Exhibit 10.2

 

HEALTHMONT, INC.

 

(f/k/a HM Acquisitions Corp.)

 

NOTE PURCHASE AGREEMENT

 

--------------------------------------------------------------------------------

 

$2,300,000

 

15.0% PROMISSORY NOTE

 

Dated as of October 3, 2003

 

--------------------------------------------------------------------------------

EXHIBITS & SCHEDULES

 

Exhibit A

  

Form of Promissory Note

Exhibit B

  

Form of Warrant

Exhibit C

  

Form of Security Agreement

Exhibit D

  

Form of Warrantholders Rights Agreement

Exhibit E

  

Form of Amended Collateral Assignment of Securities Deeds and Contracts

Exhibit F

  

Form of Parent Subordination Agreement

Exhibit G

  

Form of Intercompany Subordination Agreement

Exhibit H

  

Form of Parent Guaranty

Exhibit I

  

Form of Subsidiary Guaranty

Exhibit J

  

Form of Amended and Restated Pledge and Security Agreement

Schedule 8.5

  

Real Property

Schedule 9.2

  

Joint Ventures

Schedule 9.5

  

Facilities

Schedule 9.12

  

Transactions

Schedule 9.14

  

Capital Structure

Schedule 11

  

Permitted Liens

 

--------------------------------------------------------------------------------

 

NOTE PURCHASE AGREEMENT

 

HEALTHMONT, INC.

 

(f/k/a HM Acquisitions Corp.)

 

$2,300,000

 

15.0% Promissory Note

 

Dated as of October 3, 2003

 

CHATHAM INVESTMENT FUND I, LLC

100 Galleria Parkway, Suite 270

Atlanta, Georgia 30305

Attn: Brian G. Reynolds

 

Ladies and Gentlemen:

 

HealthMont, Inc. (f/k/a HM Acquisitions Corp.), a Delaware corporation (the
“Company”), a successor by merger to HealthMont, Inc., a Tennessee corporation
(“HealthMont”), proposes to issue and sell to Chatham Investment Fund I, LLC, a
Delaware limited liability company (the “Purchaser”), a 15.0% Promissory Note
due August 31, 2005 in the aggregate principal amount of $2,300,000 (the “Note”)
substantially in the form of Exhibit A hereto. The Company is a wholly-owned
subsidiary of SunLink Health Systems, Inc., an Ohio corporation (“Parent”).

 

The sale of the Note and the Warrant (as defined below) to Purchaser will be
made without registration of the Note or the Warrant under the Securities Act of
1933, as amended (the “Securities Act”), in reliance upon the exemption
therefrom provided by Section 4(2) of the Securities Act.

 

The Company hereby agrees with Purchaser as follows:

 

1. PURCHASE AND SALE OF THE NOTE AND WARRANT. The Company agrees to issue and
sell the Note to Purchaser and agrees to cause Parent to issue the Warrant (as
defined below) to Purchaser as hereinafter provided, and Purchaser, upon the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees to purchase the Note in exchange for
$2,300,000.

 

--------------------------------------------------------------------------------

2. PAYMENT FOR THE NOTES. Payment for the Note and the Warrant shall be made to
the Company or to its order by wire transfer or other same day funds on the
Closing Date (as defined below) to the account designated in writing to
Purchaser. The closing shall occur at the offices of the Company, 900 Circle 75
Parkway, Suite 1300, Atlanta, Georgia at 10:00 A.M., Atlanta, Georgia time on
October 3, 2003 or at such other date or time as may be mutually agreed upon.
The time and date of such payment are referred to herein as the “Closing Date.”

 

Payment for the Note and the Warrant shall be made against delivery to the
Purchaser of the Note and the Warrant registered to Purchaser.

 

3. INTEREST ON THE NOTE. Interest shall accrue on the unpaid principal amount of
the Note from and including the Closing Date, at an interest rate of 15.0% per
annum, payable at the election of the holder in cash or by wire transfer of
immediately available funds to the respective account designated in writing by
Purchaser, monthly in arrears on the last day of each month (or, if the last day
of any such month is not a Business Day, on the next Business Day after such
last day). Interest on the Note will be computed on the basis of a 360-day year
composed of twelve 30-day months. The Note shall bear interest on any overdue
principal, including any overdue payment or prepayment of principal and premium,
if any, and (to the extent permitted by applicable law) on any overdue
installment of interest, at the rate of 2% per annum in excess of the interest
rate applicable to timely payments thereon.

 

4. WARRANT.

 

4.1 On the Closing Date, Parent shall deliver to Purchaser, in consideration for
executing this Agreement, a warrant exercisable for 57,500 shares of Common
Stock (together with any substitutions or replacements therefor, the “Warrant”)
and shall have a nominal exercise price. The Warrant shall be substantially in
the form of Exhibit B hereto, and shall be duly executed and registered in
Purchaser’s name. The Warrant shall be fully earned by Purchaser by its
execution hereof. The number of shares of Common Stock for which the Warrant is
exercisable is subject to adjustment pursuant to certain provisions contained
therein.

 

4.2 Parent, Company and Purchaser agree that, for Federal income tax purposes
(i) the Warrant together with the Note constitute an investment unit, and (ii)
the aggregate issue price of the Note is $2,300,000 and the aggregate purchase
price of the Warrant is $0. Neither Parent nor Company shall voluntarily take
any action inconsistent with the agreement set forth in the immediately
preceding sentence.

 

5. CONDITIONS PRECEDENT. The obligations of Purchaser under Section 2 are
subject to the following conditions:

 

5.1 The representations and warranties of the Company contained herein are true
and correct on and as of the Closing Date in all material respects with respect
to all representations and warranties qualified by a reference to materiality or
to any Material Adverse Effect and in all respects with respect to all other
representations and warranties

 

2

--------------------------------------------------------------------------------

as if made on and as of the Closing Date, and the Company shall have complied
with all agreements and all conditions on its part to be performed or satisfied
hereunder at or prior to the Closing Date.

 

5.2 Purchaser shall have received:

 

(a) This Agreement or counterparts hereof, duly executed and delivered by the
Company and Purchaser;

 

(b) The Note, duly executed and delivered by the Company;

 

(c) The Warrant, duly executed and delivered by the Parent;

 

(d) The Warrantholders Rights Agreement, duly executed and delivered by the
Parent;

 

(e) The Security Agreement, duly executed and delivered by the Company,
HealthMont of Georgia, Inc. (d/b/a Memorial Hospital of Adel and Memorial
Convalescent Center, a Tennessee corporation (“HealthMont Georgia”), HealthMont
of Missouri, Inc. (d/b/a/ Callaway Country Community Hospital), a Tennessee
corporation (“HealthMont Missouri”), and Chatham;

 

(f) The Parent Guaranty, duly executed and delivered by the Parent;

 

(g) The Subsidiary Guaranty, duly executed and delivered by HealthMont Georgia
and HealthMont Missouri;

 

(h) The Amended Collateral Assignment, duly executed and delivered by the
Parent;

 

(i) The Intercompany Subordination Agreement, duly executed and delivered by the
Parent, HealthMont Georgia, HealthMont Missouri and Purchaser;

 

(j) The Subordination Agreement, duly executed and delivered by GE, the Parent,
HealthMont, HealthMont Georgia, HealthMont Missouri and the Company;

 

(k) The Amended Pledge and Security Agreement, duly executed and delivered by
the Parent and Chatham;

 

(l) A copy of the resolutions in form and substance reasonably satisfactory to
them, of the Boards of Directors of the Company and its Subsidiaries, and the
Parent authorizing the execution, delivery and performance of this Agreement,
the Warrant, the Related Transactions and any other documents contemplated
hereby or thereby to which they are a party, certified as of the Closing Date by
the secretary or an assistant secretary of the Company and

 

3

--------------------------------------------------------------------------------

the Parent, and such certificate(s) shall state that the resolutions thereby
certified have not been amended, modified, revoked or rescinded as of the date
of such certificate;

 

(m) A certificate of the secretary or an assistant secretary of the Company and
its Subsidiaries, and the Parent, dated as of the Closing Date, certifying as to
the incumbency and signatures of the officers of the Company executing this
Agreement, the Warrant and any certificate or other documents to be delivered by
either of them pursuant hereto, together with evidence of the incumbency of such
secretary or assistant secretary;

 

(n) The unaudited Consolidated balance sheet and statement of income of the
Company and its Subsidiaries for the monthly period ended August 31, 2003 (all
in reasonable detail and form acceptable to Purchaser), prepared in accordance
with GAAP and fairly presenting, in all material respects, the financial
position of the Persons covered thereby at the date thereof and the results of
their operations for such period, subject only to normal year-end audit
adjustments and the addition of footnotes;

 

(o) Copies of the certificate of incorporation of the Parent and all amendments
thereto certified by the Secretary of State of Ohio, together with copies of the
by-laws of the Parent certified as accurate and complete by the secretary or
assistant secretary of the Parent;

 

(p) Good standing certificates for the Parent, dated as of a recent date prior
to the Closing Date, issued by the Secretary of State of the State of Ohio;

 

(q) Copies of the certificate of incorporation of the Company and its
Subsidiaries, and all amendments thereto certified by the Secretary of State in
which they are incorporated, together with copies of the by-laws of the Company
certified as accurate and complete by the secretary or assistant secretary of
the Company; and

 

(r) Good standing certificates for the Company and its Subsidiaries, dated as of
a recent date prior to the Closing Date, issued by the Secretary of State in
which it is incorporated.

 

5.3 Purchaser shall have received an officer’s solvency certificate supporting
the conclusions that, after giving effect to the transactions contemplated by
this Agreement, the Warrant and the Related Transactions and the contemplated
borrowings of the full amounts available thereunder, the Company, individually
and on a Consolidated basis with its subsidiaries, will not be insolvent, will
not be rendered insolvent by the indebtedness incurred in connection therewith,
will not be left with unreasonably small capital with which to engage in its
business or will not have incurred debts, including contingent obligations,
beyond its ability to pay such debts as they mature.

 

4

--------------------------------------------------------------------------------

5.4 The Company shall have duly executed and delivered to Purchaser a true,
correct and complete copy of each of the Related Transaction Documents, together
with evidence satisfactory to Purchaser in its sole good faith discretion of the
satisfaction (without waiver) of all other conditions to the closing of the
Related Transactions scheduled to be closed on the Closing Date, and that all
transactions contemplated by the Related Transaction Documents to be consummated
on or before the Closing Date will take place prior to or simultaneously with
the transactions hereunder contemplated to take place on the Closing Date.

 

5.5 Satisfaction of Purchaser in its sole good faith discretion as to the
absence of any event, act, condition or occurrence of whatever nature that
constitutes, or could reasonably be expected to result in, a Material Adverse
Effect since June 30, 2002.

 

5.6 Purchaser shall have received on and as of the Closing Date a certificate
signed by an appropriate officer of the Company in which such officer shall
state (i) that the representations and warranties in this Agreement, the Note
and the Warrant are true and correct in all material respects, as if made at and
as of the Closing Date, (ii) that the Company has complied with all agreements
and satisfied all conditions on its part to be performed or satisfied hereunder
or thereunder in all material respects at or prior to the Closing Date, (iii)
that subsequent to March 31, 2003 no Material Adverse Effect shall have
occurred, and (iv) there has not occurred any default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument to which it is a party or by which it may be bound
or to which any of its properties may be subject and which default has resulted,
or created a material risk of resulting, in a Material Adverse Effect.

 

5.7 Purchaser and its counsel and other advisors shall have received all costs,
fees and expenses payable to it on the Closing Date, including, without
limitation, the commitment fee to Purchaser in the amount of $57,500.

 

5.8 The Company and Parent shall have received any and all necessary consents
and shall have made any and all filings necessary in connection with the
consummation of the transactions contemplated by this Agreement and the Related
Transaction Documents.

 

5.9 On or prior to the Closing Date the Company and Parent shall have furnished
to Purchaser such further certificates and documents as Purchaser shall
reasonably request.

