Exhibit 10.73

 

EXECUTION COPY

 

CREDIT AGREEMENT

 

Between

 

SUNLINK HEALTH SYSTEMS, INC.,

SUNLINK HEALTHCARE, LLC,

DEXTER HOSPITAL, LLC,

CLANTON HOSPITAL, LLC,

SOUTHERN HEALTH CORPORATION OF ELLIJAY, INC.,

SOUTHERN HEALTH CORPORATION OF DAHLONEGA, INC.,

SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.,

HEALTHMONT, INC.

HEALTHMONT OF GEORGIA, INC.,

HEALTHMONT OF MISSOURI, INC.,

HEALTHMONT, LLC,

HEALTHMONT OF MISSOURI, LLC,

SUNLINK SERVICES, INC.,

OPTIMA HEALTHCARE CORPORATION, and

KRUG PROPERTIES, INC.

 

(“Borrowers”)

 

and

 

RESIDENTIAL FUNDING CORPORATION

 

(“Lender”)

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TABLE OF CONTENTS

 

ARTICLE I DEFINITIONS AND ACCOUNTING TERMS

   1     Section 1.1   Defined Terms    1     Section 1.2   Accounting Terms and
Calculations    22     Section 1.3   Computation of Time Periods    22    
Section 1.4   Other Definitional Terms    22

ARTICLE II TERMS OF THE CREDIT FACILITIES

   23     Section 2.1   Lending Commitments    23     Section 2.2   Procedure
for Loans    24     Section 2.3   Records    25     Section 2.4   Interest
Rates, Interest Payments and Default Interest.    26     Section 2.5   Repayment
   26     Section 2.6   Prepayments.    27     Section 2.7   Mandatory
Prepayment of Term Loan B from Excess Cash Flow    28     Section 2.8   Optional
Reduction of Revolving Commitment Amount or Termination of Revolving Commitment
   28     Section 2.9   Revolving Commitment Fee    28     Section 2.10   Term
Loan B Commitment Fee    28     Section 2.11   Servicing Fee    28    
Section 2.12   Computation    29     Section 2.13   Payments    29     Section
2.14   Use of Loan Proceeds    29     Section 2.15   Adjustment of NCV    29    
Section 2.16   Taxes.    29     Section 2.17   Appraisals    30     Section 2.18
  Wire Transfer Fee    31

ARTICLE III CONDITIONS PRECEDENT

   31     Section 3.1   Conditions of Initial Transaction    31     Section 3.2
  Conditions to Term Loan B Closing    33     Section 3.3   Conditions Precedent
to the Term Loans and all Advances    35     Section 3.4   Conditions Subsequent
   35

ARTICLE IV REPRESENTATIONS AND WARRANTIES

   36     Section 4.1   Organization, Standing, Etc.    36     Section 4.2  
Authorization and Validity    36     Section 4.3   No Conflict; No Default    36
    Section 4.4   Government Consent    36     Section 4.5   Financial
Statements and Condition.    37     Section 4.6   Litigation    37     Section
4.7   Conduct of Business; Permits    37     Section 4.8   Environmental, Health
and Safety Laws    37     Section 4.9   Compliance With Health Care Laws.    38

 

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     Section 4.10    Compliance with Health Plans    39      Section 4.11   
Physician Agreements    39      Section 4.12    Funds from Restricted Grants   
39      Section 4.13    HIPAA Compliance    39      Section 4.14    ERISA    40
     Section 4.15    Federal Reserve Regulations    40      Section 4.16   
Title to Property; Leases; Liens; Subordination    40      Section 4.17    Taxes
   41      Section 4.18    Trademarks, Patents    41      Section 4.19   
Existing Foreign Subsidiaries    41      Section 4.20    Force Majeure    41  
   Section 4.21    Investment Company Act    41      Section 4.22    Public
Utility Holding Company Act    41      Section 4.23    Retirement Benefits    41
     Section 4.24    Full Disclosure    41      Section 4.25    Subsidiaries   
42      Section 4.26    Restrictions on Subsidiaries    42      Section 4.27   
Labor Matters    42      Section 4.28    Deposit Accounts    42      Section
4.29    Offsets    42      Section 4.30    Solvency    42      Section 4.31   
Management Procedures    43      Section 4.32    For-Profit Entities    43

ARTICLE V AFFIRMATIVE COVENANTS

   43      Section 5.1    Financial Statements and Reports    43      Section
5.2    Existence    46      Section 5.3    Insurance    46      Section 5.4   
Payment of Taxes and Claims    47      Section 5.5    Inspection; Collateral
Audits    47      Section 5.6    Maintenance of Properties    47      Section
5.7    Books and Records    48      Section 5.8    Compliance; Permits    48  
   Section 5.9    ERISA    48      Section 5.10    Environmental Matters;
Reporting    48      Section 5.11    Accreditation    49      Section 5.12   
Further Assurances    49      Section 5.13    Compliance with Terms of Material
Contracts    49      Section 5.14    Joinder of Domestic Subsidiaries    50     
Section 5.15    Regions Bank Account    50

