and then, in any event, such Borrower or Affiliate will consult with Holder before issuing such press release or other public disclosure.

          11.14     IRS Form 8821. Revoke IRS Form 8821 designating Administrative Agent as Borrowers' appointee to receive directly from the IRS, on an on-going basis, certain tax information, notices, and other written communication or fail to take actions necessary to renew such Form 8821 prior to its expiration for all time periods prior to the Termination Date.

          11.15     Certificates of Need. Except in the ordinary course of its business, amend, alter, suspend, terminate, or make provisional in any material way, any certificate of need, provider number, or provider agreement without the prior written consent of Required Holders, which consent shall not be unreasonably withheld.

          11.16     Sale Lease-back Transactions. Directly or indirectly, enter into any arrangement whereby any Borrower sells or transfers all or any of its assets and, within one (1) year thereafter, rents or leases such assets so sold or transferred, without the prior consent of Required Holders; provided that Borrowers may enter into any such arrangements so long as the aggregate fair market value of all property subject to such arrangements does not exceed $5,000,000 (based on the fair market value at the time of the transaction). Notwithstanding anything in the foregoing to the contrary, Borrowers may enter into sale and lease back transactions (i) in connection with the THCI Turnover and (ii) in respect of the Campus Transaction.

          11.17     Plan and Confirmation Order. Without the prior written consent of Required Holders, Borrowers will not (i) make any material change to the Plan, (ii) seek to revise or amend the Confirmation

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Order, or (iii) fail to fully implement or fail to perform any duty or other obligation under the Plan or the Confirmation Order, including, but not limited to, making any payment(s) to creditor(s) when due under the terms of the Plan and the Confirmation Order, including, but not limited to, any agreement(s) or document(s) approved or incorporated therein or executed pursuant thereto.

SECTION 12.     DEFAULT, RIGHTS, AND REMEDIES

          12.1     Default. "Default" shall mean the occurrence or existence of any one or more of the following (for each section a different grace or cure period may be specified, if no grace or cure period is specified, such occurrence or existence constitutes an immediate Default):

          (a)     Payment. Failure of any Borrower to comply with Section 9.11 or any other failure to make payment of any of the Obligation when due and in the case of interest, such failure shall not be cured within five days of the applicable due date; or

          (b)     Default in Other Agreements. (i) Failure of any Borrower to pay when due any principal or interest on any Debt (other than the Obligation) or (ii) breach or default of any Borrower with respect to any Debt (other than the Obligation), in each case, only if such failure to pay, breach, or default entitles the holder to cause such Debt having an individual principal amount in excess of $1,000,000 or having an aggregate principal amount in excess of $3,000,000 to become or be declared due prior to its stated maturity; or

          (c)     Breach of Certain Provisions. Failure of any Borrower to perform or comply with any term or condition contained in Sections 9.1, 9.4, 9.10, 10, and 11; or

          (d)     Breach of Warranty. Any representation, warranty, certification, or other statement made by any Borrower in any Loan Document or in any statement or certificate at any time given by such Person in writing pursuant to or in connection with any Loan Document is false in any material respect on the date made; or

          (e)     Other Defaults Under Loan Documents. Any Borrower defaults in the performance of or compliance with any term contained in this Agreement other than those otherwise set forth in this Section 12.1 (a, or defaults in the performance of or compliance with any term contained in the other Loan Documents and such default is not remedied or waived within 15 days after notice from Administrative Agent to Borrowers of such default; provided that if such default is not capable of being cured within such 15 day period and Borrowers have and continue to diligently, continuously and in good faith pursue a cure, Borrowers shall have an additional period of 15 days to cure such default; or

          (f)     Change in Control. (i) Any Person or group (as defined in the Securities Exchange Act of 1934, as amended), other than the holders of the voting stock of the Company as of the Closing Date, shall acquire for the first time direct or indirect ownership (constructive or otherwise), or the direct or indirect power to vote more than 40% of the outstanding voting stock of the Company, or (ii) individuals who, as of the Closing Date, were members of the board of officers or directors of the Company (together with any new director whose election by the Company's board of directors or whose nomination for election by the Company's shareholders were approved by a vote of at least a majority of the directors then in office who themselves were either directors as of the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute at least a majority of the members of the board of directors of the Company then in office; or

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          (g)     Involuntary Bankruptcy; Appointment of Receiver, etc.(i) A court enters a decree or order for relief with respect to the Company or any of its Subsidiaries in an involuntary case under any Debtor Relief Law now or hereafter in effect, which decree or order is not stayed or other similar relief is not granted under any applicable Law; or (ii) the continuance of any of the following events for 60 days unless dismissed, bonded or discharged: (A) an involuntary case is commenced against the Company or any of its Subsidiaries, under any Debtor Relief Law now or hereafter in effect; or (B) a receiver, liquidator, sequestrator, trustee, custodian, or other fiduciary having similar powers over the Company or any of its Subsidiaries, or over all or a substantial part of their respective property, is appointed; or

          (h)     Voluntary Bankruptcy; Appointment of Receiver, etc.(i) The Company or any of its Subsidiaries commences a voluntary case under any Debtor Relief Law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case or to the conversion of an involuntary case to a voluntary case under any such Law or consents to the appointment of or taking possession by a receiver, trustee, or other custodian for all or a substantial part of its property; or (ii) the Company or any of its Subsidiaries makes any assignment for the benefit of creditors; or (iii) the board of directors of the Company or any of its Subsidiaries adopts any resolution or otherwise authorizes action to approve any of the actions referred to in this Section 12.1(h); or

          (i)     Liens. Any Lien, levy, or assessment is filed or recorded with respect to or otherwise imposed upon all or any part of the Collateral or the assets of the Company or any of its Subsidiaries by the United States or any department or instrumentality thereof or by any other Governmental Authority (other than Permitted Liens) and such Lien, levy, or assessment is not stayed, vacated, paid, or discharged within ten days; or

          (j)     Judgment and Attachments. Any money judgment, writ or warrant of attachment, or similar process involving (i) an amount in any individual case in excess of $500,000 or (ii) an amount in the aggregate at any time in excess of $1,000,000 (in either case not adequately covered by insurance as to which the insurance company has acknowledged coverage) is entered or filed against the Company or any of its Subsidiaries or any of their respective assets and remains undischarged, unvacated, unbonded, or unstayed for a period of 45 consecutive days; or

          (k)     Dissolution. Any order, judgment, or decree is entered against the Company or any of its Subsidiaries decreeing the dissolution or split up of the Company or such Subsidiary, and such order remains undischarged or unstayed for a period in excess of 20 consecutive days, but in any event not later than five days prior to the date of any proposed dissolution or split up; provided that in the case of a dissolution or split up of a Subsidiary that is not a Borrower, such dissolution or split up could reasonably be expected to result in a Material Adverse Event; or

          (l)     Solvency. The Borrowers, on a consolidated basis, cease to be Solvent or any Borrower admits in writing its present or prospective inability to pay its debts as they become due; or

          (m)     Injunction. The Company or any of its Subsidiaries is enjoined, restrained, or in any way prevented by the order of Governmental Authority from conducting all or any material part of its business and such order continues for 30 consecutive days or more; or

          (n)     Invalidity of Loan Documents. Any of the Loan Documents for any reason, other than a partial or full release in accordance with the terms thereof, ceases to be in full force and

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effect or is declared to be null and void, or any Borrower denies that it has any further liability under any Loan Documents to which it is party, or gives notice to such effect (in each case prior to such respective partial or full release); or

          (o)     Failure of Security. Administrative Agent, on behalf of itself and Holders, does not have or ceases to have a valid and perfected security interest in the Collateral (subject only to Permitted Liens), in each case, for any reason other than the failure of Administrative Agent or any Holder to take any action within its control; or

          (p)     Damage, Strike, Casualty. Any damage to, or loss, theft, or destruction of, any Collateral, whether or not insured, or any strike, lockout, labor dispute, embargo, condemnation, act of God or public enemy, or other casualty which causes, for more than ten consecutive days, the cessation or substantial curtailment of revenue producing activities at any Facility of any Borrower or any of its Subsidiaries, if any such event or circumstance could reasonably be expected to result in a Material Adverse Event; or

          (q)     Licenses and Permits. The loss, suspension or revocation of, or failure to renew, any license, permit or other governmental Authorization now held or hereafter acquired by the Borrowers that is required for either the Borrowers to conduct their business as presently conducted or for the Borrowers to receive reimbursements, which loss, suspension, revocation, or failure to renew could reasonably be expected to result in a Material Adverse Effect; or

          (r)     Forfeiture. There is filed against any Borrower any civil or criminal action, suit, or proceeding under any federal or state racketeering statute (including, without limitation, the Racketeer Influenced and Corrupt Organization Act of 1970), which action, suit or proceeding (i) is not dismissed within 120 days; and (ii) could reasonably be expected to result in the confiscation or forfeiture of any material portion of the Collateral; or

          (s)     Default Under Plan and/or Confirmation Order. The default by Borrowers (or any of them) under any of Borrowers' duties under the Plan or the Confirmation Order, including, but not limited to the failure of Borrowers (or any of them) to make any payment(s) to creditor(s) when due under the terms of the Plan or the Confirmation Order, including, but not limited to, any agreement(s) or document(s) approved or incorporated therein or executed pursuant thereto and subject to any applicable grace periods.

          (t)     Alteration Or Revocation Of Plan Or Confirmation Order. Any change to the Plan or Confirmation Order requested by Borrowers without the prior written consent of Required Holders and any change to, or the revocation or change of the terms of the Plan or the Confirmation Order approved by the Bankruptcy Court on any basis, including, but not limited to orders of the Bankruptcy Court entered under Bankruptcy Code Section1127(b), Bankruptcy Code Section1144, and Federal Rule of Civil Procedure 60, as incorporated by Bankruptcy Rule 9024 in each case which could reasonably be expected to result in a Material Adverse Event; or

          (u)     Senior Loan Documents. The occurrence of an "Event of Default" by any Borrower under the Senior Loan Agreement (or any other Senior Loan Documents) which event of default gives the holders of the obligations under such Term Loan Documents the right to accelerate the Debt thereunder prior to the stated maturity thereof; or

          (v)     Material Contracts. The termination of, expiration (without renewal or replacement on then-market terms) of, or occurrence of an event of default by any Borrower under any

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Material Contract that could reasonably be expected to result in a Material Adverse Event.

          12.2     Remedies Upon Default.

          (a)     Debtor Relief. If a Default exists under Section 12.1(g) or 12.1(h), the commitment to extend credit hereunder shall automatically terminate and the entire unpaid balance of the Obligation shall automatically become due and payable without any action or notice of any kind whatsoever.