 

5

--------------------------------------------------------------------------------

6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE OTHER CREDIT PARTIES.
To induce Purchaser to enter into this Agreement and purchase the Note and the
Warrant as provided herein, the Company represents and warrants to Purchaser
that:

 

6.1 Corporate Existence and Power. The Company and each of its Subsidiaries is
duly organized, validly existing and in good standing under the laws of the
state of its organization, and has all organizational powers and all material
governmental licenses, authorizations, consents and approval required to carry
on its business as now conducted and as from time to time will be conducted. The
Company and each of its Subsidiaries is qualified to do business as a foreign
organization in each jurisdiction in which the failure to be so qualified could
reasonably be expected to have a Material Adverse Effect.

 

6.2 Corporate and Governmental Authorization; No Contravention. The execution,
delivery and performance by the Company of the Financing Documents to which it
is a party are within its organizational powers, have been duly authorized by
all necessary organizational action, require no action by or in respect of, or
filing with, any governmental body, agency or official and do not contravene or
constitute a default under, any provisions of applicable law or regulation the
violation of which could reasonably be expected to have a Material Adverse
Effect, or of the Organizational Documents of the Company, or of any agreement,
judgment, injunction, order, decree or other instrument binding upon the Company
or result in the creation or imposition of any Lien on any asset of the Company.

 

6.3 Binding Effect.

 

(a) Each of the Financing Documents to which each is a party constitutes a valid
and binding agreement of the Company and Parent in each case enforceable in
accordance with its respective terms, subject to: (i) the effect of any
applicable bankruptcy, fraudulent transfer, moratorium, insolvency,
reorganization or other similar laws affecting the rights of creditors
generally; and (ii) the effect of general principles of equity whether applied
by a court of equity or law.

 

(b) The Parent has reserved and will keep available for issuance upon exercise
of the Warrant the total number of Warrant Shares deliverable upon such exercise
from time to time outstanding. The issuance of the shares of Common Stock
issuable upon the exercise of the Warrant has been duly and validly authorized
and, when issued and sold in accordance with the Warrant, Warrant Shares will be
duly and validly issued, fully paid and nonassessable and free of preemptive
rights.

 

6.4 No Default. No Default has occurred and is continuing and neither the
Company nor any of its Subsidiaries is in default under or with respect to any
material contract, agreement, lease or other material instrument to which it is
a party or by which its property is bound or affected.

 

6.5 Taxes. All Federal, state and local tax returns, reports and statements
required to be filed by or on behalf of the Company and any of its Subsidiaries
prior to the date hereof have been filed with the appropriate governmental
agencies in all

 

6

--------------------------------------------------------------------------------

jurisdictions in which such returns, reports and statements are required to be
filed, and all taxes (including real property taxes) and other charges shown to
be due and payable have been timely paid prior to the date on which any fine,
penalty, interest, late charge or loss may be added thereto for nonpayment
thereof, except any of the foregoing as may be subject to a Permitted Contest
and except for such filings or payments, the failure to make which (individually
or in the aggregate) could not reasonably be expected to have a Material Adverse
Effect. All state and local sales and use taxes required to be paid by the
Company and its Subsidiaries prior to the date hereof have been paid, except any
of the foregoing as may be subject to a Permitted Contest and except for such
payments the failure to make which (individually or in the aggregate) could not
reasonably be expected to have a Material Adverse Effect. All federal and state
returns have been filed by the Company for all periods for which returns were
due with respect to employee income tax withholding, social security and
unemployment taxes, and the amounts shown thereon to be due and payable have
been paid in full or adequate provisions therefore have been made. For the
avoidance of doubt, such payments, returns, reports and statements do not
include any of the foregoing with respect to Medicare, Medicaid or Tricare
programs.

 

6.6 Brokers. No broker, finder or other intermediary has brought about the
obtaining, making or closing of the transactions contemplated by the Financing
Documents, and the Company does not or will not have any obligation to any
Person in respect of any finder’s or brokerage fees in connection herewith or
therewith.

 

6.7 Full Disclosure. None of the information (financial or otherwise) furnished
to Purchaser by or on behalf of the Company or any of its Subsidiaries in
connection with the consummation of the transactions contemplated by any of the
Financing Documents nor any forms, reports or documents required to be filed by
the Company with the Securities and Exchange Commission the contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein or therein not misleading in the light of the
circumstances under which such statements were made; provided that with respect
to projected financial information the Company represents only that such
information was prepared in good faith based upon assumptions believed to be
reasonable at the time. As of the date hereof, no fact is actually known to the
Company or any of its Subsidiaries which has resulted, or in the future (so far
as the Company or any of its Subsidiaries can reasonably foresee) will result,
or creates a material risk of resulting, in any Material Adverse Effect, except
to the extent that present or future general or industry economic conditions may
result in a Material Adverse Effect or as otherwise disclosed in the Company’s
filings with the Securities and Exchange Commission. All financial projections
delivered, if any, to Purchaser have been prepared on the basis of the
assumptions stated therein.

 

6.8 Representation and Warranties Incorporation from Other Operative Documents.
As of the Closing Date, each of the representations and warranties made in the
Financing Documents by each of the parties thereto is true and correct in all
material respects, and such representations and warranties are hereby
incorporated herein by reference with the same effect as though set forth in
their entirety herein, as qualified therein.

 

7

--------------------------------------------------------------------------------

6.9 Solvency. Both before and after giving effect to (a) the loan to be made or
extended on the Closing Date and the issuance of the Warrant on the Closing
Date, (b) the disbursement of the proceeds of such loan pursuant to the
instructions of the Company, (c) the consummation of the transactions
contemplated in the Financing Documents and the Related Transaction Documents,
and (d) the payment and accrual of all transaction costs in connection with the
foregoing, the Company and each of its Subsidiaries is solvent.

 

7. PAYMENT OF NOTES. Except as expressly provided in Section 7.2, the Company
may not prepay all or any part of the principal amount of the Note. The Company
covenants that so long as the Note is outstanding:

 

7.1 Amortization of Note. The Company shall repay the entire principal amount of
the Note then outstanding on August 31, 2005, together with all accrued and
unpaid interest thereon. On any accelerated maturity of the Note, the Company
will pay the entire principal amount of the Note then outstanding together with
all accrued and unpaid interest thereon.

 

7.2 Voluntary Prepayments.

 

(i) The Company may, from and after the Closing Date, upon 5 Business Days’
prior written notice thereof from the Company to Purchaser, redeem the Note, in
whole or in part, together with the applicable prepayment provisions provided
below; provided that any such redemptions shall be in a minimum amount of
$100,000 and integral multiples of $100,000 in excess of such amount, plus all
accrued and unpaid interest including the date of redemption with respect to
such amount redeemed.

 

(ii) In the event of any prepayments or redemptions on or in respect of the Note
(other than from the proceeds of the issuance of equity securities of Parent)
the Company shall, subject to the provisions of the Subordination Agreement, on
the date of such prepayment or redemption, pay the holder a prepayment premium
(the “Prepayment Premium”) in an amount equal to (x) 2.5% of the amount so
prepaid or redeemed after the first anniversary of the Closing Date, (y) 1.5% of
the amount so prepaid or redeemed after the first anniversary of the Closing
Date and on or prior to the second anniversary of the Closing Date, and (z) 0%
of the amount so prepaid or redeemed after the second anniversary of the Closing
Date.

 

Notwithstanding the foregoing provisions of this Section 7.2(ii), Chatham agrees
to waive the applicable amount of the Prepayment Premium to the extent any such
prepayment of the Note arises from the proceeds of a refinancing in which
Chatham or its Affiliates are a participant or lender.

 

8

--------------------------------------------------------------------------------

8. AFFIRMATIVE COVENANTS. Company hereby covenants and agrees with Purchaser to
comply with such of the following provisions as are applicable to it (except as
otherwise agreed or consented to or waived in writing by Purchaser):

 

8.1 Integration. The Company will take all action that is appropriate or
necessary to assure that its offerings of other securities will not be
integrated for purposes of the Securities Act with the offerings of the Note and
the Warrant by the Company to Purchaser contemplated hereby in any manner that
would require the registration of such securities under the Securities Act.

 

8.2 Solicitation. Neither the Company, its Affiliates nor any person acting on
its or their behalf, have offered or sold, or have solicited or will solicit any
offer to buy or offer to sell, the Note or the Warrant by means of any form of
general solicitation or general advertising within the meaning of Rule 502(c) of
Regulation D or in any manner involving a public offering within the meaning of,
or prohibited by, Section 4(2) of the Securities Act.

 

8.3 Available Information. While the Note and/or the Warrant remain outstanding
and are “restricted securities” within the meaning of Rule 144(a)(3) under the
Securities Act, the Company will, during any period in which it is not subject
to Section 13 or 15(d) of the Exchange Act, make available to Purchaser in
connection with any sale thereof, in each case as soon as is reasonably
practicable upon written request of Purchaser, the information specified in, and
meeting the requirements of, Rule 144A(d)(4) under the Securities Act (or any
successor thereto), provided that Purchaser agrees to maintain the
confidentiality of any such information which has not been disclosed to the
public.

 

8.4 Payments Under this Agreement. The Company will make all payments of
principal, interest, fees, and all other payments required under this Agreement
and under the Note, and under any other agreements with the Purchaser to which
the Company is a party, as and when due.

 

8.5 Mortgages. Within fifteen (15) days of the Closing Date, the Company will
provide mortgages on all real property ascribed on Schedule 8.5, and all such
title insurance policies, endorsements and opinions in each case in form and
substance satisfactory to the Purchaser.

 

8.6 Information Covenants. Company and its Subsidiaries will furnish or cause to
be furnished to Purchaser or the registered holder of the Note, the Warrant
and/or the Warrant Shares:

 

(a) Monthly Statements. As soon as available, but in any event within 15 days
after the end of each month of the Company, duplicate copies of:

 

(i) consolidated balance sheets of the Company and its Subsidiaries as at the
end of such month, and

 

9

--------------------------------------------------------------------------------

(ii) consolidated statements of income and stockholders’ equity of the Company
and its Subsidiaries for such month and, in addition, statements of cash flow,
in each case, for the portion of the fiscal year ending with such month,

 

in each case prepared in accordance with GAAP applicable to periodic financial
statements generally, and fairly presenting, in all material respects, the
financial position of the Persons being reported on and their results of
operations and cash flows, subject to changes resulting from normal year-end
adjustments.

 

(b) Quarterly Statements. As soon as available, but in any event within 60 days
after the end of each fiscal quarter of the Company, duplicate copies of:

 

(i) consolidated balance sheets of the Company and its Subsidiaries as at the
end of such quarter, and

 

(ii) consolidated statements of income and stockholders’ equity of the Company
and its Subsidiaries for such quarter and, in addition, statements of cash flow,
in each case, for the portion of the fiscal year ending with such quarter,

 

in each case prepared in accordance with GAAP applicable to periodic financial
statements generally, and fairly presenting, in all material respects, the
financial position of the Persons being reported on and their results of
operations and cash flows, subject to changes resulting from normal year-end
adjustments.

 

(c) Annual Statements. As soon as available, but in any event within 105 days
after the end of each fiscal year of the Company, duplicate copies of:

 

(i) consolidated balance sheets of the Company and its Subsidiaries as at the
end of such year, and

 

(ii) consolidated statements of income, stockholders’ equity and cash flows of
the Company and its Subsidiaries for such year,

 

in each case prepared in accordance with GAAP, fairly presenting, in all
material respects, the financial position of the Persons being reported on and
their results of operations and cash flows, and accompanied by an opinion
thereon of independent certified public accountants of recognized national
standing, which opinion (i) shall state that such financial statements (other
than consolidating statements) present fairly, in all material respects, the
financial position of the Persons being reported upon and their results of
operations and cash flows and have been prepared in conformity with GAAP, and
that the examination of such accountants in connection with such financial
statements (other than consolidating statements) has been made in accordance
with generally accepted auditing standards in the United States, and that such
audit provides a reasonable basis for

 

10

--------------------------------------------------------------------------------

such opinion in the circumstances, and (ii) shall not contain any “going
concern” qualification.