ARTICLE VI NEGATIVE COVENANTS

   50      Section 6.1    Merger    50      Section 6.2    Disposition of Assets
   50      Section 6.3    Plans    51      Section 6.4    Change in Nature of
Business    51

 

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     Section 6.5    Negative Pledges; Subsidiary Restrictions    51      Section
6.6    Restricted Payments    51      Section 6.7    Transactions with
Affiliates    52      Section 6.8    Accounting Changes    52      Section 6.9
   Deposit Accounts    52      Section 6.10    Capital Expenditures    52     
Section 6.11    Subordinated Debt    52      Section 6.12    Investments    53  
   Section 6.13    Indebtedness    54      Section 6.14    Liens    54     
Section 6.15    Contingent Liabilities    55      Section 6.16    Leverage Ratio
   55      Section 6.17    Minimum Liquidity    55      Section 6.18   
Collateral Coverage Ratio    56      Section 6.19    Fixed Charge Coverage Ratio
   56      Section 6.20    Executive Compensation    56      Section 6.21   
Restrictions on Leases, etc.    56      Section 6.22    Loan Proceeds    56     
Section 6.23    Sale and Leaseback Transactions    56      Section 6.24   
Hedging Agreements    57

ARTICLE VII EVENTS OF DEFAULT AND REMEDIES

   57      Section 7.1    Events of Default    57      Section 7.2    Remedies
   59      Section 7.3    Lockbox; Rights Under Control Agreements    59     
Section 7.4    Offset    60

ARTICLE VIII MISCELLANEOUS

   60      Section 8.1    Modifications    60      Section 8.2    Expenses    60
     Section 8.3    Waivers, etc.    61      Section 8.4    Notices.    61     
Section 8.5    Taxes    62      Section 8.6    Successors and Assigns.    62  
   Section 8.7    Confidentiality of Information    62      Section 8.8   
Governing Law and Construction    63      Section 8.9    Consent to Jurisdiction
   63      Section 8.10    Waiver of Jury Trial    63      Section 8.11   
Survival of Agreement    64      Section 8.12    Indemnification    64     
Section 8.13    Captions    65      Section 8.14    Entire Agreement    65     
Section 8.15    Counterparts    65      Section 8.16    Borrower
Acknowledgements    65      Section 8.17    Appointment of and Acceptance by
Borrowers’ Agent    65      Section 8.18    Relationship Among Borrowers.    65

 

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Section 8.19

   Interest Rate Limitation    68

Section 8.20

   Deposit on Termination of Commitments    69

 

EXHIBITS

 

Exhibit A

   Form of Revolving Note

Exhibit B

   Form of Term Loan A Note

Exhibit C

   Form of Term Loan B Note

Exhibit D

   Form of Security Agreement

Exhibit E

   Form of Pledge Agreement

Exhibit F

   Form of Borrowing Base Certificate

Exhibit G

   Form of Compliance Certificate

Exhibit H

   NCV Calculation

Exhibit I-1

   Matters to be Covered in Opinion of Counsel

Exhibit I-2

   Matters to be Covered in Supplemental Opinion of Counsel

Exhibit J

   Business Associate Agreement

Exhibit J-1

   Covered Entities

Exhibit K

   Wire Instructions

 

SCHEDULES

 

Schedule 1.1(a)

   Encumbered Real Estate

Schedule 1.1(b)

   Required Control Agreements

Schedule 3.2

   Leased Locations/Locations of Inventory

Schedule 4.6

   Litigation

Schedule 4.8

   Environmental Matters

Schedule 4.12

   Restricted Grants

Schedule 4.14

   ERISA

Schedule 4.16

   List of Real Properties

Schedule 4.25

   Subsidiaries

Schedule 4.28

   Deposit Accounts

Schedule 4.29

   Offsets

Schedule 6.12

   Existing Investments

Schedule 6.13

   Existing Indebtedness

Schedule 6.14

   Existing Liens

Schedule 6.15

   Contingent Obligations

Schedule 6.22

   Leases

 

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CREDIT AGREEMENT

 