          (b)     Other Defaults. If any Default exists, Administrative Agent may (and, subject to the terms of Section 13, shall upon the request of Required Holders) or Required Holders may, do any one or more of the following: (i) if the maturity of the Obligation has not already been accelerated under Section 12.2(a), declare the entire unpaid balance of the Obligation, or any part thereof, immediately due and payable, whereupon it shall be due and payable; (ii) terminate the commitments of Holders to extend credit hereunder; (iii) reduce any claim to judgment; (iv) to the extent permitted by Law, exercise (or request each Holder to, and each Holder shall be entitled to, exercise) the Rights of offset or banker's Lien against the interest of each Borrower in and to every account and other property of any Borrower which are in the possession of Administrative Agent or any Holder to the extent of the full amount of the Obligation (to the extent permitted by Law, each Borrower being deemed directly obligated to each Holder in the full amount of the Obligation for such purposes); and (v) exercise any and all other legal or equitable Rights afforded by the Loan Documents, the Laws of the State of New York, or any other applicable jurisdiction as Administrative Agent or Required Holders (as the case may be) shall deem appropriate, or otherwise, including, but not limited to, the Right to bring suit or other proceedings before any Governmental Authority either for specific performance of any covenant or condition contained in any of the Loan Documents or in aid of the exercise of any Right granted to Administrative Agent or any Holder in any of the Loan Documents.

          12.3     Borrower Waivers. To the extent permitted by Law, the Borrowers hereby waive presentment and demand for payment, protest, notice of intention to accelerate, notice of acceleration, and notice of protest and nonpayment, and agree that their respective liability with respect to the Obligation (or any part thereof) shall not be affected by any renewal or extension in the time of payment of the Obligation (or any part thereof), by any indulgence, or by any release or change in any security for the payment of the Obligation (or any part thereof).

          12.4     Performance by Administrative Agent. If any covenant, duty, or agreement of any Borrower is not performed in accordance with the terms of the Loan Documents, after the occurrence and during the continuance of a Default, Administrative Agent may, at its option (but subject to the approval of Required Holders), perform or attempt to perform such covenant, duty, or agreement on behalf of such Borrower. In such event, any amount expended by Administrative Agent in such performance or attempted performance shall be payable by the Borrowers, jointly and severally, to Administrative Agent on demand, shall become part of the Obligation, and shall bear interest at the Default Rate from the date of such expenditure by Administrative Agent until paid. Notwithstanding the foregoing, it is expressly understood that Administrative Agent does not assume, and shall never have, except by its express written consent, any liability or responsibility for the performance of any covenant, duty, or agreement of any Borrower.

          12.5     Delegation of Duties; Reliance. Administrative Agent may perform any of its duties or exercise any of its Rights under the Loan Documents by or through its Representatives. Administrative Agent and its Representatives shall (a) be entitled to rely upon (and shall be protected in relying upon)

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any writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telecopy, telegram, telex or teletype message, statement, order, or other documents or conversation believed by it or them to be genuine and correct and to have been signed or made by the proper Person and, with respect to legal matters, upon opinion of counsel selected by Administrative Agent, (b) be entitled to deem and treat each Holder as the owner and holder of the Obligation owed to such Holder for all purposes until, subject to Section 14.12, written notice of the assignment or transfer thereof shall have been given to and received by Administrative Agent (and any request, authorization, consent, or approval of any Holder shall be conclusive and binding on each subsequent holder, assignee, or transferee of the Obligation owed to such Holder or portion thereof until such notice is given and received), (c) not be deemed to have notice of the occurrence of a Default unless a responsible officer of Administrative Agent, who handles matters associated with the Loan Documents and transactions thereunder, has received written notice from a Holder or any Borrower and stating that such notice is a "Notice of Default," and (d) be entitled to consult with legal counsel (including counsel for any Borrower), independent accountants, and other experts selected by Administrative Agent and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants, or experts.

          12.6     Not in Control. Nothing in any Loan Document shall, or shall be deemed to (a) give Administrative Agent or any Holder the Right to exercise control over the assets (including real property), affairs, or management of any Borrower, (b) preclude or interfere with compliance by any Borrower thereof with any Law, or (c) require any act or omission by any Borrower thereof that may be harmful to Persons or property. Any "Material Adverse Event" or other materiality qualifier in any representation, warranty, covenant, or other provision of any Loan Document is included for credit documentation purposes only and shall not, and shall not be deemed to, mean that Administrative Agent or any Holder acquiesces in any non-compliance by any Borrower with any Law or document, or that Administrative Agent or any Holder does not expect the Borrowers to promptly, diligently, and continuously carry out all appropriate removal, remediation, and termination activities required or appropriate in accordance with all Environmental Laws. The Administrative Agent and the Holders have no fiduciary relationship with or fiduciary duty to any Borrower arising out of or in connection with the Loan Documents, and the relationship between the Administrative Agent and the Holders, on the one hand, and Borrowers, on the other hand, in connection with the Loan Documents is solely that of debtor and creditor. The power of the Administrative Agent and Holders under the Loan Documents is limited to the Rights provided in the Loan Documents, which Rights exist solely to assure payment and performance of the Obligation and may be exercised in a manner calculated by the Administrative Agent and Holders in their respective good faith business judgment.

          12.7     Course of Dealing. The acceptance by Administrative Agent or Holders at any time and from time to time of partial payment on the Obligation shall not be deemed to be a waiver of any Default then existing. No waiver by Administrative Agent, Required Holders, or Holders of any Default shall be deemed to be a waiver of any other then-existing or subsequent Default. No delay or omission by Administrative Agent, Required Holders, or Holders in exercising any Right under the Loan Documents shall impair such Right or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such Right preclude other or further exercise thereof, or the exercise of any other Right under the Loan Documents or otherwise.

          12.8     Cumulative Rights. All Rights available to Administrative Agent and Holders under the Loan Documents are cumulative of and in addition to all other Rights granted to Administrative Agent and Holders at law or in equity, whether or not the Obligation is due and payable and whether or not Administrative Agent or Holders have instituted any suit for collection, foreclosure, or other action in connection with the Loan Documents.

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          12.9     Application of Proceeds. Any and all proceeds ever received by Administrative Agent or Holders from the exercise of any Rights pertaining to the Obligation shall be applied to the Obligation in the order and manner set forth in Section 3.12.

          12.10     Certain Proceedings. Each Borrower will promptly execute and deliver, or cause the execution and delivery of, all applications, certificates, instruments, registration statements, and all other documents and papers Administrative Agent or Holders may reasonably request in connection with the obtaining of any consent, approval, registration, qualification, permit, license, or Authorization of any Governmental Authority or other Person necessary or appropriate for the effective exercise of any Rights under the Loan Documents. Because the Borrowers agree that Administrative Agent's and Holders' remedies at Law for failure of the Borrowers to comply with the provisions of this Section would be inadequate and that such failure would not be adequately compensable in damages, the Borrowers agree that the covenants of this Section may be specifically enforced.

          12.11     Expenditures by Holders. Borrowers shall promptly pay within fifteen (15) Business Days after request therefor (a) all reasonable costs, fees, and expenses paid or incurred by Administrative Agent and Highland Capital Management, L.P., incident to any Loan Document (including, but not limited to, the reasonable fees and expenses of counsel to Administrative Agent and Highland Capital Management, L.P. in connection with the negotiation, preparation, delivery, execution, coordination, and administration of the Loan Documents and any related amendment, waiver, or consent) and (b) all reasonable costs and expenses of Holders and Administrative Agent incurred by Administrative Agent or any Holder in connection with the enforcement of the obligations of any Borrower arising under the Loan Documents (including, without limitation, costs and expenses incurred in connection with any workout or bankruptcy) or the exercise of any Rights arising under the Loan Documents (including, but not limited to, reasonable attorneys' fees including allocated cost of internal counsel, court costs, and other costs of collection), all of which shall be a part of the Obligation and shall bear interest at the Default Rate from the date due until the date repaid.

          12.12     Indemnification. Each Borrower agrees, jointly and severally, to indemnify and hold harmless Administrative Agent, and each Holder, and each of their respective affiliates and their respective officers, directors, employees, agents, attorneys, and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities (including, without limitation, any Environmental Liabilities), costs, and expenses (including, without limitation, reasonable attorneys' fees) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation, or proceeding or preparation of defense in connection therewith) the Loan Documents, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Borrowings (including any of the foregoing arising from the negligence of the Indemnified Party), except to the extent such claim, damage, loss, liability, cost, or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation, or other proceeding to which the indemnity in this Section 11.11 applies, such indemnity shall be effective whether or not such investigation, litigation, or proceeding is brought by any Borrower, their directors, shareholders, or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. Each Borrower agrees not to assert any claim against any indemnified party on any theory of liability, for special, indirect, consequential, or punitive damages arising

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out of or otherwise relating to the Loan Documents, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Borrowings. Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers contained in this Section 11.11 shall survive the payment in full of the Borrowings and all other amounts payable under the Loan Documents.

SECTION 13     AGREEMENT AMONG HOLDERS.

          13.1     Administrative Agent

          (a)     Appointment of Administrative Agent. Each Holder hereby appoints U.S. Bank National Association (and U.S. Bank National Association hereby accepts such appointment) as its nominee and agent, in its name and on its behalf: (i) to act as nominee for and on behalf of such Holder in and under all Loan Documents; (ii) to arrange the means whereby the funds of Holders are to be made available to Borrowers under the Loan Documents; (iii) to take such action as may be requested by any Holder under the Loan Documents (when such Holder is entitled to make such request under the Loan Documents and after such requesting Holder has obtained the concurrence of such other Holders as may be required under the Loan Documents); (iv) to receive all documents and items to be furnished to Holders under the Loan Documents; (v) to timely distribute, and Administrative Agent agrees to so distribute, to each Holder all material information, requests, documents, and items received from Borrowers under the Loan Documents; (vi) to promptly distribute to each Holder its ratable part of each payment or prepayment (whether voluntary, as proceeds of collateral upon or after foreclosure, as proceeds of insurance thereon, or otherwise) in accordance with the terms of the Loan Documents; and (vii) to deliver to the appropriate Persons requests, demands, approvals, and consents received from Holders; provided, however, Administrative Agent shall not be required to take any action which exposes Administrative Agent to personal liability or which is contrary to the Loan Documents or applicable Law.