 

(d) Certificate of Chief Financial Officer. Concurrently with the delivery of
the financial statements referred to in subsections (a) and (b) of this Section
8.5, a certificate of the Chief Executive Officer or Chief Legal Officer and the
Chief Financial Officer or Chief Accounting Officer of the Company stating that
(i) to the best of such officer’s actual knowledge, the Company and each of its
Subsidiaries has observed or performed in all material respects all of its
covenants and other agreements, and satisfied in all material respects every
condition, contained in this Agreement and the other Financing Documents to be
observed, performed or satisfied by it (ii) neither officer has obtained
knowledge of any Default except as specified in such certificate, and (iii) to
the best of such officer’s knowledge, such financial statements have been
prepared in accordance with GAAP (with respect to quarterly financial
statements, subject to the absence of footnotes and changes resulting from
normal year-end adjustments) and fairly present, in all material respects, the
financial position of the Persons being reported on and their results of
operations and cash flows.

 

(e) Other Information. Promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent by the Company
or any of its Subsidiaries to its securityholders or made available generally by
the Company or any of its Subsidiaries and all regular and periodic reports and
all registration statements and final prospectuses, if any, filed by the Company
or any of its Subsidiaries with any securities exchange or with the Securities
and Exchange Commission or any other governmental authority succeeding to any of
its functions and, promptly upon request, such additional financial and other
information as Purchaser may from time to time reasonably request.

 

(f) Notice of Default or Event of Default or Litigation. The Company shall give
prompt notice to the Purchaser of any litigation, arbitration, or other
proceeding before any Governmental Authority against or affecting the Company if
the amount claimed is more than $50,000.00 for any single claim, or if the
amounts at issue in all proceedings pending against the Company at any point in
time exceed $250,000 in the aggregate.

 

(g) Additional Information to Holders of Other Indebtedness. Simultaneously with
the furnishing of such information to any other holder of Indebtedness of the
Company or any of its Subsidiaries, (i) copies of all other financial
statements, reports or projections with respect to the Company or any of its
Subsidiaries which are broader in scope or on a more frequent basis than the
such Person is required to provide under this Agreement and (ii) copies of all
studies, reviews, reports or assessments that reveal circumstances, events or
other matters that could reasonably be expected to have a Material Adverse
Effect.

 

11

--------------------------------------------------------------------------------

(h) Notices Related HealthMont Loan Documents. Promptly (but in any event within
3 Business Days) after receipt by the Company of any notice with respect to the
prepayment of HealthMont Loan, copies of such communication.

 

8.7 Employee Benefit Plans. The Company will (i) comply with the funding
requirements of ERISA with respect to the Plans for its employees, or will
promptly satisfy any accumulated funding deficiency that arises under Section
302 of ERISA; (ii) furnish the Purchaser, promptly after filing the same, with
copies of all reports or other statements filed with the United States
Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal
Revenue Service with respect to all Plans, or which the Company, or any member
of a Controlled Group, may receive from such Governmental Authority with respect
to any such Plans, and (iii) promptly advise the Purchaser of the occurrence of
any Reportable Event or Prohibited Transaction with respect to any such Plan and
the action which the Company proposes to take with respect thereto. The Company
will make all contributions when due with respect to any multi- employer pension
plan in which it participates and will promptly advise the Purchaser: (x) upon
its receipt of notice of the assertion against the Company of a claim for
withdrawal liability; (y) upon the occurrence of any event which could trigger
the assertion of a claim for withdrawal liability against the Company; and (z)
upon the occurrence of any event which would place the Company in a Controlled
Group as a result of which any member (including the Company) thereof may be
subject to a claim for withdrawal liability, whether liquidated or contingent.

 

8.8 Financing Statements. The Company shall provide to the Purchaser evidence
satisfactory to the Purchaser as to the due recording of termination statements,
releases of collateral, and Forms UCC-3, and shall cause to be recorded
financing statements on Form UCC-1, duly executed by the Company and the
Purchaser, in all places necessary to release all existing security interests
and other liens in the Collateral (other than as permitted by this Agreement)
and to perfect and protect the Purchaser’s lien and security interest in the
Collateral, as the Purchaser may request.

 

8.9 Books, Records and Inspections. The Company will, and will cause each of its
respective Subsidiaries to, keep true and correct books of records and accounts
in which full and correct entries will be made of all their business
transactions, all sufficient to all for the preparation of the Company’s
financial statements in accordance with GAAP. The Company will, and will cause
each of its respective Subsidiaries to, permit, upon one (1) Business Days prior
notice to the chief executive officer or chief financial officer of the Company
(or with no prior notice if a Default or Event of Default then exists), officers
and designated representatives of Purchaser to visit and inspect any of the
properties or assets of the Company and of any of its Subsidiaries, and to
examine the books and records of the Company, and any of its respective
Subsidiaries, all at such reasonable times and intervals during normal business
hours and to such reasonable extent as the Purchaser may reasonably request.

 

12

--------------------------------------------------------------------------------

8.10 Maintenance of Property; Insurance.

 

(a) The Company and its Subsidiaries will exercise commercially reasonable
efforts to maintain or cause to be maintained in good repair, working order and
condition (subject to normal wear and tear) all properties used in its
businesses and from time to time will make or cause to be made all appropriate
repairs, renewals and replacements thereof and will maintain and renew as
necessary all material licenses, permits and other clearances necessary to use
and occupy such properties, except where the failure to comply with any of the
foregoing could not reasonably be expected to have a Material Adverse Effect.

 

(b) The Company and its Subsidiaries will maintain or cause to be maintained,
with financially sound and reputable insurers, insurance with respect to its
properties and business which are of an insurable character against loss or
damage of the kinds customarily insured against by corporations of established
reputation engaged in the same or similar businesses and similarly situated, of
such types and in such amounts as are customarily carried under similar
circumstances by such other corporations.

 

8.11 Payment of Taxes. The Company will, and will cause each of its respective
Subsidiaries to, pay and discharge all material taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits, or
upon any properties belonging to it, prior to the date on which material
penalties attach thereto, and all lawful claims which, if unpaid, might become a
Lien (other than Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent) or charge upon any properties of the Company or any
of its respective Subsidiaries or cause a failure or forfeiture of title
thereto; provided that neither the Company nor any of its respective
Subsidiaries shall be required to pay any such tax, assessment, charge, levy or
claim that is being contested in good faith and by appropriate proceedings,
which proceedings have the effect of preventing the forfeiture or sale of the
property or asset that may become subject to such Lien, if it has maintained
adequate reserves with respect thereto in accordance with and to the extent
required under GAAP.

 

8.12 Corporate Franchises. The Company will continue to engage in business of
the same general type as is conducted by is immediately prior to the Closing
Date and will do or cause to be done all things necessary to preserve and keep
in full force and effect their existence and authority as a corporation.

 

8.13 Compliance with Statutes, etc. The Company will, and will cause each of its
Subsidiaries to, comply with all applicable statutes, regulations and orders of,
and all applicable restrictions imposed by, all Governmental Authorities,
domestic or foreign, in respect of the conduct of its business and the ownership
of its property (including all applicable Environmental Laws), except where such
noncompliance could not reasonably be expected to result in a Material Adverse
Effect.

 

13

--------------------------------------------------------------------------------

8.14 Taxes and Charges. The Company will timely file all tax reports and pay and
discharge all taxes, assessments and governmental charges or levies imposed upon
the Company, or its income or profits or upon its properties or any part
thereof, before the same shall be in default and before the date on which
penalties attach thereto, as well as all lawful claims for labor, material,
supplies or otherwise which, if unpaid, might become a lien or charge upon the
properties or any part thereof of the Company; provided, however, that the
Company shall not be required to pay and discharge or cause to be paid and
discharged any such tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be contested in good faith and by appropriate
proceedings by the Company, and the Company shall have set aside on their books
adequate reserve therefor; and provided further, that such deferment of payment
is permissible only so long as the Company’s title to, and its right to use, the
Collateral is not adversely affected thereby and Purchaser’s lien and priority
on the Collateral are not adversely affected, altered or impaired thereby.

 

8.15 Performance of Obligations. The Company will, and will cause its Parent and
each of its Subsidiaries to, perform in all material respects all of their
respective obligations under the terms of each mortgage, indenture, security
agreement, other debt instrument and material contract by which they are bound
or to which they are a party, except where such nonperformance could not
reasonably be expected to result in a Material Adverse Effect.

 

8.16 Use of Proceeds. All proceeds of the sale of the Note shall be used (i) to
advance funds by the Company to HealthMont, (ii) to pay certain expenses to be
incurred in connection with the Merger, (iii) to fund certain fees and expenses
associated with the sale of the Note and Warrant hereunder, and (iv) the
remainder for general corporate purposes.

 

8.17 Purchase Price of the Note; Additional Taxes. The Company agrees with
Purchaser that, for purposes of Sections 127_ through 1275 of the Code, the
aggregate purchase price of the Note shall be $2,300,000.00 and that such price
will be appropriately used by the Company and Purchaser for financial reporting
and income tax purposes.

 

8.18 Access. The Company shall, and cause each of its respective Subsidiaries
to, during normal business hours, from time to time upon one (1) Business Days’
prior notice as frequently as Purchaser determines to be appropriate: (a)
provide Purchaser and any of their officers, employees and agents access to its
properties, facilities, advisors and employees (including officers) of the
Company and each of its Subsidiaries, (b) permit Purchaser, and any of their
officers, employees and agents, to inspect, audit and make extracts from the
Company’s and each of its Subsidiaries’ books and records, and (c) permit
Purchaser, and their officers, employees and agents, to inspect, review,
evaluate and make test verifications and counts of the accounts, inventory and
other assets of the Company and each of its Subsidiaries. If a Default or Event
of Default has occurred and is continuing or if access is necessary to preserve
or protect the Collateral as determined by Purchaser, Company and each of its
Subsidiaries shall provide such access to

 

14

--------------------------------------------------------------------------------

Purchaser at all times and without advance notice. Furthermore, so long as any
Event of Default has occurred and is continuing, the Company shall provide
Purchaser with access to its suppliers and customers. The Company and each of
its Subsidiaries shall make available to Purchaser and their counsel, as quickly
as is possible under the circumstances, copies of all books and records that
Purchaser may reasonably request. Company and each of its Subsidiaries shall
deliver any document or instrument necessary for either Purchaser, as it may
from time to time request, to obtain records from any service bureau or other
Person that maintains records for the Company or any of its Subsidiaries.

 

8.19 Collection of Accounts. The Company shall continue to collect its Accounts
in the ordinary course of business.

 

8.20 Places of Business. The Company shall give thirty (30) days’ prior written
notice to the Purchaser of any charge in the location of any of its places of
business, of the places where its records concerning its Accounts are kept, of
the places where the Collateral is kept, or of the establishment of any new, or
the discontinuance of any existing, places of business.

 

8.21 Business Conducted. The Company shall continue in the business currently
conducted by it using its best efforts to maintain its customers and goodwill.
The Company shall not engage, directly or indirectly, in any business or lines
of business which are not reasonably related to the lines of business conducted
by it immediately before the Closing Date without the prior written consent of
the Purchaser, such consent to be withheld or granted based on the Purchaser’s
determination in its sole discretion whether such action would have a
detrimental impact on (a) the Company’s ability to repay the Note and/or (b) the
Purchaser’s rights in the Collateral.

 

8.22 Licensure; Medicaid/Medicare Cost Reports. The Company will maintain all
certificates of need, provider numbers and licenses necessary to conduct its
business as currently conducted, and take any steps required to comply with any
such new or additional requirements that may be imposed on providers of medical
products and Medical Services. If required, all Medicaid/Medicare cost reports
will be properly filed.

 

8.23 Further Assurances. The Company will at its own cost and expense, cause to
be promptly and duly taken, executed, acknowledged and delivered all such
further acts, documents and assurances as may from time to time be necessary or
as Purchaser may from time to time reasonably request in order to carry out the
intent and purposes of the Financing Documents and the transactions contemplated
thereby.