THIS CREDIT AGREEMENT, dated as of October 15, 2004, is by and between SUNLINK
HEALTH SYSTEMS, INC., a corporation organized under the laws of the State of
Ohio, SUNLINK HEALTHCARE LLC, a limited liability company organized under the
laws of the State of Georgia, DEXTER HOSPITAL, LLC, a limited liability company
organized under the laws of the State of Georgia, CLANTON HOSPITAL, LLC, a
limited liability company organized under the laws of the State of Georgia,
SOUTHERN HEALTH CORPORATION OF ELLIJAY, INC., a corporation organized under the
laws of the State of Georgia, SOUTHERN HEALTH CORPORATION OF DAHLONEGA, INC., a
corporation organized under the laws of the State of Georgia, SOUTHERN HEALTH
CORPORATION OF HOUSTON, INC., a corporation organized under the laws of the
State of Georgia, HEALTHMONT, INC., a corporation organized under the laws of
the State of Delaware, HEALTHMONT OF GEORGIA, INC., a corporation organized
under the laws of the State of Tennessee, HEALTHMONT OF MISSOURI, INC., a
corporation organized under the laws of the State of Tennessee, HEALTHMONT, LLC,
a limited liability company organized under the laws of the State of Georgia,
HEALTHMONT OF MISSOURI, LLC, a limited liability company organized under the
laws of the State of Georgia, SUNLINK SERVICES, INC., a corporation organized
under the laws of the State of Georgia, OPTIMA HEALTHCARE CORPORATION, a
corporation organized under the laws of the State of Georgia, and KRUG
PROPERTIES, INC., a corporation organized under the laws of the State of Ohio
(individually, a “Borrower” and, collectively, the “Borrowers”), and RESIDENTIAL
FUNDING CORPORATION, a Delaware corporation (the “Lender”).

 

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

 

Section 1.1 Defined Terms. As used in this Agreement the following terms shall
have the following respective meanings (and such meanings shall be equally
applicable to both the singular and plural form of the terms defined, as the
context may require):

 

“Acquisition”: The purchase or other acquisition by one or more Borrowers or any
Subsidiary of assets constituting a business, division, or product line of any
Person or of the Equity Interest of any Person.

 

“Adjusted Consolidated Net Income”: For any period the Consolidated Net Income
for such period and without giving effect to any extraordinary gains or losses
from sales of assets plus, without duplication, (i) the sum of the amount of all
non cash charges (including, without limitation, depreciation, amortization,
depletion, deferred tax expense and non cash interest expense) and non cash
losses which were included in arriving at Consolidated Net Income for such
period less (ii) all non cash gains included in arriving at Consolidated Net
Income for such period.

 

“Adjusted Consolidated Working Capital”: At any time shall mean Consolidated
Current Assets (but excluding therefrom all cash and Cash Equivalents) less
Consolidated Current Liabilities.

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“Advance”: As defined in Section 2.1(a).

 

“Advance Date”: The date of the making of any Advance hereunder.

 

“Affiliate”: When used with reference to any Person, (a) each Person that,
directly or indirectly, controls, is controlled by or is under common control
with, the Person referred to, (b) each Person which beneficially owns or holds,
directly or indirectly, twenty (20%) percent or more of any class of voting
Equity Interests of the Person referred to, (c) each Person, twenty (20%)
percent or more of the voting Equity Interests (or if such Person is not a
corporation, twenty (20%) percent or more of the equity interest) of which is
beneficially owned or held, directly or indirectly, by the Person referred to,
and (d) each of such Person’s officers, directors, joint venturers and partners.
The term control (including the terms “controlled by” and “under common control
with”) means the possession, directly, of the power to direct or cause the
direction of the management and policies of the Person in question.

 

“Applicable Insolvency Laws”: As defined in Section 8.18(j).

 

“Applicable Revolving Margin”: 2.91%.

 

“Applicable Term Margin”: 3.91%.

 

“Assessments”: As defined in Section 4.13.

 

“Availability”: As of any date of calculation, the amount equal to (i) the
Borrowing Base less, (ii) the Total Outstandings.

 

“Board”: The Board of Governors of the Federal Reserve System or any successor
thereto.

 

“Borrower” and “Borrowers”: As defined in the opening paragraph hereof.

 

“Borrowers’ Agent”: SunLink Health Systems, Inc., a corporation organized under
the laws of the State of Ohio.

 

“Borrowing Base”: As of any date of calculation, a dollar amount equal to
Consolidated EBITDA, as determined as of the end of the most recent fiscal month
of the Borrowers for the twelve months ending thereon, multiplied by 3.25.

 

“Borrowing Base Certificate”: A certificate in the form of Exhibit F hereto.

 

“Business Day”: Any day which is not a day on which banking institutions in any
of the cities of Atlanta, Georgia, Dallas, Texas, Portland, Oregon or
Minneapolis, Minnesota are authorized or obligated by law or executive order to
close.

 

“Capital Expenditures”: For any period, the sum of all amounts, including
Capitalized Lease Obligations, that would, in accordance with GAAP, be included
as

 

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additions to property, plant and equipment on a consolidated statement of cash
flows for the Borrowers during such period, in respect of (a) the acquisition,
construction, improvement, replacement or betterment of land, buildings,
machinery, equipment or of any other fixed assets or leaseholds, (b) to the
extent related to and not included in (a) above, materials, contract labor
(excluding expenditures properly chargeable to repairs or maintenance in
accordance with GAAP), and (c) other capital expenditures and other uses
recorded as capital expenditures or similar terms having substantially the same
effect.