          (b)     Resignation or Removal of Administrative Agent. Successor Administrative Agent. Administrative Agent may resign at any time with or without cause as Administrative Agent under the Loan Documents by giving written notice thereof to Holders and may be removed as Administrative Agent under the Loan Documents at any time with cause by Required Holders. Should the initial or any successor Administrative Agent ever cease to be a party hereto or should the initial or any successor Administrative Agent ever resign or be removed as Administrative Agent, then Required Holders shall elect the successor Administrative Agent from among the Holders (other than the resigning Administrative Agent). If no successor Administrative Agent shall have been so appointed by Required Holders, within 30 days after the retiring Administrative Agent's giving of notice of resignation or Required Holders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of Holders, appoint a successor Administrative Agent. Upon the acceptance of any appointment as Administrative Agent under the Loan Documents by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the Rights of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations of Administrative Agent under the Loan Documents, and each Holder shall execute such documents as any Holder may reasonably request to reflect such change in and under the Loan Documents. After any retiring Administrative Agent's resignation or removal as Administrative Agent under the Loan Documents, the provisions of this Section 13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under the Loan Documents.

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          (c)     Administrative Agent as a Holder. Non-Fiduciary. Administrative Agent if also a Holder, in such capacity as a Holder, shall have the same Rights under the Loan Documents as any other Holder and may exercise the same as though it were not acting as Administrative Agent; the term "Holder" shall, unless the context otherwise indicates, include Administrative Agent; and any resignation, or removal of Administrative Agent hereunder shall not impair or otherwise affect any Rights which it has or may have in its capacity as an individual Holder. Each Holder and Borrowers agree that Administrative Agent is not a fiduciary for Holders or for Borrowers but simply is acting in the capacity described herein to alleviate administrative burdens for both Borrowers and Holders, that Administrative Agent has no duties or responsibilities to Holders or Borrowers except those expressly set forth herein, and that Administrative Agent in its capacity as a Holder has all Rights of any other Holder.

          (d)     Other Activities of Administrative Agent. Administrative Agent and its Affiliates may now or hereafter be engaged in one or more loan, letter of credit, leasing, or other financing transactions with Borrowers, act as trustee or depositary for Borrowers, or otherwise be engaged in other transactions with Borrowers (collectively, the "other activities") not the subject of the Loan Documents. Without limiting the Rights of Holders specifically set forth in the Loan Documents, Administrative Agent and its Affiliates shall not be responsible to account to Holders for such other activities, and no Holder shall have any interest in any other activities, any present or future guaranties by or for the account of Borrowers which are not contemplated or included in the Loan Documents, any present or future offset exercised by Administrative Agent and its Affiliates in respect of such other activities, any present or future property taken as security for any such other activities, or any property now or hereafter in the possession or control of Administrative Agent or its Affiliates which may be or become security for the obligations of Borrowers arising under the Loan Documents by reason of the general description of indebtedness secured or of property contained in any other agreements, documents, or instruments related to any such other activities; provided that, if any payments in respect of such guaranties or such property or the proceeds thereof shall be applied to reduction of the Obligation, then each Holder shall be entitled to share in such application ratably.

          13.2     Expenses. Upon demand by Administrative Agent, each Holder shall pay its ratable portion (determined as of the date reimbursement is sought hereunder) of any reasonable expenses (including, without limitation, court costs, reasonable attorneys' fees, and other costs of collection) incurred by Administrative Agent in connection with any of the Loan Documents if and to the extent such Administrative Agent does not receive reimbursement therefor from other sources within 60 days after incurred; provided that, each Holder shall be entitled to receive its ratable portion of any reimbursement for such expenses, or part thereof, which Administrative Agent subsequently receives from such other sources.

          13.3     Proportionate Absorption of Losses. Except as otherwise provided in the Loan Documents, nothing in the Loan Documents shall be deemed to give any Holder any advantage over any other Holder insofar as the Obligation is concerned, or to relieve any Holder from absorbing its ratable portion of any losses sustained with respect to the Obligation (except to the extent such losses result from unilateral actions or inactions of any Holder that are not made in accordance with the terms and provisions of the Loan Documents).

          13.4     [Intentionally Omitted]

          13.5     Limitation of Liability.

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          (a)     General. Neither Administrative Agent nor any of its Representatives shall be liable for any action taken or omitted to be taken by it or them under the Loan Documents in good faith and reasonably believed by it or them to be within the discretion or power conferred upon it or them by the Loan Documents or be responsible for the consequences of any error of judgment, except for fraud, gross negligence, or willful misconduct; and neither Administrative Agent nor any of its Representatives has a fiduciary relationship with any Holder by virtue of the Loan Documents (provided that, nothing herein shall negate the obligation of Administrative Agent to account for funds received by it for the account of any Holder).

          (b)     Non-Discretionary Actions. Indemnification. Unless indemnified to its satisfaction against loss, cost, liability, and expense, neither Administrative Agent nor any other Agent shall be compelled to do any act under the Loan Documents or to take any action toward the execution or enforcement of the powers thereby created or to prosecute or defend any suit in respect of the Loan Documents. If Administrative Agent requests instructions from Holders or Required Holders, as the case may be, with respect to any act or action (including, but not limited to, any failure to act) in connection with any Loan Document, Administrative Agent shall be entitled (but shall not be required) to refrain (without incurring any liability to any Person by so refraining) from such act or action unless and until it has received such instructions. Except where action of Required Holders or all Holders is required in the Loan Documents, Administrative Agent may act hereunder in its own discretion without requesting instructions. In no event, however, shall Administrative Agent or any of its Representatives be required to take any action which it or they determine could incur for it or them criminal or onerous civil liability. Without limiting the generality of the foregoing, no Holder shall have any right of action against Administrative Agent as a result of Administrative Agent's acting or refraining from acting hereunder in accordance with the instructions of Required Holders (or all Holders if required in the Loan Documents).

          (c)     Independent Credit Decision. Neither Administrative Agent nor any other Agent shall be responsible in any manner to any Holder or any Participant for, and each Holder represents and warrants that it has not relied upon Administrative Agent or any other Agent in respect of, (i) the creditworthiness of any Borrower and the risks involved to such Holder, (ii) the effectiveness, enforceability, genuineness, validity, or the due execution of any Loan Document, (iii) any representation, warranty, document, certificate, report, or statement made therein or furnished thereunder or in connection therewith, (iv) the existence, priority, or perfection of any Lien hereafter granted or purported to be granted under any Loan Document, or (v) observation of or compliance with any of the terms, covenants, or conditions of any Loan Document on the part of any Borrower. Each Holder agrees to indemnify Administrative Agent and its Representatives and hold them harmless from and against (but limited to such Holder's Pro Rata Part of) any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses, and reasonable disbursements of any kind or nature whatsoever which may be imposed on, asserted against, or incurred by them in any way relating to or arising out of the Loan Documents or any action taken or omitted by them under the Loan Documents (including any of the foregoing arising from the negligence of Administrative Agent or its Representatives), to the extent Administrative Agent and its Representatives are not reimbursed for such amounts by any Borrower (provided that, Administrative Agent and its Representatives shall not have the Right to be indemnified hereunder for its or their own fraud, gross negligence, or willful misconduct).

          13.6     Default; Collateral.

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          (a)     Upon the occurrence and continuance of a Default, Holders agree to promptly confer in order that Required Holders or Holders, as the case may be, may agree upon a course of action for the enforcement of the Rights of Holders; and Administrative Agent shall be entitled to refrain from taking any action (without incurring any liability to any Person for so refraining) unless and until Administrative Agent shall have received instructions from Required Holders. All Rights of action under the Loan Documents and all Rights to the Collateral, if any, hereunder may be enforced by Administrative Agent and any suit or proceeding instituted by Administrative Agent in furtherance of such enforcement shall be brought in its name as Administrative Agent without the necessity of joining as plaintiffs or defendants any other Agent or Holder, and the recovery of any judgment shall be for the benefit of Holders subject to the expenses of Administrative Agent. In actions with respect to any property of Borrowers, Administrative Agent is acting for the ratable benefit of each Holder. Any and all agreements to subordinate (whether made heretofore or hereafter) other indebtedness or obligations of Borrowers to the Obligation shall be construed as being for the ratable benefit of each Holder.

          (b)     Each Holder authorizes and directs Administrative Agent to enter into the Collateral Documents for the benefit of the Holders. Except to the extent unanimity or a supermajority is required hereunder, each Holder agrees that any action taken by the Required Holders in accordance with the provisions of the Loan Documents, and the exercise by the Required Holders of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Holders.

          (c)     Administrative Agent is hereby authorized on behalf of all of the Holders, without the necessity of any notice to or further consent from any Holder, from time to time to take any action with respect to any Collateral or Collateral Documents which may be necessary to perfect and maintain perfected the Liens upon the Collateral granted pursuant to the Collateral Documents.

          (d)     Administrative Agent shall have no obligation whatsoever to any Holder or to any other Person to assure that the Collateral exists or is owned by any Borrower or is cared for, protected, or insured or has been encumbered or that the Liens granted to Administrative Agent herein or pursuant hereto have been properly or sufficiently or lawfully created, perfected, protected, or enforced, or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure, or fidelity, or to continue exercising, any of the Rights granted or available to Administrative Agent in this Section 13.6 or in any of the Collateral Documents; it being understood that Administrative Agent shall have no duty or liability whatsoever to any Holder, other than to act without gross negligence or willful misconduct.

          (e)     Holders hereby irrevocably authorize Administrative Agent, at its option and in its discretion, to release any Lien granted to or held by Administrative Agent upon any Collateral: (i) upon payment and satisfaction of the Obligation; (ii) constituting property in which no Borrower owned an interest at the time the Lien was granted or at any time thereafter;(iii) upon the sale, transfer, or disposition of Collateral which is expressly permitted pursuant to the Loan Documents; (iv) as contemplated in Section 6.3; or (v) if approved, authorized, or ratified in writing by all necessary Holders. Upon request by Administrative Agent at any time, Holders will confirm in writing Administrative Agent's authority to release particular types or items of Collateral pursuant to this Section 13.6.

          (f)     In furtherance of the authorizations set forth in this Section 13.6, each Holder hereby irrevocably appoints Administrative Agent its attorney-in-fact, with full power of substitution, for

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and on behalf of and in the name of each such Holder, (i) to enter into Collateral Documents (including, without limitation, any appointments of substitute trustees under any Collateral Document), (ii) to take action with respect to the Collateral and Collateral Documents to perfect, maintain, and preserve Holder's Liens, and (iii) to execute instruments of release or to take other action necessary to release Liens upon any Collateral to the extent authorized in Paragraph (e) hereof. This power of attorney shall be liberally, not restrictively, construed so as to give the greatest latitude to Administrative Agent's power, as attorney, relative to the Collateral matters described in this Section 13.6. The powers and authorities herein conferred on Administrative Agent may be exercised by Administrative Agent through any Person who, at the time of the execution of a particular instrument, is an officer of Administrative Agent. The power of attorney conferred by this Section 13.6(f) is granted for valuable consideration and is coupled with an interest and is irrevocable so long as the Obligation, or any part thereof, shall remain unpaid or Holders are obligated to make any Borrowings under the Loan Documents.