 

15

--------------------------------------------------------------------------------

9. NEGATIVE COVENANTS. Company covenants and agrees that so long as the Company
may borrow under this Agreement and until payment in full of the Note md
performance of all Obligations and other obligations of the Company under the
Financing Documents:

 

9.1 Borrowing. The Company will not, and will not permit any of its Subsidiaries
to create, incur, assume or suffer to exist any liability for Borrowed Money
except: (i) indebtedness to the Company and any of its Subsidiaries, (ii)
indebtedness of the Company and any of its Subsidiaries secured by mortgages,
encumbrances or liens expressly permitted by Section 9.3; (iii) accounts payable
to trade creditors and current operating expenses (other than for borrowed
money) which are not aged more than one hundred twenty (120) days from the
billing date or more than thirty (30) days from the due date, in each case
incurred in the ordinary course of business and paid within such time period,
unless the same are being contested in good faith and by appropriate and lawful
proceedings, and the Company and any of its Subsidiaries shall have set aside
such reserves, if any, with respect thereto as are required by GAAP and deemed
adequate by the Company and any of its Subsidiaries and its independent
accountants; (iv) borrowings incurred in the ordinary course of its business and
not exceeding $10,000.00 in the aggregate outstanding at any one time, (v)
capital leases existing as of the date of this Agreement, and (vi) capital
equipment leases and/or purchase money conditional sale contracts entered into
following the date of this Agreement provided that the aggregate amount
obligated on all such capital equipment leases and/or purchase money conditional
sale contracts does not exceed $300,000 per Company facility without the prior
written consent of the Purchaser. The Company will not, and will not permit any
of its Subsidiaries to make prepayments on any existing or future indebtedness
for Borrowed Money to any Person (other than the Company, to the extent
permitted by this Agreement or any subsequent agreement between the Company and
the Purchaser).

 

9.2 Joint Ventures. Except as specifically described in Schedule 9.2, the
Company and its Subsidiaries will not invest directly or indirectly in any joint
venture for any Purpose without the prior written notice to, and the prior
written consent of, the Purchaser, which consent shall not be unreasonably
withheld.

 

9.3 [INTENTIONALLY OMITTED]

 

9.4 Liens and Encumbrances. The Company and its Subsidiaries will not create,
incur, assume or suffer to exist any mortgage, pledge, lien or other encumbrance
of any kind (including the charge upon property purchased under a conditional
sale or other title retention agreement) upon, or any security interest in, any
of its Collateral, whether now owned or hereafter acquired, except for Permitted
Liens.

 

9.5 Restriction on Fundamental Changes; No Change in Operation or Control.
Without the prior written consent of the Purchaser, such consent to be withheld
or granted based on Purchaser’s determination in its sole discretion whether the
requisite following actions would have a material adverse effect on (a) the
Company’s and its Subsidiaries’ ability to repay the Note and/or (b) the
Purchaser’s rights in the Collateral, the Company and its Subsidiaries will not:
(i) enter into any transaction of merger or consolidation; (ii) liquidate,
wind-up or dissolve itself (or suffer any liquidation or dissolution); (iii)
convey, sell, lease, sublease, transfer or otherwise dispose of, in one
transaction or a series of transactions, any of its assets, or the capital stock
of any subsidiary of the Company and its Subsidiaries, whether now owned or
hereafter

 

16

--------------------------------------------------------------------------------

acquired; or (iv) acquire by purchase or otherwise all or any substantial part
of the business or assets of, or stock or other evidence of beneficial ownership
of, any Person. The Company and its Subsidiaries agree that compliance with this
Section 9.5 is a material inducement to the Purchaser’s advancing credit under
this Agreement and the Company and its Subsidiaries further agree that any
breach of the terms of this Section 9.5 shall constitute fraud. The Company and
its Subsidiaries further agree that in addition to all other remedies available
to the Purchaser, the Purchaser shall be entitled to specific enforcement of the
covenants in this Section 9.5, including injunctive relief. Consistent with the
foregoing, until the Obligations are repaid in full, the Company and its
Subsidiaries shall not transfer, assign, convey or grant to any other Person the
right to operate or control any of the facilities listed on Schedule 9.5,
whether by lease, sublease, management agreement, joint venture agreement or
otherwise.

 

9.6 Dividends, Distributions and Management Fees. The Company will not, and will
not permit any of its Subsidiaries to, declare or pay any dividends or other
distributions with respect to, purchase, redeem or otherwise acquire for value
any of its outstanding stock now or hereafter outstanding, or return any capital
of its stockholders, nor shall the Company or any of its Subsidiaries pay
management fees or fees of a similar nature to any Person. Notwithstanding the
foregoing, so long as no Event of Default has occurred under any of the
Financing Documents, the Company shall be entitled to make (a) distributions to
Parent, (b) payments of principal on the intercompany indebtedness owed by the
Company to Parent, and (c) amounts in respect of payments made by the Company to
Parent for the Company’s allocable share of costs for goods or services, that
Parent obtains from third persons in the ordinary course of business, but in
each case, in (a), (b) or (c), such distribution may only be made to the extent
that such distribution or other payments will not cause or result in an Event of
Default (including, without limitation, a violation of any financial covenants
in the Financing Documents). In furtherance of the foregoing, the parties
acknowledge and agree that, prior to any distribution made by the Company to
Parent, the Company must first provide evidence reasonably satisfactory to
Purchaser that the Company is currently in compliance with each of its financial
covenants set forth in this Agreement and the other Financing Documents, and
that any such payment intended to be made to Parent will not result in a
violation of any such financial covenants.

 

9.7 Loans. The Company will not make loans or advances to any Person, other than
(i) trade credit extended in the ordinary course of its business, and (ii)
advances for business travel and similar temporary advances made in the ordinary
course of business to officers, stockholders, directors, and employees.

 

9.8 Contingent Liabilities. The Company and its Subsidiaries will not assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any Person, except by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.

 

17

--------------------------------------------------------------------------------

9.9 Subsidiaries. The Company and its Subsidiaries will not form any subsidiary,
or make any investment in or any loan in the nature of an investment to, any
other Person.

 

9.10 Compliance with ERISA. The Company and its Subsidiaries will not permit
with respect to any Plan covered by Title IV of ERISA any Prohibited Transaction
or any Reportable Event.

 

9.11 Certificates of Need. The Company and its Subsidiaries will not amend,
alter or suspend or terminate or make provisional in any material way, any
certificate of need or provider number without the prior written consent of the
Purchaser, which consent shall not be unreasonably withheld.

 

9.12 Transactions with Affiliates. The Company and its Subsidiaries will not
enter into any transaction, including without limitation the purchase, sale, or
exchange of property, or the loaning or giving of funds to any Affiliate or
Subsidiary, except in the ordinary course of business and pursuant to the
reasonable requirements of the Company’s and the Subsidiaries’ business and upon
terms substantially the same and no less favorable to the Company and the
Subsidiaries as it would obtain in a comparable arm’s length transaction with
any Person not an Affiliate or subsidiary, and so long as the transaction is not
otherwise prohibited under this Agreement. For purposes of the foregoing, Lender
consents to the transactions described on Schedule 9.12.

 

9.13 Use of Lender’s Name. The Company and its Subsidiaries will not use
Purchaser’s name (or the name of any of Purchaser’s affiliates) in connection
with any of its business operations. The Company and its Subsidiaries may
disclose to third parties that the Company and its Subsidiaries has a borrowing
relationship with the Purchaser. Nothing contained in this Agreement is intended
to permit or authorize the Company and its Subsidiaries to make any contract on
behalf of the Purchaser.

 

9.14 Change in Control. There shall occur no change in the ownership of the
Company’s or its Subsidiaries’ capital stock or in the Company’s or its
Subsidiaries’ capital structure which would result in a Change in Control
without the prior written consent of the Purchaser, such consent to be withheld
or granted based on the Purchaser’s determination in its sole discretion whether
such Change in Control would have a detrimental impact on (a) the Company’s or
its Subsidiaries’ ability to repay the Note and/or (b) the Purchaser’s rights in
the Collateral. The capital structure of the Company and its Subsidiaries is set
forth in Schedule 9.14.

 

9.15 Contracts and Agreements. The Company and its Subsidiaries will not become
or be a party to any contract or agreement which would breach this Agreement, or
breach any other instrument, agreement, or document to which the Company and its
Subsidiaries are party or by which it is or may be bound.

 

18

--------------------------------------------------------------------------------

9.16 Margin Stock. The Company and its Subsidiaries will not carry or purchase
any “margin security” within the meaning of Regulations U, T or X of the Board
of Governors of the Federal Reserve System.

 

9.17 Truth of Statements and Certificates. The Company and its Subsidiaries will
not furnish to the Purchaser any certificate or other document that contains any
untrue statement of a material fact or that omits to state a material fact
necessary to make it not misleading in light of the circumstances under which it
was furnished.

 

9.18 Debt Service Coverage Ratio. Commencing with a measurement on June 30,
2004, and continuing with measurements on the last day of each quarter
thereafter throughout the term of the Note, the Company shall have maintained
the following Debt Service Coverage Ratios:

 

Quarter Ending

--------------------------------------------------------------------------------

 

DSC Ratio

--------------------------------------------------------------------------------

        6/30/04

  1.1 to 1.00

        9/30/04

  1.1 to 1.00

        12/31/04

  1.1 to 1.00

        3/31/05

  1.1 to 1.00

        6/30/05 and thereafter

  1.2 to 1.00

 

For purposes of this covenant, “Debt Service Coverage Ratio” shall mean the
ratio of (i) Cash Flow (defined below) from the Facilities (determined as set
forth below) to (ii) Debt Service (defined below). The Debt Service Coverage
Ratio shall be measured on a quarterly basis beginning with the quarter ending
June 30, 2004 and continuing until the Note is repaid in full. For purposes of
this covenant, “Cash Flow” shall mean, for any given accounting period, net
income (as determined in accordance with generally accepted accounting
principles applied on a basis consistent with prior periods) plus amortization,
depreciation, interest, and accrued taxes. For purposes of this covenant, “Debt
Service” shall mean, for any given period, all regularly scheduled interest
payments due under the Note to Purchaser, plus all interest on capital leases,
and any other debt permitted pursuant to the terms of the Financing Documents
(including, without limitation, in respect of the “GEHFS Obligations” as defined
in the Subordination Agreement, dated as of September 30, 2003 among Chatham, GE
and the other parties thereto) or otherwise permitted in writing by Purchaser.
For purposes of this covenant, “Facilities” shall mean HealthMont Missouri and
HealthMont Georgia.

 

19

--------------------------------------------------------------------------------

9.19 Cash Flow. Commencing with a measurement on September 30, 2004, and
continuing with measurements on the last day of each quarter thereafter
throughout the term of the Note, the Company shall have maintained minimum
annualized Cash Flow (as defined in Section 9.18) for the preceding twelve (12)
months of operations as follows:

 

Quarter Ending

--------------------------------------------------------------------------------

 

Cash Flow

--------------------------------------------------------------------------------

        9/30/04

  $1,000,000

        12/31/04

  $1,100,000

        3/31/05

  $1,200,000

        6/30/05 and thereafter

  $1,200,000

 

9.20 Amendments, Modifications or Waivers of Senior Loan Documents. The Company
shall not (and shall not permit any of its Subsidiaries to) amend, modify, waive
or agree to the amendment, modification or waiver of the terms and provisions of
the GEHFS Documents (as defined in the Subordination Agreement) without the
Purchaser’s prior written consent.