 

“Capitalized Lease”: A lease of (or other agreement conveying the right to use)
real or personal property with respect to which at least a portion of the rent
or other amounts thereon constitute Capitalized Lease Obligations.

 

“Capitalized Lease Obligations”: As to any Person, the obligations of such
Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real or personal property which obligations are
required to be classified and accounted for as a capital lease on a balance
sheet of such Person under GAAP (including Statement of Financial Accounting
Standards No. 13 of the Financial Accounting Standards Board), and, for purposes
of this Agreement, the amount of such obligations shall be the capitalized
amount thereof, determined in accordance with GAAP (including such Statement No.
13).

 

“Captive Insurance Subsidiary”: A direct, wholly owned Subsidiary of SHSI, which
is a company solely engaged in the business of providing insurance coverage to
the Borrowers and their Subsidiaries and, to the extent the insurance coverage
provided covers risks that (i) would be covered by a standard general
malpractice liability policy and (ii) arise solely from providing services and
products in the ordinary course of business of the Borrowers and their
Subsidiaries.

 

“Cash Equivalents”: As to any Person, (i) securities issued or directly and
fully guaranteed or insured by the United States or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities of not more than one
year from the date of acquisition, (ii) time deposits and certificates of
deposit of any commercial bank having, or which is the principal banking
subsidiary of a bank holding company organized under the laws of the United
States, any State thereof or the District of Columbia having capital, surplus
and undivided profits aggregating in excess of $200,000,000, with maturities of
not more than one year from the date of acquisition by such Person, (iii)
repurchase obligations with a term of not more than 90 days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (ii) above, (iv) commercial paper
issued by any Person incorporated in the United States rated at least A 2 or the
equivalent thereof by Standard & Poor’s Corporation or at least P 2 or the
equivalent thereof by Moody’s Investors Service, Inc. and in each case maturing
not more than one year after the date of acquisition by such Person, and (v)
investments in money market funds substantially all of whose assets are
comprised of securities of the types described in clauses (i) through (iv)
above.

 

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“CHAMPVA”: Collectively, the Civilian Health and Medical Program of the
Department of Veteran Affairs, a program of medical benefits covering retirees
and dependents of former members of the armed services administered by the
United States Department of Veteran Affairs, and all laws, rules, regulations,
manuals, orders, guidelines or requirements pertaining to such program including
(a) all federal statutes (whether set forth in 38 U.S.C. §1713 or elsewhere)
affecting such program or, to the extent applicable to CHAMPVA, and (b) all
rules, regulations (including 38 C.F.R. §17.54), manuals, orders and
administrative, reimbursement and other guidelines of all governmental
authorities promulgated in connection with such program (whether or not having
the force of law), in each case as the same may be amended, supplemented or
otherwise modified from time to time.

 

“Change of Control”: The occurrence, after the Closing Date, of any of the
following circumstances: (a) any Person or two or more Persons acting in concert
acquiring beneficial ownership (within the meaning of Rule 13d-3 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934),
directly or indirectly, of Equity Interests of any Borrower representing twenty
(20%) percent or more of the combined voting power of all Equity Interests of
such Borrower entitled to vote in the election of directors; or (b) during any
period of up to twelve consecutive months, whether commencing before or after
the Closing Date, individuals who at the beginning of such twelve-month period
were directors of any Borrower ceasing for any reason to constitute a majority
of the Board of Directors of any Borrower (other than by reason of death,
disability or scheduled retirement); provided, however, that, notwithstanding
anything to the contrary herein, Lender acknowledges and agrees that SHSI shall
be permitted to reduce the number of directors on its Board of Directors to five
(5) members during the term hereof; or (c) any Person or two or more Persons
acting in concert acquiring by contract or otherwise, or entering into a
contract or arrangement which upon consummation will result in its or their
acquisition of, control over Equity Interests of any Borrower representing
twenty (20%) percent or more of the combined voting power of all Equity
Interests of any Borrower entitled to vote in the election of directors.

 

“Charges”: As defined in Section 8.19.

 

“Closing Date”: Any Business Day between the date of this Agreement and October
15, 2004 selected by the Borrowers for the making of Term Loan A or the first
Advance hereunder; provided, that all the conditions precedent to the obligation
of the Lender to make Term Loan A or such Advance, as set forth in Article III,
have been, or, on such Closing Date, will be, satisfied. The Borrowers’ Agent
shall give the Lender not less than three (3) Business Days’ prior notice of the
day selected as the Closing Date.

 

“Code”: The Internal Revenue Code of 1986, as amended.

 

“Collateral”: The property of the Borrowers described in the Security Documents
as “Collateral” and Encumbered Real Estate.

 

“Collateral Account”: As defined in Section 7.3.