          13.7     Limitation of Liability. To the extent permitted by Law, (a) Administrative Agent (acting in its agent capacity) shall not incur any liability to any Holder or Participant except for acts or omissions resulting from its own fraud, gross negligence or willful misconduct, and (b) neither Administrative Agent nor any Holder or Participant shall incur any liability to any other Person for any act or omission of any other Holder or Participant.

          13.8     Relationship of Holders. Nothing herein shall be construed as creating a partnership or joint venture among Administrative Agent and Holders.

          13.9     Benefits of Agreement. None of the provisions of this Section 13 shall inure to the benefit of any Borrower or any other Person other than Holders and Administrative Agent; consequently, no Borrower or any other Person shall be entitled to rely upon, or to raise as a defense, in any manner whatsoever, the failure of Administrative Agent or any Holder to comply with such provisions.

          13.10     Obligations Several. The obligations of Holders hereunder are several, and each Holder hereunder shall not be responsible for the obligations of the other Holders hereunder, nor will the failure of one Holder to perform any of its obligations hereunder relieve the other Holders from the performance of their respective obligations hereunder.

SECTION 14     MISCELLANEOUS.

          14.1     Headings. The headings, captions, and arrangements used in any of the Loan Documents are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify, or modify the terms of the Loan Documents, nor affect the meaning thereof.

          14.2     Nonbusiness Days. In any case where any payment or action is due under any Loan Document on a day which is not a Business Day, such payment or action may be delayed until the next-succeeding Business Day, but interest and fees shall continue to accrue in respect of any payment to which it is applicable until such payment is in fact made; provided that, if, in the case of any such payment in respect of a Eurodollar Rate Borrowing, the next-succeeding Business Day is in the next calendar month, then such payment shall be made on the next-preceding Business Day.

          14.3     Communications. Unless otherwise specifically provided herein or any other Loan Document, all notices shall be in writing addressed to the respective party as set forth below and may be personally served, faxed, telecopied, or sent by overnight courier service or United States mail and shall be deemed to have been given: (a) if delivered in person, when delivered; (b) if delivered by fax or telecopy, on the date of transmission if transmitted on a Business Day before 4:00 p.m. New York time

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or, if not, on the next succeeding Business Day; (c) if delivered by overnight courier, the next succeeding Business Day after delivery to such courier properly addressed; or (d) if by U.S. Mail, four (4) Business Days after depositing in the United States mail, with postage prepaid and properly addressed.

If to any Borrower:	c/o SUN HEALTHCARE GROUP, INC.
	101 Sun Avenue NE
	Albuquerque, New Mexico 87109
	Attn: Treasurer
	Fax/Telecopy No.: (505) 468-6635
With a copy to:	c/o SUN HEALTHCARE GROUP, INC.
	101 Sun Avenue NE
	Albuquerque, New Mexico 87109
	Attn: General Counsel
	Fax/Telecopy No.: (505) 468-4747
If to Administrative Agent:	U.S. Bank National Association
	225 South Sixth Street
	Minneapolis, Minnesota 55402-4302
With a copy to:	Highland Capital Management, L.P.
	Two Galleria Tower, Suit 1300
	13455 Noel Road
	Dallas, Texas 75240
	Attn: Patrick H. Daugherty
	Fax/Telecopy No.: 972/628-4147
With a copy to:	Haynes and Boone, LLP
	901 Main Street
	Suite 3100
	Dallas, Texas 75202
	Attn: Laurie G. Lang
	Fax/Telecopy No.: 214/200-0667

          If to any Holder: Its address indicated on the signature page hereto, in an Assignment and Acceptance Agreement or in a notice to Agents and Borrowers or to such other address as the party addressed shall have previously designated by written notice to the serving party, given in accordance with this Section 14.3.

          14.4     Form and Number of Documents. Each agreement, document, instrument, or other writing to be furnished under any provision of the Loan Documents must be in form and substance and in such number of counterparts as may be reasonably satisfactory to Administrative Agent and its counsel.

          14.5     Survival. All covenants, agreements, undertakings, representations, and warranties made in any of the Loan Documents shall survive all closings under the Loan Documents and, except as otherwise indicated, shall not be affected by any investigation made by any party. All Rights of, and provisions relating to, reimbursement and indemnification of Administrative Agent or any Holder (and any other provision of the Loan Documents that expressly provides for such survival) shall survive termination of this Agreement, payment in full of the Obligation, and any assignment by any Holder.

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          14.6     Governing Law. The Loan Documents have been entered into pursuant to Section 5-1401 of the New York General Obligations Law and the substantive laws of the State of New York (except to the extent the laws of another jurisdiction govern the creation, perfection, validity, or enforcement of Liens under the Collateral Documents), and the applicable federal laws of the United States of America shall govern the validity, construction, enforcement and interpretation of the Loan Documents.

          14.7     Invalid Provisions. In the event that any provision of this Agreement is deemed to be invalid, illegal, or unenforceable by reason of the operation of any Law or by reason of the interpretation placed thereon by any Governmental Authority, the validity, legality, and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby, and the affected provision shall be modified to the minimum extent permitted by Law so as most fully to achieve the intention of this Agreement.

          14.8     Entirety. The Rights and Obligations of each Borrower, Holders, and Administrative Agent Shall Be Determined Solely from Written Agreements, Documents, and Instruments, and Any Prior Oral Agreements Between Such Parties Are Superseded by and Merged into Such Writings. This Agreement (As Amended in Writing from Time to Time) and the Other Written Loan Documents Executed by Any Borrower, Any Holder, and/or Administrative Agent (Together with All Commitment Letters and Fee Letters as They Relate to the Payment of Fees after the Closing Date) Represent the Final Agreement Between the Borrowers, Holders, and Administrative Agent, and May Not Be Contradicted by Evidence of Prior, Contemporaneous, or Subsequent Oral Agreements by Such Parties. There Are No Unwritten Oral Agreements Between Such Parties.

          14.9     Jurisdiction; Venue; Service of Process; Jury Trial. Each Party Hereto, in Each Case for Itself, its Successors and Assigns, Hereby (A) irrevocably Submits to the Nonexclusive Jurisdiction of the State (pursuant to Section 5-1402 of the New York General Obligations Law) and Federal Courts Located in the Borough of Manhattan in the State of New York, and Agrees and Consents That Service of Process May Be Made upon it in Any Legal Proceeding Arising out of or in Connection with the Loan Documents and the Obligation by Service of Process as Provided by New York Law, (B) irrevocably Waives, to the Fullest Extent Permitted by Law, Any Objection Which it May Now or Hereafter Have to the Laying of Venue of Any Litigation Arising out of or in Connection with the Loan Documents and the Obligation Brought in Any Such Court, (C) irrevocably Waives Any Claims That Any Litigation Brought in Any Such Court Has Been Brought in an Inconvenient Forum, (D) agrees to Designate and Maintain an Agent for Service of Process in New York in Connection with Any Such Litigation and to Deliver to Administrative Agent Evidence Thereof, If Requested, (E) irrevocably Consents to the Service of Process out of Any of the Aforementioned Courts in Any Such Litigation by the Mailing of Copies Thereof by Certified Mail, Return Receipt Requested, Postage Prepaid, at its Address Set Forth Herein, (F) irrevocably Agrees That Any Legal Proceeding Against Any Party Hereto Arising out of or in Connection with the Loan Documents or the Obligation Shall Be Brought in One of the Aforementioned Courts, and (G) irrevocably Waives, to the Fullest Extent Permitted by Law, its Respective Rights to a Jury Trial of Any Claim or Cause of Action Based upon or Arising out of Any Loan Document or the Transactions Contemplated Thereby. The scope of each of the foregoing waivers is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including, without limitation, contract claims, tort claims, breach of duty

57

claims, and all other common law and statutory claims. The Borrowers and each other party to the Loan Documents acknowledge that this waiver is a material inducement to the agreement of each party hereto to enter into a business relationship, that each has already relied on this waiver in entering into the Loan Documents, and each will continue to rely on each of such waivers in related future dealings. The Borrowers and each other party to the Loan Documents warrant and represent that they have reviewed these waivers with their legal counsel, and that they knowingly and voluntarily agree to each such waiver following consultation with legal counsel. THE WAIVERS IN THIS SECTION 14.9 ARE IRREVOCABLE, MEANING THAT THEY MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THESE WAIVERS SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS, AND REPLACEMENTS TO OR OF THIS OR ANY OTHER LOAN DOCUMENT. In the event of Litigation, this Agreement may be filed as a written consent to a trial by the court.

          14.10     Amendments, Consents, Conflicts, and Waivers.

          (a)     Except as otherwise specifically provided in this Section 14.10 or otherwise in the Loan Documents, (i) this Agreement may only be amended, modified, or waived by an instrument in writing executed jointly by Borrowers and Required Holders, and, if required by, the Intercreditor Agreement, the Senior Agent, and, in the case of any matter affecting Administrative Agent (except removal of Administrative Agent as provided in Section 13) by Administrative Agent, and may only be supplemented by documents delivered or to be delivered in accordance with the express terms hereof, and (ii) the other Loan Documents may only be the subject of an amendment, modification, or waiver if Borrowers and Required Holders, and, in the case of any matter affecting Administrative Agent (except as set forth above), such Administrative Agent, have approved same.

          (b)     Any amendment to or consent or waiver under any Loan Document which purports to accomplish any of the following must be approved by Borrowers and by each Holder adversely affected thereby, and, if required by, the Intercreditor Agreement, the Senior Agent, and, in the case of any matter affecting Administrative Agent, by Administrative Agent: (i) postpones or delays any date fixed by the Loan Documents for any payment of all or any part of the Obligation payable to such Holder or Administrative Agent; (ii) reduces the interest rate or decreases the amount of any payment of principal, interest, fees, or other sums payable to Administrative Agent or any such Holder hereunder (except such reductions as are contemplated by this Agreement); (iii) changes the definition of "Required Holders" or this Section 14.10(b) or any other provisions of the Loan Documents that require the unanimous consent of the Holders; (iv) changes the order of application of any payment or prepayment set forth in Sections 3.3 and 3.12 in any manner that adversely affects such Holder or Administrative Agent; or (v) except as otherwise permitted by any Loan Document (including, without limitation, Section 6.3), releases all or any substantial portion of the Collateral or any material Borrower. Without the consent of such Holder, no Holder's "Commitment Percentage" may be increased.