 

10. DEFAULTS.

 

10.1 Events of Default. Each of the following (individually, an “Event of
Default” and collectively, the “Events of Default”) shall constitute an event of
default under this Agreement:

 

(a) A default in the payment of any installment of principal of, or interest
upon, the Note when due and payable, whether at maturity or otherwise, or any
breach of Section 3, which default or breach, as applicable, shall have
continued unremedied for a period of five (5) Business Days after written notice
of the default or breach from the Purchaser to the Company, the Parent and any
of their Subsidiaries;

 

(b) A default in the payment of any other charges, fees, or other monetary
obligations to the Purchaser arising out of or incurred in connection with this
Agreement or any of the other Financing Documents when such payment is due and
payable, which default shall have continued unremedied for a period of five (5)
Business Days after written notice of the default from the Purchaser to the
Company, any of its Subsidiaries and the Parent;

 

(c) A default in the due observance or performance by the Company, any of its
Subsidiaries and the Parent of any other term, covenant or agreement contained
in any of the Financing Documents, which default shall have continued unremedied
for a period of ten (10) Business Days after written notice of the default from
the Purchaser to the Company, any of its Subsidiaries and the Parent;

 

(d) Any representation or warranty made by the Company, any of its Subsidiaries
and the Parent in this Agreement or in any of the other Financing Documents, any
financial statement, or any statement or representation made in any other
certificate, report or opinion delivered in connection with this Agreement or
the other Financing Documents proves to have been incorrect or misleading in any
material respect when made, which default shall have continued

 

20

--------------------------------------------------------------------------------

unremedied for a period of ten (10) Business Days after written notice of the
default from the Purchaser to the Company, any of its Subsidiaries and the
Parent;

 

(e) Any obligation of the Company and any of its Subsidiaries (other than its
Obligations under this Agreement or any of the other Financing Documents) for
the payment of Borrowed Money is not paid when due or within any applicable
grace period, or such obligation becomes or is declared to be due and payable
before the expressed maturity of the obligation, or there shall have occurred an
event which, with the giving of notice or lapse of time, or both, would cause
any such obligation to becomes or allow any such obligation to be declared to
be, due and payable;

 

(f) The Company and any of its Subsidiaries make an assignment for the benefit
of creditors, offers a composition or extension to creditors, or makes or sends
notice of an intended bulk sale of any business or assets now or hereafter
conducted by the Company, the Parent and any of their Subsidiaries;

 

(g) The Company or any of its Subsidiaries file a petition in bankruptcy, (ii)
the Company or any of its Subsidiaries are adjudicated insolvent or bankrupt,
petitions or applies to any tribunal for any receiver of or any trustee for
itself or any substantial part of its property, (iii) the Company or any of its
Subsidiaries commence any proceeding relating to itself under any
reorganization, arrangement, readjustment or debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect, (iv) any
such proceeding is commenced against the Company or any of its Subsidiaries, and
such proceeding remains undismissed for a period of sixty (60) days, (v) the
Company or any of its Subsidiaries by any act indicates its consent to, approval
of, or acquiescence in, any such proceeding or the appointment of any receiver
of or any trustee for the Company or any of its Subsidiaries or any substantial
part of its property or suffers any such receivership or trusteeship to continue
undischarged for a period of sixty (60) days,

 

(h) Any final judgment is rendered for an amount such that the aggregate for all
such judgments is in excess of $500,000 in any Fiscal Year in excess of
applicable insurance coverage (and excluding the $1,000,000 self-insurance
basket) for the Company and its Subsidiaries, taken together, which for a period
of 60 consecutive days of such rendering or filing is not either vacated,
discharged, stayed or bonded pending appeal.

 

(i) A Reportable Event which is grounds for termination of any Plan covered by
Title IV of ERISA or for the appointment by the appropriate United States
District Court of a trustee to administer any such Plan or for the entry of a
lien or encumbrance to secure any deficiency, has occurred and is continuing
thirty (30) days after its occurrence, or any such Plan is terminated, or a
trustee is appointed by an appropriate United States District Court to
administer any such Plan, or the Pension Benefit Guaranty Corporation institutes
proceedings to

 

21

--------------------------------------------------------------------------------

terminate any such Plan or to appoint a trustee to administer any such Plan, or
a lien or encumbrance is entered to secure any deficiency or claim;

 

(j) There shall occur a Change of Control with respect to the Company and any of
its Subsidiaries and the Company has not complied with the provisions set forth
in Section 9.14 above;

 

(k) There shall occur any uninsured damage to or loss, theft or destruction of
any portion of the Collateral that exceeds $50,000 in the aggregate;

 

(1) The Company and any of its Subsidiaries breaches or violates the terms of,
or a default or an event which could, whether with notice or the passage of
time, or both, constitute a default, occurs under any other existing or future
agreement (related or unrelated) between the Company, the Parent, any of their
Subsidiaries and the Purchaser;

 

(m) Upon the issuance of any execution or distraint process against the Company,
any of its Subsidiaries or any of their property or assets;

 

(n) The Company ceases any material portion of its business operations as
currently conducted;

 

(o) Any indication or evidence is received by the Purchaser that the Company or
any of its Subsidiaries, may have directly or indirectly been engaged in any
type of activity which, in the Purchaser’s discretion, may result in the
forfeiture of any property of Company to any Governmental Authority, which
default shall have continued unremedied for a period of ten (10) Business Days
after written notice from the Purchaser;

 

(p) The Company or any of its Subsidiaries, or any Affiliate of the Company or
any of their Subsidiaries, shall challenge or contest, in any action, suit or
proceeding, the validity or enforceability of this Agreement, or any of the
other Financing Documents, the legality or the enforceability of any of the
Obligations or the perfection or priority of any Lien granted to the Purchaser;

 

(q) The Company or any of its Subsidiaries shall be criminally indicted or
convicted under any law that could lead to a forfeiture of any Collateral; or

 

(r) There shall occur a Material Adverse Effect in the financial condition or
business prospects of the Company or any of its Subsidiaries, which default
shall have continued unremedied for a period of ten (10) Business Days after
written notice from the Purchaser

 

(s) The Parent shall have breached any of its covenants or obligations under the
Warrant.

 

22

--------------------------------------------------------------------------------

10.2 Acceleration. Upon the occurrence of any of the foregoing Events of
Default, the Note shall become and be immediately due and payable upon
declaration to that effect delivered by the Purchaser to the Company; provided
that, upon the happening of any event specified in Section 10.1(g), the Note
shall be immediately due and payable without declaration or other notice to the
Company.

 

10.3 Remedies.

 

(a) Upon the occurrence of and during the continuance of an Event of Default
under this Agreement or the other Financing Documents, the Purchaser, in
addition to all other rights, options, and remedies granted to the Purchaser
under this Agreement or at law or in equity, may take any of the following steps
(which list is given by way of example and is not intended to be an exhaustive
list of all such rights and remedies):

 

(i) Terminate the Note, whereupon all outstanding Obligations shall be
immediately due and payable;

 

(ii) Exercise all other rights granted to it under this Agreement and all rights
under the UCC in effect in the applicable jurisdiction(s) and under any other
applicable law; and

 

(iii) Exercise all rights and remedies under all Financing Documents now or
hereafter in effect, including but not limited to:

 

A. The right to take possession of, send notices regarding, and collect directly
the Collateral, with or without judicial process;

 

B. The right to (by its own means or with Judicial assistance) enter any of the
Company’s and any of its Subsidiaries’ premises and take possession of the
Collateral, or render it unusable, or dispose of the Collateral on such premises
in compliance with subsection (C) below, without any liability for rent,
storage, utilities, or other sums, and the Company and any of its Subsidiaries
shall not resist or interfere with such action; and

 

C. The right to require Company or any of its Subsidiaries, at Company’s or its
Subsidiaries’ expense, respectively, to assemble all or any part of the
Collateral and make it available to the Purchaser at any place designated by the
Purchaser.

 

(b) The Company or any of its Subsidiaries, agree that a notice received by it
at least ten (10) days before the time of any intended public sale, or the time
after which any private sale or other disposition of the Collateral is to be
made, shall be deemed to be reasonable notice of such sale or other disposition.
If

 

23

--------------------------------------------------------------------------------

permitted by applicable law, any perishable Collateral which threatens to
speedily decline in value or which is sold on a recognized market may be sold
immediately by the Purchaser without prior notice to the Company and its
respective Subsidiaries. At any sale or disposition of Collateral, the Purchaser
may (to the extent permitted by applicable law) purchase all or any part of the
Collateral, free from any right of redemption by the Company and its respective
Subsidiaries, which right is hereby waived and released. The Company and its
Subsidiaries covenant and agree not to interfere with or impose any obstacle to
the Purchaser’s exercise of its rights and remedies with respect to the
Collateral.

 

10.4 Nature of Remedies. The Purchaser shall have the right to proceed against
all or any portion of the Collateral to satisfy in any order (i) the liabilities
and Obligations of the Company and its Subsidiaries, to the Purchaser or any
Affiliate of the Purchaser under this Agreement, or any other loan documents
evidencing financings provided to the Company and their respective Subsidiaries,
or (ii) the liabilities and Obligations of the Company to the Purchaser or any
Affiliate of the Purchaser under the Financing Documents. All rights and
remedies granted the Purchaser under this Agreement and under any agreement
referred to in this Agreement, or otherwise available at law or in equity, shall
be deemed concurrent and cumulative, and not alternative remedies, and the
Purchaser may proceed with any number of remedies at the same time until the
Note, and all other existing and future liabilities and obligations of the
Company and its Subsidiaries, to the Purchaser, are satisfied in full. The
exercise of any one right or remedy shall not be deemed a waiver or release of
any other right or remedy, and the Purchaser, upon the occurrence of an Event of
Default, may proceed against the Company, the Parent and their respective
Subsidiaries, and/or the Collateral, at any time, under any agreement, with any
available remedy and in any order.

 

11. DEFINITIONS. As used herein, the following terms shall have the meanings
herein specified unless the context otherwise requires. Defined terms in this
Agreement shall include in the singular number the plural and in the plural the
singular:

 

“Account” means any right to payment for goods sold or leased or services
rendered, whether or not evidenced by an instrument or chattel paper, and
whether or not earned by performance, including, without limitation, the right
to payment of management fees.

 

“Affiliate” means (i) any Person that directly, or indirectly through one or
more intermediaries, controls the Parent or Company (a “Controlling Person”) or
(ii) any Person (other than the Parent, Company or any Subsidiary) which is
controlled by or is under common control with a Controlling Person. As used
herein, the term “control” of a Person means the possess on, directly or
indirectly, of the power: (A) to vote 20% or more of the voting securities of
such Person (on a fully diluted basis) having ordinary power to vote in the
election of the governing body of such Person or (B) to direct or cause the
direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.

 

24

--------------------------------------------------------------------------------

“Agreement” means this Note Purchase Agreement, as the same may after its
execution be amended, supplemented or otherwise modified from time to time in
accordance with the terms hereof.

 

“Amended Collateral Assignment” means that certain Amended and Restated
Collateral Assignment of Security, Deeds and Contracts, dated as of the date
hereof, in the form attached hereto as Exhibit E.

 

“Amended Pledge and Security Agreement” means that certain Amended and Restated
Pledge and Security Agreement, dated as of the date hereof, in the form attached
hereto as Exhibit J.

 

“Asset Sale” means, except as provided in the next sentence, (A) any sale,
issuance, conveyance, transfer, lease or other disposition (including, without
limitation, by way of merger, consolidation or sale and leaseback transaction)
(collectively, a “transfer”), directly or indirectly, in one or a series of
related transactions, of: (i) any Stock of any Subsidiary of the Company (ii)
all or substantially all of the properties and assets of any division or line of
business of the Company or any of its Subsidiaries (including, without
limitation, any hospital owned or operated by any such Person); or (iii) any
other properties or assets of the Company or any of its Subsidiaries (including,
without limitation, any hospital owned or operated by any such Person) other
than in the ordinary course of business, or (B) any public offering of any debt
or equity securities issued by the Company or any of its Subsidiaries. For the
purposes of this definition, the term “Asset Sale” shall not include any
transfer of properties and assets (a) that is by the Company or any of its
Subsidiaries to the Company or any other Subsidiary in accordance with the terms
of this Agreement, (b) that is of obsolete or worn out equipment, inventory or
other assets in the ordinary course of business, or (c) the fair market value of
which does not exceed $1,000,000 per year individually or in the aggregate.