 

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“Collateral Coverage Ratio”: The ratio as of the last day of any fiscal quarter
or other date of determination of (i) the sum of (A) Receivables Collateral
Coverage, (B) Real Estate Collateral Coverage, (C) Equipment Collateral
Coverage, and (D) Inventory Collateral Coverage, to (ii) Total Outstandings.

 

“Commitments”: The Revolving Commitment, the Term Loan A Commitment and the Term
Loan B Commitment.

 

“Compliance Certificate”: A certificate in the form of Exhibit G hereto.

 

“Consolidated” or “consolidated”: With reference to any term defined herein,
that term as applied to the accounts of the Borrowers and their subsidiaries,
consolidated in accordance with GAAP.

 

“Consolidated Current Assets”: As of any date, the consolidated current assets
of the Borrowers, determined in accordance with GAAP.

 

“Consolidated Current Liabilities”: As of any date, the consolidated current
liabilities of the Borrowers, determined in accordance with GAAP.

 

“Consolidated EBITDA”: With respect the Borrowers and their Subsidiaries
determined in accordance with GAAP for any fiscal period, without duplication,
an amount equal to:

 

(a) Consolidated Net Income of the Borrowers and their Subsidiaries for such
period determined in accordance with GAAP, minus

 

(b) on a consolidated basis, the sum of (i) income tax credits, (ii) interest
income, (iii) gain from extraordinary items for such period, (iv) any aggregate
net gain (but not any aggregate net loss) during such period arising from the
sale, exchange or other disposition of capital assets by the Borrowers and their
Subsidiaries (including any fixed assets, whether tangible or intangible, all
inventory sold in conjunction with the disposition of fixed assets and all
securities), and (v) any other non-cash gains that have been added in
determining Consolidated Net Income, in each case to the extent included in the
calculation of Consolidated Net Income of the Borrowers and their Subsidiaries
for such period in accordance with GAAP, but without duplication, plus

 

(c) on a consolidated basis, the sum of (i) any provision for income taxes, (ii)
Consolidated Interest Expense, (iii) loss from extraordinary items for such
period, (iv) the amount of non-cash charges (including depreciation,
amortization, depletion, deferred tax expense, and non-cash interest expense)
for such period, (v) the amount, if any, of non-recurring costs or expenses
related to any refinancing, acquisition, or merger transaction, including,
without limitation, accounting, legal, consulting and other professional fees in
connection therewith, for such period, (vi) amortized debt discount for such
period, and (vii) the amount of any deduction to Consolidated Net Income as the
result of any grant to any

 

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members of the management of the Borrowers and their Subsidiaries of any Equity
Interests (in each case, as determined in accordance with GAAP), in each case to
the extent included in the calculation of Consolidated Net Income of the
Borrowers and their Subsidiaries for such period in accordance with GAAP, but
without duplication.

 

“Consolidated Excess Cash Flow”: For any period, the remainder of (a) the sum of
(i) Adjusted Consolidated Net Income for such period, and (ii) the decrease, if
any, in Adjusted Consolidated Working Capital from the first day to the last day
of such period, minus (b) the sum of (i) the amount of Capital Expenditures made
by the Borrowers and its Subsidiaries on a consolidated basis during such period
in accordance with Section 6.10, (ii) the aggregate amount of permanent
principal payments of Indebtedness for borrowed money of the Borrowers and their
Subsidiaries and the permanent repayment of the principal component of
Capitalized Lease Obligations of the Borrowers and their Subsidiaries (excluding
(A) payments with proceeds of asset sales and Net Insurance/Condemnation
Proceeds and (B) payments with the proceeds of other Indebtedness or equity or
equity contributions) (but in the case of a voluntary prepayment of the Loans,
only to the extent accompanied by a voluntary reduction to the Commitments)
during such period, (iii) the increase, if any, in Adjusted Consolidated Working
Capital from the first day to the last day of such period and (iv) the aggregate
amount of cash consideration paid to make Permitted Acquisitions during such
period.

 

“Consolidated Interest Expense”: For any period of determination, the aggregate
consolidated amount, without duplication, of interest (whether cash or non-cash)
paid, accrued or scheduled to be paid in respect of any Indebtedness of the
Borrowers and its Subsidiaries, including (a) all but the principal component of
payments in respect of conditional sale contracts, Capitalized Leases and other
title retention agreements, (b) commissions, discounts and other fees and
charges with respect to letters of credit and bankers’ acceptance financings and
(c) net costs under interest rate protection agreements, in each case determined
in accordance with GAAP.

 

“Consolidated Net Income”: For any period, the consolidated net after tax income
of the Borrowers and their Subsidiaries determined in accordance with GAAP;
provided that the following items shall be excluded in computing Consolidated
Net Income (without duplication): (i) the net income of any Person which is not
a Subsidiary of the Borrower, except to the extent of the amount of any
dividends or other distributions actually paid to the Borrowers or any of their
Subsidiaries during such period, (ii) except for determinations expressly
required to be made on a pro forma basis, the net income (or loss) of any Person
accrued prior to the date it becomes a Subsidiary or all or substantially all of
the property or assets of such Person are acquired by a Subsidiary and (iii) the
net income of any Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Subsidiary.