          (d)     Any conflict or ambiguity between the terms and provisions of this Agreement and terms and provisions in any other Loan Document shall be controlled by the terms and provisions herein.

          (e)     No course of dealing nor any failure or delay by Administrative Agent, any Holder, or any of their respective Representatives with respect to exercising any Right of Administrative Agent or any Holder hereunder shall operate as a waiver thereof. A waiver must be in writing and signed by Administrative Agent and requisite Holders to be effective, and such waiver will be effective only in the specific instance and for the specific purpose for which it is given.

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          14.11     Multiple Counterparts. The Loan Documents may be executed in a number of counterparts, each of which shall be deemed an original for all purposes and all of which constitute, collectively, one agreement; but, in making proof of any Loan Document, it shall not be necessary to produce or account for more than one such counterpart. This Agreement shall become effective when counterparts hereof shall have been executed and delivered to Administrative Agent by each Holder, Administrative Agent, and Borrowers, or, when Administrative Agent shall have received telecopied, telexed, or other evidence satisfactory to it that such party has executed and is delivering to Administrative Agent a counterpart hereof.

          14.12     Successors and Assigns; Assignments and Participations.

          (a)     The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrowers may not, except as otherwise permitted under the Loan Documents, assign or otherwise transfer any of its Rights or obligations hereunder without the prior written consent of each Holder and no Holder may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of Section 14.12(b), (ii) by way of participation in accordance with the provisions of Section 14.12(d), or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 14.12(f) (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in Section 14.12(d) and, to the extent expressly contemplated hereby, the Affiliates of each of the Administrative Agent and the Holders) any legal or equitable Right, remedy, or claim under or by reason of this Agreement.

          (b)     Any Holder may at any time assign to one or more Eligible Assignees all or a portion of its Rights and obligations under this Agreement (including all or a portion of the Aggregate Principal Debt owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Holder's Aggregate Principal Debt at the time owing to it or its Discount Notes or in the case of an assignment to a Holder or an Affiliate of a Holder or a Related Fund with respect to a Holder, the aggregate amount of the Aggregate Principal Debt of the assigning Holder subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than $1,000,000, unless each of Administrative Agent and, so long as no Default or Potential Default has occurred and is continuing, the Borrowers otherwise consent (each such consent not to be unreasonably withheld or delayed); (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Holder's Rights and obligations under this Agreement with respect to the Term Loan Principal Debt or the Discount Notes assigned, except that this clause (ii) shall not prohibit any Holder from assigning all or a portion of its Rights and obligations among separate Tranches on a non-pro rata basis; and (iii) the parties to each assignment shall execute and deliver to Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500, and the Eligible Assignee, if it shall not be a Holder, shall deliver to the Administrative Agent such information as Administrative Agent shall reasonably request. Subject to acceptance and recording thereof by Administrative Agent pursuant to Section 14.12(c), from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Holder under this Agreement, and the assigning Holder thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Holder's Rights and obligations under this Agreement, such Holder shall cease to be a

59

party hereto) but shall continue to be entitled to the benefits of Sections 4, 12, and 14 with respect to facts and circumstances occurring prior to the effective date of such assignment. Any assignment or transfer by a Holder of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Holder of a participation in such rights and obligations in accordance with Section 14.12(d).

          (c)     Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in St. Louis, Missouri a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Holders, Aggregate Principal Amount owing to, each Holder pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrowers, Administrative Agent, and the Holders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Holder hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrowers and any Holder, at any reasonable time and from time to time upon reasonable prior notice.

          (d)     Any Holder may at any time, without the consent of, or notice to, any Borrower or Administrative Agent, sell participations to any Person (other than a natural person or any Borrower or any of Borrowers' Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of such Holder's Rights and/or obligations under this Agreement (including all or a portion of the Aggregate Principal Debt owing to it); provided that (i) such Holder's obligations under this Agreement shall remain unchanged, (ii) such Holder shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iii)  Borrowers, Administrative Agent, and the other Holders shall continue to deal solely and directly with such Holder in connection with such Holder's Rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Holder sells such a participation shall provide that such Holder shall retain the sole right to enforce this Agreement and to approve any amendment, modification, or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Holder will not, without the consent of the Participant, agree to any amendment, modification, or waiver with respect to the following: extending the due date for payment of any amount in respect of principal (other than mandatory prepayments), interest, or fees due under the Loan Documents, reducing the interest rate or the amount of principal or fees applicable to the Obligation (except such reductions as are contemplated by the Loan Documents), or releasing all or any substantial portion of the Collateral for the Obligation under the Loan Documents (except such releases of Collateral as are contemplated in Section 6.3) that affects such Participant. Subject to Section 14.12(e), Borrowers agree that each Participant shall be entitled to the benefits of Section 4 to the same extent as if it were a Holder and had acquired its interest by assignment pursuant to Section 14.12(b). To the extent permitted by Law, each Participant also shall be entitled to the benefits of Section 3.14 as though it were a Holder, provided such Participant agrees to be subject to Section 3.13 as though it were a Holder.

          (e)     A Participant shall not be entitled to receive any greater payment under Section 4 than the applicable Holder would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with Borrowers' prior written consent. A Participant that would is not incorporated under the Laws of the United States of America or a state thereof shall not be entitled to the benefits of Section 4.6 unless Borrowers are notified of the participation sold to such Participant and such Participant agrees, for the benefit of Borrowers, to comply with Section 4.6(d) as though it were a Holder.

          (f)     Any Holder may at any time pledge or assign a security interest in all or any portion of its Rights under this Agreement to secure obligations of such Holder, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Holder from any of its obligations hereunder or substitute any such pledgee or assignee for such Holder as a party hereto.

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          14.13     Decisions by Borrowers. To the extent any action under the Loan Documents requires the consent or direction of all Borrowers and all Borrowers do not agree on the action to be taken, Administrative Agent shall (a) take the alternative action (if any) provided under the Loan Documents for circumstances under which no consent or direction is given by Borrowers, or (b) if no such action is provided, take no action unless otherwise directed by Required Holders.

          14.14     Confidentiality. Administrative Agent and each Holder agree to exercise its best efforts to keep confidential any non-public information delivered pursuant to the Loan Documents and identified as such by Borrowers and not to disclose such information to Persons other than to: its respective Affiliates, officers, directors, and employees and in each case, on a need-to-know basis and provided that such recipient complies with the confidentiality provisions hereof; or its potential assignees or Participants; or Persons employed by or engaged by Administrative Agent, any Holder, or any Holder's assignees or Participants including, without limitation, attorneys, auditors, professional consultants, rating agencies, and portfolio management services and in each case, on a need-to-know basis and provided that such recipient complies with the confidentiality provisions hereof. The confidentiality provisions contained in this subsection shall not apply to disclosures (a) required to be made by Administrative Agent or any Holder to any Governmental Authority or pursuant to legal process or (b) consisting of general portfolio information that does not identify any Borrower. The obligations of Administrative Agent and Holders under this Section 14.14 shall supersede and replace the obligations of Administrative Agent and Holders under any confidentiality agreement in respect of this financing executed and delivered by Administrative Agent or any Holder prior to the date hereof. In no event shall Administrative Agent or any Holder be obligated or required to return any materials furnished by any Borrower; provided, however, each potential assignee or Participant shall be required to agree that if it does not become an assignee (or Participant) it shall return all materials furnished to it by such Borrower in connection herewith.

          14.15     Publication. Borrowers consent to the publication by Administrative Agent or Holders of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement; provided, however, Administrative Agent or Holders (as applicable) shall provide a draft of any such tombstone or similar advertising material to Borrowers for review prior to the publication thereof. Administrative Agent and Holders reserve the right to provide industry trade organizations information necessary and customary for inclusion in league table measurements.

          14.16     Company as Agent. By executing this Agreement, each of the Borrowers confirms to the other parties to this Agreement that the Company shall (and has been duly appointed by each of the Borrowers to) act as agent for the Borrowers for all purposes of the Loan Documents, including, without limitation, taking any action or receiving any communication on behalf of such Borrower in connection with the Loan Documents. Each of the Holders and Administrative Agent shall be entitled to deal with any Borrower through the Company and to rely on any instructions or other communications from the Company on behalf of any Borrower. None of the Holders or Administrative Agent shall have any responsibility to any Borrower for dealing with the Borrowers as provided in this Section 14.16, and the Obligation of each of the Borrowers to the Holders shall not be affected by any matter relating to acts or omissions of the Company relating to the Borrowing or otherwise as agent for the Borrowers hereunder. Notwithstanding the appointment of the Company as agent for the Borrowers hereunder, Administrative Agent and the Holders shall in their sole discretion be entitled to deal directly with any Borrower for all purposes of the Loan Documents.

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          14.17     Intercreditor Agreement. Notwithstanding any contrary provision in any Loan Document, each Loan Document is subject to the Intercreditor Agreement, and each Borrower, Administrative Agent, and each Holder acknowledges and agrees to be bound by the provisions of the Intercreditor Agreement.

          14.18     Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances. The obligations of each Borrower under the Loan Documents shall remain in full force and effect until the payment in full of the Aggregate Principal Debt and of all interest, fees, and other amounts of the Obligation then due and owing, except that Sections 4, 12, and 14, and any other provisions under the Loan Documents expressly intended to survive by the terms hereof or by the terms of the applicable Loan Documents, shall survive such termination. If at any time any payment of the principal of or interest on any Note or any other amount payable by any Borrower under any Loan Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy, or reorganization of such Borrower or otherwise, the obligations of each Borrower under the Loan Documents with respect to such payment shall be reinstated as though such payment had been due but not made at such time.

[Remainder of Page Intentionally Blank.
Signature Pages Follow.]

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REPORTING RIDER

          This Reporting Rider is attached and made a part of that certain Term Loan and Note Purchase Agreement, dated as of February 28, 2002 and entered into among Borrowers, Administrative Agent, and Holder.

          (A)     Monthly Financials. As soon as available and in any event within thirty (30) days after the end of each month, the Company will deliver to Administrative Agent and Holders (1) the consolidated balance sheet and cash flow statement of the Company and its Subsidiaries as at the end of such month and the related consolidated statements of income and stockholders' equity for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, and (2) a schedule of the outstanding Debt for borrowed money of the Company and its Subsidiaries describing in reasonable detail each such debt issue or loan outstanding and the principal amount and amount of accrued and unpaid interest with respect to each such debt issue or loan.