 

“Bankruptcy Code” has the meaning provided in Section 10.1(e).

 

“Beldray Lease” means (i) that certain Rent Review Memorandum, dated August 30,
2000, between Rootmead Limited, Beldray Limited and KRUG International (UK)
Limited, and (ii) that certain Counterpart/Revisionary Lease, dated August 30,
2000, between Rootmead Limited, Beldray Limited and KRUG International (UK)
Limited.

 

“Borrowed Money” means any obligation to repay money, any indebtedness evidenced
by notes, bonds, debentures or similar obligations, any obligation under a
conditional sale or other title retention agreement and the net aggregate
rentals under any lease which under GAAP would be capitalized on the books of
Borrower or which is the substantial equivalent of the financing of the property
so leased.

 

“Business Day” means any day on which financial institutions are open for
business in the State of New York or the State of Georgia, excluding Saturdays
and Sundays.

 

“Change of Control” means (i) individuals who, as of the Closing Date,
constituted the board of directors of the Company (together with any new
directors whose election by that board

 

25

--------------------------------------------------------------------------------

of directors or whose nomination for election by the stockholders of the Company
was approved by two-thirds of the directors of the Company then still in office
who were either directors at the beginning of the period or whose election or
nomination for election was previously approved) cease for any reason to
constitute a majority of the board of directors of the Company then in office,
or (ii) a transfer for capital stock of the Company occurs such that,
immediately after giving effect to the transfer, Persons who held capital stock
of the Company immediately prior to the transfer do not continue to hold at
least 67% of the capital stock of the Company.

 

“Chatham” shall mean Chatham Investment Fund I, LLC, a Delaware limited
liability company, together with its successors.

 

“Closing Date” has the meaning provided in Section 2.

 

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

 

“Collateral” means all now existing and hereafter acquired or arising personal
property of the Company including, without limitation, all goods, accounts,
inventory, equipment, intangibles, investment property, deposit accounts,
fixtures, instruments, documents, chattel paper, intellectual property, letters
of credit and letters of credit rights, all supporting obligations, all
commercial tort claims and all products and proceeds of the foregoing including
insurance proceeds.

 

“Common Stock” means the Parent’s common stock, no par value.

 

“Company” is defined in the preamble.

 

“Consolidated”, when used with reference to any term, mean that term as applied
to the accounts of any specified Person and all of its direct Subsidiaries (or
other specified group of Persons), or such of its direct Subsidiaries as may be
specified, consolidated (or combined) or consolidating (or combining), as the
case may be, in accordance with GAAP and with appropriate deductions for
minority interests in Subsidiaries.

 

“Consolidated Subsidiary” means at any date any Subsidiary or other entity the
accounts of which would be consolidated with those of the Company or the Parent
in its consolidated financial statements if such statements were prepared as of
such date.

 

“Controlled Group” means all businesses that would be treated as a single
employer under Section 4001(b) of ERISA.

 

“Default” means any Event of Default and any event or condition which with the
passage of time or giving of notice, or both, would become an Event of Default,
including the filing against the Company, any of its Subsidiaries or the Parent
of a petition commencing an involuntary case under the Bankruptcy Code.

 

“Dollars” means United States Dollars.

 

26

--------------------------------------------------------------------------------

“EBITDA” means, for any period and for any Person, the consolidated net income
of such Person and its consolidated Subsidiaries for such period, after all
expenses and other charges plus (to the extent deducted in computing net income)
interest expense, income taxes, depreciation and amortization, determined in
accordance with GAAP and eliminating, without duplication: (i) all intercompany
items, (ii) all earnings attributable to equity interests in Persons that are
not Subsidiaries of such Person unless actually received by such Person, (iii)
all income arising from the forgiveness, adjustment, or negotiated settlement of
any Indebtedness, (iv) any extraordinary items of income or expense, (v) any
increase or decrease in income arising from any change in such Person’s method
of accounting, (vi) any interest income, (vii) any net gain in respect of any
Asset Sale during such period, and (viii) any other non-cash charges.

 

“Environmental Laws” means any and all federal, state and local statutes, laws,
judicial decisions, regulations, ordinances, rules, judgments, orders, decrees,
codes, injunctions, and permits, whether now or hereafter in effect, relating to
human health, the environment or to emissions, discharges or releases of
Hazardous Materials into the environment, including ambient air, surface water,
ground water or land, or otherwise relating to treatment, storage, disposal,
transport or handling of Hazardous Materials or the clean-up or other
remediation thereof.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time. Section references to ERISA are to ERISA as in effect at the
date of this Agreement and any subsequent provisions of ERISA, amendatory
thereof, supplemental thereto or substituted therefor.

 

“ERISA Group Person” means the Parent, Company and its Subsidiaries.

 

“Event of Default” has the meaning provided in Section 10.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“Financial Officer” of any specified Person means its chief executive officer,
chief financial officer, chief operating officer, chairman, president,
treasurer, controller or any of its vice presidents whose primary responsibility
is for its financial affairs, in each case whose incumbency and signatures have
been certified to the Purchaser by the secretary or other appropriate attesting
officer of such specified Person.

 

“Financing Documents” means this Agreement, the Note, the Warrant, the
Warrantholders Rights Agreement, the Security Agreement, the Amended Collateral
Assignment, the Parent Subordination Agreement, the Intercompany Subordination
Agreement, the Parent Guaranty, the Subsidiary Guaranty, the Amended Pledge and
Security Agreement and the other agreements and documents executed pursuant
thereto.

 

“First Amendment to Merger Agreement” means that certain First Amendment to
Merger Agreement, dated of March 24, 2003, by and among Parent, the Company, and
HealthMont.

 

“Funded Debt” means, with respect to any Person, without duplication, (a) all
Indebtedness for borrowed money and (b) all Indebtedness evidenced by notes,
bonds,

 

27

--------------------------------------------------------------------------------

debentures or similar instruments, or upon which interest payments are
customarily made, in each case, that by its terms matures more than one (1) year
from, or is directly or indirectly renewable or extendible at such Person’s
option under a revolving credit or similar agreement obligating the lender or
lenders to extend credit over a period of more than one (1) year from, the date
of creation thereof, and specifically including, without limitation, all
obligations with respect to capital leases, current maturities of long-term
debt, revolving credit and short-term debt extendible beyond one (1) year at the
option of the debtor, and also including, in the case of the Parent, the
Obligations and, without duplication, any obligation guaranteeing any Funded
Debt of other Persons; provided, however, all Indebtedness arising from the
Beldray Lease shall not constitute Funded Debt.

 

“GAAP” means generally accepted accounting principles in the United States of
America as from time to time in effect, including the statements and
interpretations of the United States Financial Accounting Standards Board.

 

“Governmental Authority” means and includes any federal, state, District of
Columbia, county, municipal, or other government and any department, commission,
board, bureau, agency or instrumentality thereof, whether domestic or foreign.

 

“Hazardous Material” means any pollutant, toxic or hazardous material or waste
which is regulated or defined by any Environmental Law, including any “hazardous
substance” or “pollutant” or “contaminant” as defined in section 101(14) of
CERCLA or any other Environmental Law or regulated as toxic or hazardous under
RCRA or any other Environmental Law including, without limitation petroleum and
any fraction thereof.

 

“HealthMont Loan Documents” means that certain Loan Agreement, dated of even
date herewith, among the Company and HealthMont, and all other agreements and
documents executed in connection therewith or related thereto (other than that
certain Management Agreement, among the Company and HealthMont).

 

“Indebtedness” of a Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable and liabilities arising and paid in the
ordinary course of business, (iv) all capital leases of such Person, (v) all
obligations of such Person to purchase securities (or other property) which
arise out of or in connection with the issuance or sale of the same or
substantially similar securities (or property), (vi) all contingent or
non-contingent obligations of such Person to reimburse any bank or other Person
in respect of amounts paid under a letter of credit or similar instrument, (vii)
all equity securities of such Person subject to repurchase or redemption
otherwise than at the sole option of such Person, (viii) all Indebtedness
secured by a Lien on any asset of such Person, whether or not such Indebtedness
is otherwise an obligation of such Person, and (ix) all Indebtedness of others
guaranteed by such Person.

 

“Indemnified Person” has the meaning provided in Section 12.

 

28

--------------------------------------------------------------------------------

“Indemnifying Person” has the meaning provided in Section 12.

 

“Insurer” means 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 the Company to compensate the Company for providing services to a
Patient.

 

“Intercompany Subordination Agreement” means that certain Intercompany
Subordination Agreement, dated as of the date hereof, in the form attached
hereto as Exhibit G.

 

“Leverage Ratio” means, with respect to the Company, Parent and their respective
Subsidiaries, on a consolidated basis for any fiscal quarter, the ratio obtained
by dividing (a) Funded Debt as of the last day of such fiscal quarter, by (b)
EBITDA for the four fiscal quarter period ending as of the last day of such
fiscal quarter.

 

“Lien” means, with respect to any specified Person:

 

(a) any lien, encumbrance, mortgage, pledge, charge or security interest of any
kind upon any property or assets of such specified Person, whether now owned or
hereafter acquired, or upon the income or profits therefrom;

 

(b) the acquisition of, or the agreement to acquire, any property or asset upon
conditional sale or subject to any other title retention agreement, device or
arrangement (including a capital lease);

 

(c) the sale, assignment, pledge or transfer for security of any accounts,
general intangibles or chattel paper of such specified Person, with or without
recourse; and

 

(d) the transfer of any tangible property or assets for the purpose of
subjecting such items to the payment of previously outstanding Indebtedness in
priority to payment of the general creditors of such specified Person.

 

“Material Adverse Effect” means, with respect to any event, act, condition or
occurrence of whatever nature (including any adverse determination in any
litigation, arbitration or governmental investigation or proceeding), whether
singly or in conjunction with any other event or events, act or acts, condition
or conditions, occurrence or occurrences, whether or not related, a material
adverse change in, or a material adverse effect upon, any of (i) the financial
condition, operations, business, properties or prospects of the Company and each
of its Subsidiaries, taken as a whole, exclusive of events affecting the economy
generally, (ii) the rights and remedies of Purchaser under the Financing
Documents, or the ability of the Company, any of its Subsidiaries or the Parent
to perform its obligations under any of the Financing Documents to which it is a
party, as applicable, or (iii) the legality, validity or enforceability of any
Financing Document

 

“Material Debt” has the meaning provided to such term in Section 10.1(g).

 

“Medical Services” means medical and health care services provided to a Patient,
including, but not limited to, medical and health care services provided to a
Patient and

 

29

--------------------------------------------------------------------------------

performed by the Company 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 the Company to a Patient for a necessary or specifically
requested valid and proper medical or health purpose.

 

“Merger” means the merger of HealthMont with and into the Company pursuant to
the Merger Agreement.

 

“Merger Agreement” means that certain Agreement and Plan of Merger, dated
October 15, 2002, by and among Parent, the Company and HealthMonth, as amended
by the First Amendment to Merger Agreement.

 

“Multiemployer Plan” means any Plan that is a “multiemployer plan” as defined in
section 4001(a)(3) of ERISA.

 

“Note” has the meaning provided in the preamble to this Agreement.

 

“Obligations” means, collectively, all amounts now or hereafter owing to
Purchaser by the Company arising under or in connection with this Agreement, the
Note, or any other Financing Document, including without limitation, the unpaid
principal balance of the Note and all interest, fees, expenses and other charges
relating thereto or accruing thereon, as well as any and all other indebtedness,
liabilities, and obligations of the Company, whether direct or indirect,
absolute or contingent, or liquidated or unliquidated, which may be now existing
or may hereafter arise under or as a result of any of the Financing Documents,
and any and all renewals, extensions, modifications or refinancings of any of
the foregoing.

 

“Parent Guaranty” means that certain Guaranty, dated as of the date hereof, in
the form attached hereto as Exhibit H.