 

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“Contingent Obligations”: With respect to any Person at the time of any
determination, without duplication, any obligation, contingent or otherwise, of
such Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other Person (the “primary obligor”) in any manner, whether
directly or otherwise: (a) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness or to purchase (or to advance or
supply funds for the purchase of) any direct or indirect security therefor, (b)
to purchase property, securities, Equity Interests or services for the purpose
of assuring the owner of such Indebtedness of the payment of such Indebtedness,
(c) to maintain working capital, equity capital or other financial statement
condition of the primary obligor so as to enable the primary obligor to pay such
Indebtedness or otherwise to protect the owner thereof against loss in respect
thereof, or (d) entered into for the purpose of assuring in any manner the owner
of such Indebtedness of the payment of such Indebtedness or to protect the owner
against loss in respect thereof; provided, that the term “Contingent
Obligations” shall not include endorsements for collection or deposit, in each
case in the ordinary course of business.

 

“Control Agreement”: An agreement which satisfies the requirements of “control”
in favor of the Lender over a Deposit Account, investment property, electronic
chattel paper or letter-of-credit rights, within the meaning of the UCC.

 

“Cut-off Period”: 180 days after the service date for the applicable Receivable.

 

“Default”: Any event which, with the giving of notice (whether such notice is
required under Section 7.1, or under some other provision of this Agreement, or
otherwise) or lapse of time, or both, would constitute an Event of Default.

 

“Deposit Account”: Any demand, lockbox, time, savings, passbook or similar
account now or hereafter maintained by or for the benefit of a Borrower, with an
organization that is engaged in the business of banking (including, without
limitation, banks, savings banks, savings and loan associations, credit unions
and trust companies), and all funds and amounts therein, whether or not
restricted or designated for a particular purpose, including without limitation,
all Collateral Accounts, and all “deposit accounts” as defined in the UCC.

 

“Domestic Subsidiary”: Any Subsidiary incorporated in any of the states of the
United States or in the District of Columbia.

 

“Draw Date”: The date of the making of any Term Loan B Draw hereunder.

 

“Eligible Inventory”: Inventory owned by a Borrower which at all times continues
to be acceptable to the Lender in its reasonable credit judgment exercised in
good faith. In general, Inventory shall be Eligible Inventory if it meets all of
the criteria set forth below:

 

(a) Such Inventory is not obsolete or unreasonably aged, as determined by the
Lender in its reasonable credit judgment;

 

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(b) Such Inventory is subject to a valid, first priority perfected security
interest in favor of the Lender, subject only to Permitted Liens; and

 

(c) Such Inventory is not held by a Borrower as a consignee or pursuant to a
similar title retention arrangement with a vendor of such Inventory.

 

The criteria for Eligible Inventory set forth above may be changed and the
Lender may establish any new criteria for Eligible Inventory from time to time
in the Lender’s reasonable credit judgment exercised in good faith.

 

“Eligible Receivables”: Receivables created by a Borrower that continue to be
acceptable to the Lender based on the Lender’s criteria of eligibility set forth
below. In general, Receivables shall be Eligible Receivables if they meet all of
the criteria set forth below:

 

(a) Such Receivables arise from the actual and bona fide sale and delivery of
goods or rendition of services by a Borrower in the ordinary course of its
business to a Person which is not an Affiliate of such Borrower, for which an
invoice has been or will be issued in accordance with such Borrower’s customary
billing procedures;

 

(b) Such Receivables are not unpaid more than the Cut-off Period;

 

(c) Such Receivables do not arise from sales on consignment, guaranteed sale,
sale and return, sale on approval, or other terms under which payment by the
Obligor may be conditional or contingent;

 

(d) The chief executive office of the Obligor with respect to such Receivables
is located in the United States;

 

(e) The Obligor with respect to such Receivables has not asserted or threatened
to assert a counterclaim, defense or dispute and does not have any right of
setoff or recoupment against such Receivables (but the portion of the
Receivables of such Obligor in excess of the amount at any time and from time to
time subject to setoff or counterclaim may be deemed Eligible Receivables);

 

(f) There are no facts, events or occurrences which would impair the validity,
enforceability or collectability of such Receivables or reduce the amount
payable or delay payment thereunder;

 

(g) Such Receivables are subject to the first priority, valid and perfected
security interest of the Lender, subject only to Permitted Liens;

 

(h) There are no proceedings or actions (including, without limitation,
Insolvency Proceedings) which are threatened or pending against the Obligor with
respect to such Receivables which might result in any material adverse change in
any such Obligor’s financial condition;

 

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(i) Such Receivables are not evidenced by or arising under any instrument or
chattel paper (as such terms are defined in the UCC);

 

(j) Such Receivables for a single Obligor do not have more than a specified
percentage of the total aged beyond the Cut-off Period, as specified in Exhibit
H attached hereto.