          (B)     Quarterly Financials. As soon as available and in any event within fifty-five (55) days of the end of each of the first three calendar quarters of each Fiscal Year, the Company will deliver to Administrative Agent and (1) Holders the consolidated balance sheet and cash flow statement of the Company and its Subsidiaries as at the end of each such calendar quarter and the related consolidated statements of income, stockholders' equity, and cash flow for each such calendar quarter and for the period from the beginning of the then current Fiscal Year to the end of each such calendar quarter and (2) a reasonably detailed schedule of the Capital Expenditures incurred during such calendar quarter.

          (C)     Year-End Financials. As soon as available and in any event within one hundred five (105) days after the end of each Fiscal Year, the Company will deliver to Administrative Agent and Holders: (1) the consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income, stockholders' equity, and cash flow for such Fiscal Year; (2) a detailed schedule of the Capital Expenditures incurred during such Fiscal Year; and (3) report with respect to the Financial Statements from the Company's Accountants, which report shall be unqualified as to going concern and scope of audit of the Company and its Subsidiaries and shall provide in substance that (a) such consolidated Financial Statements present fairly the consolidated financial position of the Company and its Subsidiaries as at the dates indicated and the results of their operations and cash flow for the periods indicated in conformity with GAAP and (b) that the examination by Company's' Accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; and (4) copies of the consolidating financial statements of Borrowers and their Subsidiaries, including (a) consolidating balance sheets of the Company and its Subsidiaries as at the end of such Fiscal Year showing intercompany elimination's and (b) related consolidating statements of income of Borrowers and their Subsidiaries showing intercompany elimination's.

          (D)     Compliance Certificate. Together with the delivery of each set of Financial Statements referenced in subparagraphs (A), (B), and (C) above, Borrowers will deliver to Administrative Agent and Holders a Compliance Certificate in substantially the form of Exhibit F, together with copies of the calculations and work-up employed to determine Borrowers' compliance or noncompliance with the financial covenants set forth in Section 10.

          (E)     Borrowing Base Certificates, Registers, and Journals. On no less than a weekly basis, Borrowers shall deliver to Administrative Agent: (1) a Borrowing Base Certificate updated to reflect the most recent sales and collections of Borrowers and an assignment schedule of all of accounts created by Borrowers; (2) an invoice register or sales journal describing all sales of Borrowers, in form and

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substance satisfactory to Administrative Agent, and, if Administrative Agent so requests, copies of invoices evidencing such sales and proofs of delivery relating thereto; (3) a cash receipts journal; (4) a credit memo journal; and (5) an adjustment journal, setting forth all adjustments to accounts.

          (F)     Reconciliation Reports, Inventory Reports, and Listings and Agings. On the Closing Date and within twenty (20) days after the end of each calendar month and, if a Potential Default shall have occurred and be continuing, from time to time upon the request of Administrative Agent, Borrowers will deliver to Administrative Agent: (1) an aged trial balance of all then existing accounts; and (2) an Inventory Report duly executed by an officer of each Borrower as of the last day of such period. As soon as available and in any event within five (5) Business Days after both the fifteenth and the last day of each month, and from time to time upon the request of Administrative Agent, Borrowers will deliver to Administrative Agent: (1) a Reconciliation Report duly executed by the Financial Officer and substantially in the form of Exhibit E as at the last day of such period; (2) an aged trial balance of all then existing accounts payable; and (3) a detailed inventory listing and cover summary report. All such reports shall be in form and substance satisfactory to Required Holders.

          (G)     Management Report. Together with each delivery of Financial Statements of Borrowers and their Subsidiaries pursuant to subparagraph (A) above, Borrowers will deliver to Administrative Agent and Holders a management report: (1) describing the operations and financial condition of the Borrowers (by business segment) for the month then ended and the portion of the current Fiscal Year then elapsed; (2) setting forth in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the most recent Projections for the current Fiscal Year delivered to Administrative Agent and Holders pursuant to subparagraph (L) below; and (3) discussing the reasons for any significant variations. The information above shall be presented in reasonable detail and shall be certified by the chief financial officer of the Company to the effect that such information fairly presents the results of operations and financial condition of Borrowers and their Subsidiaries as at the dates and for the periods indicated.

          (H)     Appraisals. From time to time, upon the request of Administrative Agent, Borrowers will obtain and deliver to Administrative Agent, at Borrowers' expense, appraisal reports in form and substance and from appraisers satisfactory to Administrative Agent, stating the then current fair market and orderly liquidation values of all or any portion of the Collateral; provided, however, so long as no Default or Potential Default is continuing, Administrative Agent shall not request an appraisal as to any particular category of Collateral to be performed more than once every 12 months at Borrowers' expense.

          (I)     Government Notices. Borrowers will deliver to Administrative Agent no later than five (5) Business Days following receipt copies of all notices, requests, subpoenas, inquiries, or other writings received from any Governmental Authority concerning the violation or alleged violation of ERISA, the violation or alleged violation of any Environmental Laws, or the violation or alleged violation of the Fair Labor Standards Act. Borrowers shall deliver to Collateral Agent an update to Schedule 8.7 no less frequently than on a quarterly basis.

          (J)     Notice of Default, etc. Promptly upon a Borrower obtaining knowledge of any of the following events or conditions, such Borrower shall deliver to Administrative Agent a certificate of such Borrower's chief executive officer or a financial officer specifying the nature and period of existence of such condition or event and what action such Borrower has taken, is taking, and proposes to take with respect thereto: (1) any condition or event that constitutes a Default or Potential Default; (2) any notice of default that any Person has given to such Borrower or any of its Subsidiaries, which default if unremedied could reasonably be expected to result in a Material Adverse Event; or (3) the occurrence of any Material Adverse Event.

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          (K)     Projections. As soon as available and in any event no later than sixty (60) days after the end of each Fiscal Year of the Company, Borrowers, will deliver to Administrative Agent and Holders consolidated Projections of Borrowers and their Subsidiaries for the forthcoming three Fiscal Years, year by year, and for the forthcoming Fiscal Year, month by month.

          (L)     Other Information. With reasonable promptness, Borrowers will deliver such other information and data as Administrative Agent or any Holder may reasonably request from time to time.

          (M)     Opening Balance Sheet. As soon as available and in any event within ninety (90) days after the Closing Date, Borrowers will deliver to Administrative Agent and Holders a consolidated Closing Date balance sheet reviewed and reported on by the Company's Accountants.

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EXECUTED to be effective as of the date first written above.

U.S. BANK NATIONAL ASSOCIATION, as Administrative Agent, Lender, and Purchaser

By:/s/ Jason Nadler                            

Jason Nadler, Assistant Vice President

Signature Page to Term Loan Note

EXECUTED to be effective as of the date first written above.

BORROWERS
SUN HEALTHCARE GROUP, INC.	ACCELERATED CARE PLUS, L.L.C.
	By:  Cal-Med, Inc.,        Member of Accelerated Care Plus, L.L.C.
By:   /s/ Robert K. Schneider                                Robert K. Schneider, Vice President and       Treasurer	By:   /s/ Robert K. Schneider                                Robert K. Schneider, Vice President and       Treasurer
	By:  HC, Inc.,  Member of Accelerated Care         Plus, L.L.C.
	By:   /s/ Robert K. Schneider                                Robert K. Schneider, Vice President and       Treasurer
SUNDANCE REHABILITATION TEXAS, LIMITED PARTNERSHIP	WEST JERSEY/MEDIPLEX REHABILI-TATION LIMITED PARTNERSHIP
By:  SRT, Inc., its general partner	By:  Mediplex of New Jersey, Inc.,        its general partner
By:   /s/ Robert K. Schneider                                Robert K. Schneider, Vice President and       Treasurer	By:   /s/ Robert K. Schneider                                Robert K. Schneider, Vice President and       Treasurer
EACH ADDITIONAL BORROWER LISTED ON THE ANNEX ATTACHED TO AND INCORPORATED INTO THIS SIGNATURE PAGE
By:   /s/ Robert K. Schneider                                Robert K. Schneider, Vice President and       Treasurer of the entities listed on the       attached Annex

Signature Page to Term Loan Note

Advantage Health Services, Inc.	Heritage Rehabilitation Center	Regency Rehab Hospitals, Inc.
Americare Health Services Corp.	HoMed Convalescent Equipment, Inc.	Regency-North Carolina, Inc.
Americare of West Virginia, Inc.	HTA of New York, Inc.	Regency-Tennessee, Inc.
Atlantic Medical Supply Company, Inc.	Huntington Beach Convalescent Hospital	Retirement Care Associates, Inc.
Beckley Health Care Corp.	Jeff Davis Healthcare, Inc.	Rose Rehabilitation Center
Bergen Eldercare, Inc.	Lake Forest Healthcare Center, Inc.	Salem Health Care Corp.
Bibb Health & Rehabilitation, Inc.	Libbie Rehabilitation Center, Inc.	San Bernardino Rehabilitation Hospital, Inc.
BioPath Clinical Laboratories, Inc.	Manatee Springs Nursing Center, Inc.	San Joaquin G.P. Corporation
Braswell Enterprises, Inc.	Maplewood Health Care Center of Jackson, Tennessee, Inc.	Shandin Hills Rehabilitation Center
Brent-Lox Hall Nursing Home, Inc.	Marion Health Care Corp.	Southside Health Care Center, Inc.
Brittany Rehabilitation Center, Inc.	Masthead Corporation	Spofford Land, Inc.
Cal-Med, Inc.	Meadowbrook Rehabilitation Center	SRT, Inc.
Care Enterprises West	Mediplex Management of Palm Beach County, Inc.	Statesboro Healthcare Center, Inc.
Care Enterprises, Inc.	Mediplex Management, Inc. Mediplex of Concord, Inc.	Stockton Rehabilitation Center, Inc.
Care Home Health Services	Mediplex of Connecticut, Inc.	Summers Landing, Inc.
CareerStaff Management, Inc.	Mediplex of Kentucky, Inc.	Sun Lane Purchase Corporation
CareerStaff Services Corporation	Mediplex of Maryland, Inc.	SunAlliance Healthcare Services, Inc.
CareerStaff Unlimited, Inc.	Mediplex of Massachusetts, Inc.	SunBridge G.P. Corporation
Carmichael Rehabilitation Center	Mediplex of New Hampshire, Inc.	SunBridge Healthcare Corporation
Charlton Healthcare, Inc.	Mediplex of New Jersey, Inc.	SunBridge Healthcare of Colorado, Inc.
Circleville Health Care Corp.	Mediplex Rehabilitation of Massachusetts, Inc.	SunBridge Rehab of Colorado, Inc.
Clipper Home of North Conway, Inc.	Mid-Florida, Inc.	SunBridge, Inc.
Clipper Home of Portsmouth, Inc.	Mountain Care Management, Inc.	SunCare Respiratory Services, Inc.
Clipper Home of Rochester, Inc.	New Bedford Nursing Center, Inc.	SunCare Services Corporation
Clipper Home of Wolfeboro, Inc.	Newport Beach Rehabilitation Center	SunChoice Medical Supply, Inc.
Coalinga Rehabilitation Center	Nursing Home, Inc.	SunDance Rehabilitation Corporation
Contour Medical, Inc.	Orange Rehabilitation Hospital, Inc.	SunDance Services Corporation
Correctional Care Corp.	P.M.N.F. Management, Inc.	SunFactors, Inc.
Covina Rehabilitation Center	Pacific Health Care, Inc.	SunHealth Specialty Services, Inc.
Dunbar Health Care Corp.	Paradise Rehabilitation Center, Inc.	SunMark Nevada, Inc.
Duval Healthcare Center, Inc.	Pharmacy Factors of California, Inc.	SunMark of New Mexico, Inc.
Executive Pharmacy Services, Inc.	Pharmacy Factors of Florida, Inc. Pharmacy Factors of Texas, Inc.	SunPlus Home Health Services, Inc.
Facility Supply, Inc.	PRI, Inc.	SunScript Pharmacy Corporation
Fairfield Rehabilitation Center	Putnam Health Care Corp.	SunSolution, Inc.
First Class Pharmacy, Inc.	Quality Care Holding Corporation	The Mediplex Group, Inc.
Fullerton Rehabilitation Center	Quality Nursing Care of Massachusetts, Inc.	U.S. Laboratory Corp.
Gainesville Healthcare Center, Inc.	Regency Health Services, Inc.	Vista Knoll Rehabilitation Center, Inc.
Gardendale Health Care Center, Inc.	Regency High School, Inc.	West Tennessee, Inc.
Glendora Rehabilitation Center		Willow Way, Inc.
Glenville Health Care Inc.		Worcester Nursing Center, Inc.
Goodwin Nursing Home, Inc.
Grand Terrace Rehabilitation Center
Hallmark Health Services, Inc.
Harbor View Rehabilitation Center
HC, Inc.