 

“Parent Subordination Agreement” means that certain Subordination Agreement,
dated as of the date hereof, in the form attached hereto as Exhibit F.

 

“Patient” means any Person receiving Medical Services from the Company and all
Persons legally liable to pay the Company for such Medical Services other than
Insurers.

 

“Permitted Contest” means any good faith contest in which the Company reasonably
believes that (i) it will prevail on the merits in its challenge of the
assessment of Taxes or any other item that could result in Liens or other
encumbrances on its or any of its Subsidiaries’ assets, (ii) the amount of any
single Permitted Contest does not exceed $100,000, and (iii) the aggregate
amount in controversy in all Permitted Contests does not exceed $100,000 without
the written consent of Purchaser.

 

“Permitted Liens” means: (i) deposits or pledges to secure obligations under
workmen’s compensation, social security or similar laws, or under unemployment
insurance; (ii) deposits or pledges to secure bids, tenders, contracts (other
than contracts for the payment of money), leases,

 

30

--------------------------------------------------------------------------------

statutory obligations, surety and appeal bonds and other obligations of like
nature arising in the ordinary course of business; (iii) mechanic’s, workmen’s,
materialmen’s or other like liens arising in the ordinary course of business
with respect to obligations which are not due, or which are being contested in
good faith by appropriate proceedings which suspend the collection thereof and
in respect of which adequate reserves have been made (provided that such
proceedings do not, in Purchaser’s sole discretion, involve any substantial risk
of the sale, loss or forfeiture of such property or assets or any interest
therein); (iv) liens and encumbrances in favor of Purchaser; (v) liens set forth
in Schedule 11; (vi) liens in favor of GE HFS Holdings, Inc. (f/k/a Heller
Healthcare Finance, Inc.) (“GE”) in connection with the “GEHFS Obligations” as
defined in Subordination Agreement, dated as of September 30, 2003, among
Chatham, GE and the parties thereto; and (vii) liens in respect of capital
equipment leases and/or purchase money conditional sale contracts permitted
under Section 9.1.

 

“Person” means any present or future natural person or any corporation,
association, partnership, joint venture, limited liability, joint stock or other
company, business trust, trust, organization, business or government or any
governmental agency or political subdivision thereof.

 

“Plan” means, at any date, any pension benefit plan subject to Title IV of ERISA
maintained, or to which contributions have been made or are required to be made,
by any ERISA Group Person within six years prior to such date.

 

“Prepayment Premium” has the meaning provided in Section 7.2.

 

“Purchaser” has the meaning provided in the preamble to this Agreement, and
shall include any Person to whom Purchaser transfers any interest in the Note.

 

“Related Transaction Documents” means all the documents executed and delivered
in connection with the Related Transactions; including without limitation,
HealthMonth Loan Documents.

 

“Related Transactions” means (x) the advance of up to $1,600,000 by the Parent
to the Company, and (y) the Merger.

 

“Reportable Event” means a “reportable event” as defined in Section 4043(c) of
ERISA for which the notice requirements of Section 4043(a) of ERISA are not
waived.

 

“SEC” means the Securities and Exchange Commission or any successor thereto.

 

“Second Amendment to Merger Agreement” means that Second Amendment to Merger
Agreement, dated as of July 30, 2003, by and among Parent, the Company, and
HealthMont.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Security Agreements” means that certain Security Agreement, dated as of the
date hereof, in the form attached hereto as Exhibit C.

 

31

--------------------------------------------------------------------------------

“Stock” means all shares, options, warrants, general or limited partnership
interests or other equivalents (regardless of how designated) of or in a
corporation, partnership or equivalent entity whether voting or nonvoting,
including common stock, preferred stock or any other “equity security” (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the SEC under the Securities Exchange Act of 1934, as amended).

 

“Subsidiary” means, with respect to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person.

 

“Subsidiary Guaranty” means that certain Guaranty, dated as of the date hereof,
in the form attached hereto as Exhibit I.

 

“Taxes” means taxes, levies, imposts, deductions, charges or withholdings, and
all liabilities with respect thereto, excluding taxes imposed on or measured by
the net income of Purchaser by the jurisdictions under the laws of which
Purchaser is organized or conduct business or any political subdivision thereof.

 

“Temporary Cash Investments” means any Investment in (i) direct obligations of
the United States or any agency thereof, or obligations guaranteed by the United
States or any agency thereof, (ii) commercial paper rated at least A-1 by
Standard & Poor’s Rating Group and P-1 by Moody’s Investors Service, Inc., (iii)
time deposits with, including certificates of deposit issued by, any office
located in the United States of any bank or trust company which is organized
under the laws of the United States or any State thereof and has capital,
surplus and undivided profits aggregating at least $500,000,000 and which issues
(or the parent of which issues) certificates of deposit or commercial paper with
a rating described in clause (ii) above, (iv) repurchase agreements with respect
to securities described in clause (i) above entered into with an office of a
bank or trust company meeting the criteria specified in clause (iii) above,
provided in each case that such Investment matures within one year from the date
of acquisition thereof by the Company or any of its Subsidiaries or (v) any
money market or mutual fund that invests only in the foregoing and the manager
of which and the liquidity of which is reasonably satisfactory to Purchaser.

 

“Warrant” means the warrant issued with respect to the Note in substantially the
form attached as Exhibit B hereto.

 

“Warrant Shares” means the Common Stock for which the Warrant may be exercised.

 

“Warrantholders Rights Agreement” means that certain Warrantholders Rights
Agreement, dated of even date herewith, by and between Company and Purchaser,
substantially in the form attached as Exhibit D hereto.

 

“Written” or “in writing” means any form of written communication or a
communication by means of telex, telecopier device, telegraph or cable.

 

32

--------------------------------------------------------------------------------

12. INDEMNIFICATION.

 

The Company and each of its Subsidiaries agree to indemnify and hold harmless
Purchaser and each holder of the Note and each person, if any, which controls
the holder of the Note within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act, and each of their respective affiliates,
directors, officers, employees and each Person, if any, who controls any
purchaser from and against any and all losses, claims, damages, liabilities and
reasonable expenses (including without limitation legal fees and other expenses
incurred in connection with any suit, action or proceeding or any claim
asserted, which fees and expenses shall be reimbursed as incurred from time to
time) arising from actual or threatened claims, actions, proceedings or
investigations (whether or not any such person is named as a party to any such
claim, action, proceeding or investigation) relating (i) to this Agreement or
the transactions contemplated hereby or referred to herein by reason of their
being a holder of the Note (other than disputes or claims among or involving
only holder of the Note), or to any use made or proposed to be made by the
Company of the proceeds of the Note, or (ii) to any breach by the Company of a
representation, warranty or covenant contained herein or in any certificate
delivered pursuant to the provisions hereof or (iii) to the failure of the
Company or its Subsidiaries to perform in all material respects any agreement
set forth herein, but in all cases as set forth in this Section 12, excluding
any such losses, liabilities, claims, damages or expenses incurred by reason of
the gross negligence or willful malfeasance of such Indemnified Person (defined
below); provided, however, that the foregoing indemnity shall not apply to
litigation commenced by the Company against Purchaser or any holder of the Note
which seeks enforcement of any of the rights of the Company hereunder or under
any other Financing Document and is determined adversely to Purchaser or any
holder of the Note in a final nonppealable judgment. Further, should any
employees of a holder of the Note be involved in any legal action, proceeding or
investigation in connection with the transactions contemplated by this
Agreement, the Company agrees to compensate such holder of the Note in an amount
to be mutually agreed upon per employee per day for each day or portion thereof
that such employee is involved in preparation and testimony pertaining to any
such legal action, proceeding or investigation.

 

If any suit, action, proceeding (including any governmental or regulatory
investigation), claim or demand, shall be brought or asserted against any Person
in respect of which indemnity may be sought pursuant to the preceding paragraph,
such person (the “Indemnified Person”) shall promptly notify the person against
whom such indemnity may be sought (the “Indemnifying Person”) in writing, and
the Indemnifying Person shall be entitled to participate in such suit, action,
proceeding, claim or demand, and, after written notice from the Indemnifying
Person to the Indemnified Person, to assume and control the investigation or
defense of such suit, action, proceeding, claim or demand with counsel of the
Indemnifying Person’s choice at the expense of the Indemnifying Person.
Notwithstanding the Indemnifying Person’s election to assume the defense or
investigation of such suit, action, proceeding, claim or demand, the Indemnified
Person shall have the right to employ, at its sole cost and expense, separate
counsel and to participate in the defense or investigation of such suit, action,
proceeding, claim or demand. The Indemnifying Person shall bear the expense of
such separate counsel and the Indemnified Person shall control its own defense
or investigation if (i) in the written opinion of counsel to the Indemnified
Person there could reasonably be expected to be a conflict of interest between
the Indemnifying Person and the Indemnified Person, (ii) the Indemnifying Person
shall not have employed counsel to represent the Indemnified Person within a
reasonable time after notice of

 

33

--------------------------------------------------------------------------------

the commencement of any such litigation or proceeding or (iii) the Indemnifying
Person shall authorize the Indemnified Person to employ separate counsel at the
expense of the Indemnifying Person. The Indemnifying Person shall not be liable
for any settlement of any proceeding effected without its consent (which will
not be unreasonably withheld), but if settled with such consent or if there be a
final judgment for the plaintiff, the Indemnifying Person agrees to indemnify
any Indemnified Person from and against any loss or liability by reason of such
settlement or judgment. No Indemnifying Person shall, without the prior written
consent of the Indemnified Person, effect any settlement of any pending or
threatened proceeding in respect of which any Indemnified Person is or
reasonably could have been a party and indemnity reasonably could have been
sought hereunder by such Indemnified Person, unless such settlement included an
unconditional release of such Indemnified Person from all liability on claims
that are the subject matter of such proceeding.

 

If for any reason the foregoing indemnity is unavailable to any Indemnified
Person or insufficient to hold it harmless as contemplated by the foregoing then
the Indemnifying Person shall contribute to the amount paid or payable by the
Indemnified Party as a result of any claim in such proportion as is appropriate
to reflect the relative benefits received or sought to be received by the
Indemnifying Person on the one hand and such Indemnified Person on the other
hand, or, if such allocation or liabilities with respect to contributions shall
be held to be unenforceable, then in such proportion as is appropriate to
reflect such relative benefits but also the relative fault of the Indemnifying
Person and such Indemnified Person, as well as any other relevant equitable
considerations.

 

The indemnity agreements contained in this Section 12 are in addition to any
liability which the Indemnifying Persons may otherwise have to the Indemnified
Persons referred to above.

 

The indemnity agreements contained in this Section 12 and the representations
and warranties of Company and Purchaser set forth in this Agreement shall
survive (i) any termination of this Agreement, (ii) any investigation made by or
on behalf of any holder or any person controlling any holder or by or on behalf
of the Company, its officers or directors or any other person controlling the
Company and (iii) acceptance of and payment for the Note.

 

13. EFFECTIVENESS. This Agreement shall become effective upon the execution and
delivery hereof by the parties hereto.

 

14. RESTRICTIVE LEGENDS. The Warrant shall bear a legend in substantially the
following form:

 

THIS SECURITY IS NOT BEING REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY,
AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY BE RESOLD, PLEDGED
OR OTHERWISE TRANSFERRED, ONLY (1) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT. THIS

 

34

--------------------------------------------------------------------------------

WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER ARE SUBJECT TO AND
HAVE THE BENEFIT OF A WARRANTHOLDERS RIGHTS AGREEMENT DATED AS OF SEPTEMBER
    , 2003 AMONG HEALTHMONT, INC., (F/K/A HM ACQUISITIONS CORP.) AND THE HOLDER
HEREOF, A COPY OF WHICH IS ON FILE WITH HEALTHMONT, INC., (F/K/A HM ACQUISITIONS
CORP.).