 

(k) Such Receivables are owed by Obligors deemed creditworthy at all times by
the Lender in good faith; and

 

(l) Any other Receivables which the Lender, in its sole discretion, deems
Eligible Receivables.

 

The criteria for Eligible Receivables set forth above may be changed and the
Lender may establish any new criteria for Eligible Receivables from time to time
in the Lender’s reasonable credit judgment exercised in good faith.

 

“Encumbered Equipment”: All equipment of Borrowers subject to the first
priority, valid and perfected security interest of the Lender.

 

“Encumbered Real Estate”: All real property listed in Schedule 1.1(a) attached
hereto and such additional real property as the Lender may request be mortgaged
to it pursuant to Section 5.14, which real property is subject to the first
priority, valid and perfected Lien of the Lender.

 

“Equipment Collateral Coverage”: The amount equal to the net book value of the
Encumbered Equipment, unless there exists a Qualifying Appraisal for such
property issued no more than one year prior to any date of determination, in
which case the applicable amount shall be the appraised value.

 

“Equity Interests”: All shares, interests, participation or other equivalents,
however designated, of or in a corporation or limited liability company, whether
or not voting, including but not limited to common stock, member interests,
warrants, preferred stock, convertible debentures, and all agreements,
instruments and documents convertible, in whole or in part, into any one or more
or all of the foregoing.

 

“ERISA”: The Employee Retirement Income Security Act of 1974, as amended.

 

“ERISA Affiliate”: Any trade or business (whether or not incorporated) that is a
member of a group of which a Borrower is a member and which is treated as a
single employer under Section 414 of the Code.

 

“Event of Default”: Any event described in Section 7.1.

 

“Existing Foreign Subsidiaries”: The UK Subsidiaries and Klippan S.A.R.L., a
company organized under the laws of France, and Klippan GmbH, a company
organized under the laws of Germany.

 

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“Fees”: The Initial Loan Origination Fee, the Term Loan B Origination Fee, the
Servicing Fees and any other fees due pursuant to the Loan Documents.

 

“Financial Statements”: The consolidated financial statements, including,
without limitation, income statements, statements of cash flows and balance
sheets of SunLink Health Systems, Inc., Borrowers and their Subsidiaries, to be
delivered in accordance with Section 5.1.

 

“Fixed Charge Coverage Ratio”: For any period of determination, the ratio of

 

(a) Consolidated EBITDA (less unfinanced Capital Expenditures, unless incurred
in a Permitted Acquisition),

 

to

 

(b) the sum of (i) taxes paid in cash (other than taxes with respect to
non-recurring capital gains), (ii) Consolidated Interest Expense and (iii) all
scheduled or otherwise required principal payments (excluding mandatory
prepayments of Term Loans under this Agreement) with respect to Total
Liabilities (including but not limited to all payments with respect to
Capitalized Lease Obligations of the Borrowers and the Subsidiaries), in each
case determined for said period on a consolidated basis.

 

Solely for the purpose of this definition, the purchase of a Capital Expenditure
funded by a Loan is an “unfinanced” Capital Expenditure.

 

“Funded Debt”: As of each date of determination, without duplication (a) all
Indebtedness for borrowed money of the Borrowers and their consolidated
Subsidiaries on that date (including without limitation all obligations under
Capitalized Lease Obligations) and other interest bearing Indebtedness of the
Borrowers and their consolidated Subsidiaries maturing more than one year from
the date of original issuance (including current maturities), (b) the aggregate
amount available for drawing under all letters of credit outstanding on that
date for which the Borrowers or a consolidated Subsidiary of the Borrowers is
the account party (excluding, however, the aggregate amount available for
drawing under letters of credit issued to lenders and lessors of Indebtedness of
the type described in clause (a) in support of such Indebtedness), (c) the
aggregate amount drawn under all letters of credit for which the Borrowers or a
consolidated Subsidiary of the Borrowers is the account party and for which the
issuer of such letters of credit has not been reimbursed on that date, (d) all
Indebtedness for borrowed money of the Borrowers and their consolidated
Subsidiaries on that date owed to any bank or financial institution, and (e) all
Indebtedness secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or in
property (including accounts and contracts rights) owned by the Borrowers or a
consolidated Subsidiary of the Borrowers, even though the Borrowers or such
consolidated Subsidiary has not assumed or become liable for the payment of such
Indebtedness.

 

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“GAAP”: Generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
may be approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of any date of determination.

 

“Governmental Authority”: Any federal, state, local or other governmental
department, commission, board, bureau, agency, central bank, court, tribunal or
other instrumentality or authority or subdivision thereof, domestic or foreign,
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.