TWO-PAGE ANNEX TO SIGNATURE PAGE
(Attached to and incorporate by reference into the Term Loan Note)

U.S. Laboratory Corp.                        West Tennessee, Inc.     Worcester Nursing Center, Inc.
Vista Knoll Rehabilitation Center,     Willow Way, Inc.
Inc.

          HSR Partners, L.P.
          Therapists Unlimited - Baltimore/Washington,
             D.C., L.P.
          Therapists Unlimited - Chicago II, L.P.
          Therapists Unlimited - Detroit II, L.P.
          Therapists Unlimited - Fresno, L.P.
          Therapists Unlimited - Indianapolis, L.P.
          Therapists Unlimited - Seattle, L.P.

By:     CareerStaff Management, Inc.
          its general partner


          By:       /s/ Robert K. Schneider         
                    Robert K. Schneider, Vice President
                    and Treasurer      

EX-99

Exhibit 99.1

Sun Healthcare Group, Inc.
101 Sun Avenue N.E.
Albuquerque, New Mexico 87109

Securities and Exchange Commission
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549

March 28, 2002

Re:  Confirmation of Receipt of Assurances from Arthur Andersen LLP

Ladies and Gentlemen:

Arthur Andersen has audited the consolidated financial statements of Sun Healthcare Group, Inc., a Delaware corporation (the "Company") and subsidiaries of the Company as of and for the years ended December 31, 2001 and 2000. Arthur Andersen has issued its report to the consolidated financial statements dated March 18, 2002, which is included with this filing on Form 10-K.

Arthur Andersen has represented to the Company that the audit was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Arthur Andersen personnel working on the audit and availability of national office consultation. Availability of personnel at foreign affiliates of Arthur Andersen is not relevant to this audit.

Respectfully submitted,


/s/ Robert F. Murphy         
Robert F. Murphy
Secretary

EX-4

EXHIBIT 4.1

EXECUTION COPY

REGISTRATION RIGHTS AGREEMENT

                    REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of February 28, 2002, between Sun Healthcare Group, Inc., a Delaware corporation (the "Company"), and the Persons identified on Schedule I hereto (the "Initial Holders").

W I T N E S S E T H:

                    WHEREAS, pursuant to the Joint Plan of Reorganization of Sun Healthcare Group, Inc. and its affiliated debtors and debtors in possession (the "Plan"), dated December 18, 2001, the Company has agreed, among other things, to issue 10,000,000 million shares of common stock, par value $0.01 per share of the Company (the "Common Stock"); and

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

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 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).

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                    "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.

                    "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 such Initial Holder pursuant to the Plan. As to any particular Registrable Securities, once issued such securities shall cease to be Registrable Securities when (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

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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 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

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             (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 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

4

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 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;

5

                     (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 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 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

6

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."

             (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.

7

             (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 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;

8

             (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 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

9

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

             (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

10

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 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

11

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 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.

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             (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 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

13

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 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.

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             (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.

                         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

15

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 Article III.

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

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

16

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:

Weil, Gotshal & Manges, LLP

767 Fifth Avenue

New York, New York 10153

Attention: Michael Walsh

If to the Initial Holders at their addresses specified on Schedule I:

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

17

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.

     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

18

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    /s/ Robert K. Schneider                              

Title:  Treasurer

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BANK OF AMERICA, N.A.

By    /s/ M. Duncan McDuffie                      

Title:  Managing Director

  M. Duncan McDuffie                                 

Name:

BANC OF AMERICA SECURITIES, LLC

By  /s/ Peter T. Santry                                  

Title:

Name:

21

FOOTHILL INCOME TRUST, L.P.

by FIT GP, LLC, its General Partner

By   /s/ M. E. Stearns                                   

Title:  Managing Member

  M. E. Stearns                                             

Name:

FOOTHILL PARTNERS III, L.P.

By   /s/ M. E. Stearns                                   

Title:  Managing General Partner

   M. E. Stearns                                            

Name:

22

GOLDMAN SACHS & CO.

By  /s/                                                          

Title:

Name:

GSC RECOVERY II, L.P.

By   /s/  Sanjay H. Patel                               

Title:

   Sanjay H. Patel                                         

Name:

GSCP RECOVERY, INC.

By   /s/  Sanjay H. Patel                               

Title:

   Sanjay H. Patel                                         

Name:

23

HIGHLAND CRUSADER OFFSHORE
PARTNERS, L.P.

By   /s/                                                         

Title:  Portfolio Manager

Name:

24

THE JPMORGAN CHASE BANK

By   /s/ Eric Rosen                                      

Title:  Authorized Signatory

    Eric Rosen                                              

Name:

25

WOODSTEAD ASSOCIATES, L.P.

By    /s/ John W. Adams                              

Title:  Limited Partner

  John W. Adams                                         

Name:

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SCHEDULE I

INITIAL HOLDERS

1. Bank of America, N.A.; Banc of America Securities, LLC

Bank of America, N.A.	Attn: M. Duncan McDuffie 555 South Flower Street Mail Code CA9-706-11-21 Los Angeles, CA 90071-2385
Banc of America Securities, LLC	100 North Tryon Street Mail Code NC1-007-12-08 Charlotte, NC 28255

2. Foothill Income Trust, L.P.; Foothill Partners III, L.P.

Foothill Income Trust, L. P.	Attn: Nik Aggarwal 2450 Colorado Avenue, Suite 3000W Santa Monica, CA 90404
Foothill Partners III, L. P.	Attn: Nik Aggarwal 2450 Colorado Avenue, Suite 3000W Santa Monica, CA 90404

3. Goldman Sachs & Co.; GSC Recovery II, L.P.; GSCP Recovery, Inc.

Goldman Sachs & Co.	Attn: Erin Smith 85 Broad Street, 6th Floor New York, NY 10004
Goldman Sachs & Co.1	Attn: Robin Harris 1 New York Plaza, 44th Floor New York, NY 10004
GSC Recovery II, L.P.	500 Campus Drive, Suite 220 Florham Park, NJ 07932
GSCP Recovery, Inc.	500 Campus Drive, Suite 220 Florham Park, NJ 07932

4. Highland Crusader Offshore Partners, L.P.

                                 
¹ Varde Partners, Inc.

27

Highland Crusader Offshore Partners, L.P.

5. The JPMorgan Chase Bank

The JPMorgan Chase Bank Attn: Andrew Faherty
1 Chase Manhattan Plaza, 8^th Floor
New York, NY 10081

6. Woodstead Associates, L.P.

Woodstead Associates, L.P. 885 Third Avenue, 34^th Floor
New York, NY 10022

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EX-21

EXHIBIT 21

SUN HEALTHCARE GROUP, INC. SUBSIDIARIES
as of March 30, 2002

	Jurisdiction of Incorporation
CareerStaff Unlimited, Inc.	Delaware
CareerStaff Management, Inc.	Delaware
Phoenix-Hudson Company	Kansas
PRI, Inc.	Delaware
Masthead Corporation	New Mexico
Regency Health Services, Inc.	Delaware
Braswell Enterprises, Inc.	California
Brittany Rehabilitation Center, Inc.	California
Care Enterprises, Inc.	Delaware
Americare Homecare, Inc.	Ohio
Americare Homecare of West Virginia, Inc.	West Virginia
Americare Midwest, Inc.	Ohio
Americare of West Virginia, Inc.	West Virginia
Beckley Health Care Corp.	West Virginia
Dunbar Health Care Corp.	West Virginia
Putnam Health Care Corp.	West Virginia
Salem Health Care Corp.	West Virginia
Care Enterprises West	Utah
Care Home Health Services	California
Care Finance, Inc.	California
Circleville Health Care Corp.	Ohio
Glenville Health Care, Inc.	West Virginia
Marion Health Care Corp.	Ohio
Carmichael Rehabilitation Center	California
Coalinga Rehabilitation Center	California
Covina Rehabilitation Center	California
Evergreen Rehabilitation Center	California
Fairfield Rehabilitation Center	California
First Class Pharmacy, Inc.	California
Executive Pharmacy Services, Inc.	North Carolina
Fullerton Rehabilitation Center	California
Glendora Rehabilitation Center	California
Grand Terrace Rehabilitation Center	California
Hallmark Health Services, Inc.	Delaware
Harbor View Rehabilitation Center	California
Hawthorne Rehabilitation Center	California
Heritage Rehabilitation Center	California
Heritage-Torrance Rehabilitation Center	California
Huntington Beach Convalescent Hospital	California