 

15. MISCELLANEOUS.

 

15.1 Note Payments. So long as Purchaser shall hold the Note, Company will make
payments of principal thereof and interest thereon, which comply with the terms
of this Agreement and the Note, not later than 2:00 P.M. (Atlanta, Georgia time)
on the date when due in Dollars, by wire transfer of immediately available funds
for credit to the account of Purchaser, or such other account or accounts in the
United States as Purchaser may designate in writing, notwithstanding any
contrary provision herein or in the Note with respect to the place of payment.
Purchaser agrees that before disposing of the Note, it will make a notation
thereon (or on a schedule attached hereto) of all principal payments previously
made thereon and of the date to which interest thereon has been paid. The
Company agrees to afford the benefits of this Section 15.1 to any transferee
which shall have made the same agreement as Purchaser have made in this Section
15.1.

 

15.2 Expenses. Whether or not the transactions herein contemplated are
consummated, the Company agrees to pay all reasonable out-of-pocket costs and
expenses, actually incurred, of Purchaser in connection with the negotiation,
preparation, execution and delivery of this Agreement and the documents and
instruments referred to herein and any amendment, waiver or consent relating
hereto (including the reasonable fees and disbursements of Piper Rudnick LLP and
each of Purchaser’s other advisers), including, without limiting the generality
of the foregoing, all reasonable costs and expenses (i) incident to the
preparation, issuance, execution, authentication and delivery of the Note, the
Warrant and this Agreement, (ii) in connection with the printing (including
reasonable word processing and duplication costs) and delivery of this
Agreement, the Warrant and the Note, and (iii) the reasonable fees and expenses
of the attorneys for the holder of the Note incurred in connection with the
enforcement of this Agreement, the Warrant and the Note (including any such
reasonable costs, fees and expenses incurred in connection with any “workout” or
other restructuring of the Company’s obligations in respect of the Note or in
connection with any bankruptcy, reorganization or similar proceeding with
respect to the Company or its Subsidiaries). The obligations of the Company
under this Section 15.2 shall survive the transfer of the Note or portion
thereof or interest therein by Purchaser or any transferee and the payment of
the Note.

 

15.3 Consent to Amendments, Waivers. Any term, covenant, agreement or condition
of this Agreement may, with the consent of the Company, be amended or compliance
therewith may be waived (either generally or in a particular instance and either
retroactively or prospectively), if the Company shall have obtained the consent
in writing of Purchaser.

 

35

--------------------------------------------------------------------------------

Any such amendment or waiver shall be binding upon each future holder of the
Note and upon the Company, whether or not the Note shall have been marked to
indicate such amendment or waiver. No such amendment or waiver shall extend to
or affect any obligation not expressly amended or waived or impair any right
consequent thereon.

 

15.4 Transfer of Note; Lost Note. Subject to applicable laws, Purchaser may
transfer any or all of its interests in the Note provided, however, that each
transferee of the Note shall comply with the last sentence of Section 15.8. The
Company shall keep at its principal office a register in which the Company shall
provide for the registration of Note and of transfers of Note. Upon surrender
for registration of transfer of the Note at the principal office of the Company,
the Company shall, at its expense, promptly execute and deliver one or more new
notes of like tenor and of a like aggregate principal amount, registered in the
name of such transferee or transferees. At the option of the holder of the Note,
the Note may be exchanged for other notes of like tenor and of any authorized
denominations, of a like aggregate principal amount, upon surrender of the Note
to be exchanged at the principal office of the Company. Whenever the Note is so
surrendered for exchange, the Company shall, at its expense, promptly execute
and deliver the note which the holder making the exchange is entitled to
receive. If surrendered for registration of transfer or exchange, the Note shall
be duly endorsed, or be accompanied by a written instrument of transfer duly
executed, by the holder of the Note or such holder’s attorney duly authorized in
writing. Any note or notes issued in exchange for the Note or upon transfer
thereof shall carry the rights to unpaid interest and interest to accrue which
were carried by the Note so exchanged or transferred, so that neither gain nor
loss of interest shall result from any such transfer or exchange. Upon receipt
of written notice from the holder of any note of the loss, theft, destruction or
mutilation of such note and, in the case of any such loss, theft or destruction,
upon receipt of such holder’s indemnity agreement, or in the case of any such
mutilation upon surrender and cancellation of such note, the Company will
promptly make and deliver a new note, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Note. If required by the Company, such holder
must furnish to the Company an indemnity bond sufficient in the judgment of the
Company to protect the Company from any loss which it may suffer if a note is
replaced. The Company may charge such holder for its expenses in replacing a
note.

 

15.5 Persons Deemed Owners. Prior to due presentment for registration of
transfer, the Company may treat the Person in whose name the Note is registered
as the owner and holder of the Note for the purpose of receiving payment of
principal of and premium, if any, and interest on such Note and for all other
purposes whatsoever, whether or not the Note shall be overdue, and the Company
shall not be affected by notice to the contrary.

 

15.6 Survival of Representations and Warranties; Entire Agreement. All
representations and warranties contained herein or made in writing by or on
behalf of the Company or Purchaser in connection herewith shall survive the
execution and delivery of this Agreement, the Note and the Warrant, the transfer
by Purchaser of the Note, the

 

36

--------------------------------------------------------------------------------

Warrant or any portion thereof or interest therein, the payment of the Note and
the exercise of the Warrant, and may be relied upon, as of the date made, by any
transferee, regardless of any investigation made at any time by or on behalf of
Purchaser or any transferee, until such time as the Note and all other amounts
owed hereunder have been paid in full. Subject to the preceding sentence, this
Agreement, the Note and the Warrant embody the entire agreement and
understanding between Purchaser and Company and supersede all prior agreements
and understandings relating to the subject matter hereof.

 

15.7 Successors and Assigns. All covenants and other agreements in this
Agreement contained by or on behalf of either of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any transferees, subject to Section 15.4
hereof) whether so expressed or not; provided that the Company may not, directly
or indirectly (by merger or otherwise), assign or otherwise transfer any of its
obligations hereunder or under the Note without the express prior written
consent of Purchaser.

 

15.8 Descriptive Headings. The descriptive headings of the several paragraphs of
this Agreement are inserted for convenience only and do not constitute a part of
this Agreement.

 

15.9 Notices. Except as otherwise expressly provided herein, all notices and
other communications hereunder shall be in writing (including telegraphic,
telex, telecopier electronic mail or cable communication) and mailed,
telecopied, emailed or delivered, if to the Company, to HealthMont, Inc., (f/k/a
HM Acquisitions Corp.), c/o SunLink Health Systems, Inc., 900 Circle 75 Parkway,
Suite 1300, Atlanta, Georgia 30339, Attention: Mr. Robert M. Thornton, Jr.,
Facsimile: (770) 933-7010, with a copy to Smith, Gambrell & Russell, LLP, 1230
Peachtree Street, Suite 3100, Atlanta, Georgia 30309, Attention: M. Timothy
Elder, Esq., Facsimile: (404) 685-6832; and if to Purchaser, to: Chatham
Investment Fund I, LLC, c/o Chatham Capital Management, LLC, 100 Galleria
Parkway, Suite 270, Atlanta, Georgia 30305, Attention: Mr. Brian G. Reynolds,
Facsimile: (770) 980-0503. Notices to any subsequent holder of the Note shall be
sent to the person at the address specified by such holder to the Company. Each
such notice, request or other communication shall be effective (i) if given by
telex, when such telex is transmitted to the telex number specified in this
Section and the appropriate answer back is received, (ii) if given by telecopier
or electronic mail, when a conformation copy is sent by U.S. Mail or (iii) if
given by mail, prepaid overnight courier or any other means, when received at
the address specified in this Section or when delivery at such address is
refused.

 

15.10 Calculations. The financial statements to be furnished to Purchaser
pursuant hereto shall be made and prepared in accordance with GAAP consistently
applied throughout the periods involved (except as set forth in the notes
thereto or as otherwise disclosed in writing by the and Company to Purchaser).

 

37

--------------------------------------------------------------------------------

15.11 Counterparts. This Agreement may be signed in counterparts, each of which
shall be an original and all of which together shall constitute one and the same
instrument.

 

15.12 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED WHOLLY THEREIN.

 

15.13 Submission to Jurisdiction; Venue; Service of Process.

 

(a) Any legal action or proceeding with respect to this Agreement may be brought
in the courts of the State of Georgia located in Fulton County or of the United
States for the Northern District of Georgia, and, by execution and delivery of
this Agreement, the Company hereby irrevocably accepts for itself and its
Subsidiaries and in respect of their property, generally and unconditionally,
the non-exclusive jurisdiction of the aforesaid courts. The Company hereby
irrevocably waives to the extent not prohibited by applicable law that cannot be
waived any objection which it may now or hereafter have to the laying of venue
of any of the aforesaid actions or proceedings arising out of or in connection
with this Agreement brought in the courts referred to in this clause (a) and
hereby further irrevocably waives and agrees not to plead or claim in any such
court that any such action or proceeding brought in any such court has been
brought in an inconvenient forum.

 

(b) The Company hereby consents to service of process in any such suit, action
or proceeding in any manner permitted by the laws of the State of Georgia.

 

(c) Nothing herein shall affect the right to serve process in any other manner
permitted by law or shall limit the right of Purchaser to bring proceedings
against the Company in the courts of any other jurisdiction.

 

15.14 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES OR THE
TRANSACTIONS CONTEMPLATED HEREBY AND TO THE FULLEST EXTENT PERMITTED BY LAW
WAIVES ANY RIGHTS THAT IT MAY HAVE TO CLAIM OR RECEIVE CONSEQUENTIAL OR SPECIAL
DAMAGES IN CONNECTION WITH ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.

 

16. COLLATERAL MONITORING FEE. The Company shall pay to Purchaser, for its own
account, a monthly collateral monitoring fee equal to $750, payable on the
Closing

 

38

--------------------------------------------------------------------------------

Date and the first day of each calendar month after the Closing Date. Each
payment of the collateral monitoring fee shall be fully earned and
non-refundable when paid.

 

17. AGREEMENT CONCERNING ADDITIONAL COLLATERAL. The Company will at its own cost
and expense, cause to be promptly and duly taken, executed, acknowledged and
delivered all such further acts, documents and assurances as may from time to
time be necessary or as the Purchaser may from time to time reasonably request
in order to establish, preserve, protect and perfect the estate, right, title
and interest of Purchaser in and to all Liens granted in favor of the Company
pursuant to the HealthMont Loan Documents. Notwithstanding its foregoing
obligations, the Company hereby acknowledges and agrees that it shall hold all
such Liens under the HealthMont Loan Documents for the benefit of Purchaser.

 

(Signature Page to Follow)

 

39

--------------------------------------------------------------------------------

If the foregoing is in accordance with your understanding, please sign and
return four counterparts hereof.

 

Very truly yours,

 

COMPANY:

HEALTHMONT, INC. (f/k/a HM Acquisitions

Corp.)

By:   /s/    ROBERT M. THORNTON, JR.            

--------------------------------------------------------------------------------

Name:   Robert M. Thornton, Jr. Title:   Vice President

 

Accepted: October 3, 2003

 

PURCHASER:

CHATHAM INVESTMENT FUND I, LLC

By: Chatham Capital Management, LLC By:        

--------------------------------------------------------------------------------

Name:        

--------------------------------------------------------------------------------

Title:   A member of the Board of Managers

 

Signature Page to Note Purchase Agreement

 

--------------------------------------------------------------------------------

If the foregoing is in accordance with your understanding, please sign and
return four counterparts hereof.

 

Very truly yours,

 

COMPANY:

HEALTHMONT, INC. (f/k/a HM Acquisitions Corp.)

By:        

--------------------------------------------------------------------------------

Name:        

--------------------------------------------------------------------------------

Title:        

--------------------------------------------------------------------------------

 

Accepted: October 3, 2003

 

PURCHASER:

CHATHAM INVESTMENT FUND I, LLC

By: Chatham Capital Management, LLC By:   /s/    Nick Anacreonte            

--------------------------------------------------------------------------------

Name:   Nick Anacreonte Title:   A member of the Board of Managers

 

Signature Page to Note Purchase Agreement