1

Jackson Rehabilitation Center, Inc.	California
Linda-Mar Rehabilitation Center	California
Meadowbrook Rehabilitation Center	California
Newport Beach Rehabilitation Center	California
Oasis Mental Health Treatment Center, Inc.	California
Paradise Rehabilitation Center, Inc.	California
Paso Robles Rehabilitation Center	California
Regency High School, Inc.	California
Regency - North Carolina, Inc.	North Carolina
Regency Outpatient Services, Inc.	California
Pacific Beach Physical Therapy, Inc.	California
Peachwood Physical Therapy Corporation	California
Regency Rehab Hospitals, Inc.	California
Orange Rehabilitation Hospital, Inc.	Delaware
San Joaquin G. P. Corporation	New Mexico
RehabWorks of California, Inc.	California
San Bernardino Rehabilitation Hospital, Inc.	Delaware
Regency Rehabilitation Management
and Consulting Services, Inc.	California
Regency - Tennessee, Inc.	Tennessee
RHS Management Corporation	California
Rose Rehabilitation Center	California
Rosewood Rehabilitation Center, Inc.	California
Shandin Hills Rehabilitation Center	California
Stockton Rehabilitation Center, Inc.	California
SunPlus Home Health Services, Inc.	California
Vista Knoll Rehabilitation Center, Inc.	California
Willowview Rehabilitation Center	California
Retirement Care Associates, Inc.	Colorado
Bibb Health & Rehabilitation, Inc.	Georgia
Capitol Care Management Company, Inc.	Georgia
Retirement Management Corporation	Georgia
Charlton Healthcare, Inc.	Georgia
Contour Medical, Inc.	Nevada
Ameridyne Corporation	Tennessee
Atlantic Medical Supply Company, Inc.	Georgia
Americare Health Services Corp.	Delaware
Facility Supply, Inc. (Atlantic Medical Supply, Inc.-
80% interest; Contour Medical, Inc.-20% interest)	Florida
SunChoice.com, Inc.	Delaware
Contour Medical-Michigan, Inc.	Michigan
Quest Medical Supply, Inc.	Georgia
Crescent Medical Services, Inc.	Georgia
Duval Healthcare Center, Inc.	Georgia
Gainesville Healthcare Center, Inc.	Georgia
Gardendale Health Care Center, Inc.	Georgia
Jeff Davis Healthcare, Inc.	Georgia
Lake Forest Healthcare Center, Inc.	Georgia
Lake Health Care Center, Inc.	Georgia

2

Libbie Rehabilitation Center, Inc.	Virginia
Brent-Lox Hall Nursing Home, Inc.	Virginia
Phoenix Associates, Inc.	Virginia
Maplewood Health Care Center of Jackson, Tennessee,
Inc.	Tennessee
Mid-Florida, Inc.	Georgia
Pine Manor Rest Home, Incorporated	North Carolina
Pro-Scription, Inc.	Georgia
Quality NHF Leasing, Inc.	Georgia
Retirement Care G. P. Corporation	New Mexico
Riviera Retirement, Inc.	Georgia
Roberta Health Care Center, Inc.	Georgia
Sea Side Retirement, Inc.	Georgia
Southside Health Care Center, Inc.	Georgia
Statesboro Health Care Center, Inc.	Georgia
Summers Landing, Inc.	Georgia
Sun Coast Retirement, Inc.	Georgia
Encore G. P. Corporation	New Mexico
The Atrium Nursing Home, Inc. (75% interest)	Florida
West Tennessee, Inc.	Georgia
Willow Way, Inc.	Georgia
Woodbury Health Care Center, Inc.	Georgia
Shared Healthcare Systems, Inc. (70.4% interest)	Delaware
SHG Netherlands I, Inc.	New Mexico
SunBridge, Inc.	New Mexico
SunBridge Healthcare Corporation	New Mexico
Clipper Home of North Conway, Inc.	New Hampshire
Clipper Home of Portsmouth, Inc.	New Hampshire
Clipper Home of Rochester, Inc.	New Hampshire
Clipper Home of Wolfeboro, Inc.	New Hampshire
Goodwin Nursing Home, Inc.	New Hampshire
Living Services, Inc.	Washington
Mountain Care Management, Inc.	West Virginia
Nursing Home, Inc.	Washington
SunBridge G. P. Corporation (SunBridge Healthcare
Corporation-90% interest; SunScript Pharmacy
Corporation-10% interest)	New Mexico
SunBridge Healthcare of Colorado, Inc.	Colorado
SunBridge Rehab of Colorado, Inc.	Colorado
SunHealth Specialty Services, Inc.	New Mexico
SunBridge Healthcare of Florida, Inc.	Florida
SunCare Respiratory Services, Inc.	Indiana
SunChoice Medical Supply, Inc.	New Mexico

3

SunDance Rehabilitation Corporation	Connecticut
Cal-Med, Inc.	California
Accelerated Care Plus, LLC (50% interest)	Delaware
HC, Inc.	Kansas
Accelerated Care Plus, LLC (50% interest)	Delaware
NeuroFlex, Inc.	New Mexico
SRT, Inc.	New Mexico
SunAlliance Healthcare Services, Inc.	Delaware
BioPath Clinical Laboratories, Inc.	California
Golan Healthcare Group, Inc.	Massachusetts
Pacific Health Care, Inc.	Arizona
U.S. Laboratory Corp.	Delaware
SunDance Rehabilitation Services, Inc.	New Mexico
Sun Financing I	Delaware
Sun Healthcare Group International Corporation	Delaware
SHG International Holdings, Inc.	Delaware
Sun Lane Purchase Corporation	New Mexico
SunMark Nevada, Inc.	Nevada
SHG Finance, LLC (Sun Healthcare Group, Inc.-50%
member; SunMark Nevada, Inc.-50% member)	New Mexico
Sun Healthcare Group Finance Company	New Mexico
Sunmark of New Mexico, Inc.	New Mexico
SunScript Pharmacy Corporation	New Mexico
SunScript/HRA, L.L.C. (60% member)	Illinois
SunFactors, Inc.	Florida
Advantage Health Services, Inc.	Florida
HoMed Convalescent Equipment, Inc.	New Jersey
Pharmacy Factors of California, Inc.	California
Pharmacy Factors of Florida, Inc.	Florida
Pharmacy Factors of Texas, Inc.	Texas
SunSolution, Inc.	Delaware
The Mediplex Group, Inc.	New Mexico
Bergen Eldercare, Inc.	New Jersey
CareerStaff Services Corporation	Colorado
Community Re-Entry Services of Cortland, Inc.	Delaware
G-WZ of Stamford, Inc.	Connecticut
HTA of New York, Inc.	New York
LTC Staffinders, Inc.	Connecticut
Manatee Springs Nursing Center, Inc.	Florida
Mediplex Management, Inc.	Massachusetts
Mediplex Management - New Mexico, Inc.	New Mexico

4

Mediplex Management of New Jersey, Inc.	New Jersey
Mediplex Management of Palm Beach County, Inc.	Florida
Mediplex Management of Port St. Lucie, Inc.	Florida
Mediplex Management of Texas, Inc.	Texas
Mediplex of Connecticut, Inc.	Connecticut
Mediplex of Kentucky, Inc.	Kentucky
Mediplex of Maryland, Inc.	Maryland
Mediplex of Massachusetts, Inc.	Massachusetts
Mediplex of Concord, Inc.	Massachusetts
Mediplex of New Hampshire, Inc.	New Hampshire
Correctional Care Corp.	Massachusetts
Mediplex of New Jersey, Inc.	New Jersey
P.M.N.F. Management, Inc.	New Jersey
Mediplex of Ohio, Inc.	Ohio
Mediplex of Virginia, Inc.	Virginia
Mediplex Rehabilitation of Massachusetts, Inc.	Massachusetts
New Bedford Nursing Center, Inc.	Massachusetts
Oakview Treatment Centers of Kansas, Inc.	Kansas
Quality Care Holding Corp.	Massachusetts
Quality Nursing Care of Massachusetts, Inc.	Massachusetts
Spofford Land, Inc.	New Hampshire
Sun Care Corp.	Delaware
SunCare Services Corporation	Georgia
SunDance Services Corporation	Tennessee
Worcester Nursing Center, Inc.	Massachusetts

5

PARTNERSHIP INTERESTS

Name of Partnership	Shareholders/Partners	Jurisdiction of Organization
Chico Real Estate Partners, a general partnership	SunBridge G.P. Corporation - 50% partner	Washington
HSR Partners, L.P. I	CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 89% Class A limited partner; CareerStaff Unlimited, Inc. - 10% Class B limited partner	Texas
Langdon Place of Dover, a New Hampshire General Partnership	SunBridge G.P. Corporation - 5% managing partner	New Hampshire
Langdon Place of Keene Limited Partnership	SunBridge G.P. Corporation - 5% general partner	New Hampshire
L.P.E., a New Hampshire General Partnership	SunBridge G.P. Corporation - 5% managing partner	New Hampshire
San Joaquin Valley Rehabilitation Hospital	San Joaquin G.P. Corporation - 1% general partner; Orange Rehabilitation Hospital, Inc. - 69% limited partner	Delaware
SunDance Rehabilitation Texas, Limited Partnership	SunDance Rehabilitation Corporation - 1% general partner; SRT, Inc. - 99% limited partner	Texas
Tall Pines Joint Venture	Spofford Land, Inc. - 50% partner	Connecticut
The Atrium of Jacksonville, Ltd.	Retirement Care G.P. Corporation - 3% general partner; Retirement Care Associates, Inc. - 72% limited partner	Florida
Therapists Unlimited - Baltimore/ Washington D.C., L.P.	CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner	Texas
Therapists Unlimited - Chicago, L.P. II	CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 89% Class A limited partner	Texas
Therapists Unlimited - Detroit II, L.P.	CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 89% Class A limited partner	Texas
Therapists Unlimited - Fresno, L.P.	CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner	Texas

6

Therapists Unlimited - Indianapolis, L.P.	CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner	Texas
Therapists Unlimited - Seattle, L.P.	CareerStaff Management, Inc. - 1% general partner; PRI, Inc. - 99% Class A limited partner	Texas
W.R. Partners (Warner Robins), L.P.	Retirement Care Associates, Inc. - 1% general partner; Retirement Care Associates, Inc. - 49% limited partner	Georgia
West Jersey/Mediplex Rehabilitation,   Limited Partnership	Mediplex of New Jersey, Inc. - 89% general partner; Bergen Eldercare, Inc. - 11% Class A limited partner	New Jersey

7