 

“Health Care Laws”: As defined in Section 4.9.

 

“HIPAA”: Means the Health Insurance Portability and Accountability Act of 1996,
as the same may be amended, modified or supplemented from time to time, and any
successor statute thereto, and any and all rules or regulations promulgated from
time to time thereunder.

 

“HIPAA Compliance Plan”: As defined in Section 4.13.

 

“HIPAA Compliant”: Means that to the extent applicable, the applicable Borrower
or Subsidiary (A) is, or on or before any applicable compliance date will be, in
material compliance with any and all of the applicable requirements of HIPAA,
including all requirements of the Transactions Rule and the Privacy and Security
Rules and (B) is not subject to, and could not reasonably be expected to become
subject to, any civil or criminal penalty or any investigation, claim or process
that would reasonably be expected to cause a Material Adverse Occurrence in
connection with any violation by a Borrower or Subsidiary of a Borrower of the
then effective requirements of HIPAA.

 

“Immediately Available Funds”: Funds with good value on the day and in the city
in which payment is received.

 

“Indebtedness”: With respect to any Person at the time of any determination,
without duplication, all obligations, contingent or otherwise, of such Person
which in accordance with GAAP should be classified upon the balance sheet of
such Person as liabilities, but in any event including: (a) all obligations of
such Person for borrowed money (including non-recourse obligations), (b) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) all obligations of such Person upon which interest
charges are customarily paid or accrued, (d) all obligations of such Person
under conditional sale or other title retention agreements relating to property
purchased by such Person, (e) all obligations of such Person issued or assumed
as the deferred purchase price of property or services, (f) all obligations of
others secured by any Lien on property owned or acquired by such Person, whether
or not the obligations secured thereby have been assumed, (g) all Capitalized
Lease Obligations of such Person,

 

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(h) all obligations of such Person in respect of interest rate swap agreements,
cap or collar agreements, interest rate futures or option contracts, currency
swap agreements, currency futures or option agreements and other similar
contracts (i) all obligations of such Person, actual or contingent, as an
account party in respect of letters of credit or bankers’ acceptances, (j) all
obligations of any partnership or joint venture as to which such Person is or
may become personally liable, (k) all obligations of such Person under any
Equity Interests issue by such Person, and (l) all Contingent Obligations of
such Person.

 

“Indemnitee” and “Indemnitees”: As defined in Section 8.12.

 

“Initial Loan Origination Fee”: Fee payable to the Lender in an amount
determined by applying a rate of 0.75% to the sum of the Revolving Commitment
and the Term Loan A Commitment of the Lender.

 

“Insolvency Proceeding”: Any proceeding commenced by or against any Person,
under any provision of any bankruptcy, insolvency or receivership law,
including, but not limited to, assignments for the benefit of creditors, formal
or informal moratoriums, compositions, receiverships, readjustments of debt,
dissolutions, liquidations, or extensions with some or all creditors.

 

“Inventory”: Goods, other than farm products, which are leased by a Person as
lessor, are held by a person for sale or lease or to be furnished under a
contract of service, are furnished by a Person under a contract of service, or
consist of raw materials, work in process, or materials used or consumed in a
business or incorporated or consumed in the production of any of the foregoing
and supplies, in each case wherever the same shall be located, whether in
transit, on consignment, in retail outlets, warehouses, terminals or otherwise,
and all property the sale, lease or other disposition of which has given rise to
an Account and which has been returned to a Borrower or repossessed by a
Borrower or stopped in transit.

 

“Inventory Collateral Coverage”: The amount equal to the net book value of all
Eligible Inventory of the Borrowers, unless there exists a Qualifying Appraisal
for all Eligible Inventory issued no more than three months prior to any date of
determination, in which case the applicable amount shall be the appraised value.

 

“Investment”: The acquisition, purchase, making or holding of any Equity
Interests or other security, any loan, advance, contribution to capital,
extension of credit (except for trade and customer accounts receivable for
inventory sold or services rendered in the ordinary course of business and
payable in accordance with customary trade terms), any acquisitions of real or
personal property (other than real and personal property acquired in the
ordinary course of business) and any purchase or commitment or option to
purchase Equity Interests, securities or other debt of or any interest in
another Person or any integral part of any business or the assets comprising
such business or part thereof and the formation of, or entry into, any
partnership as a limited or general partner or the entry into any joint venture.
The amount of any Investment shall be the original cost of such Investment plus
the cost of all additions thereto, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment.

 

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“KRUG Pension Plan”: The defined benefit pension plan of SHSI, formerly known as
KRUG International Corp., an Ohio corporation, which is entitled the “KRUG
International Corp. Retirement Plan.”

 

“Lender”: As defined in the opening paragraph hereof.

 

“Leverage Ratio”: For any period of determination, the ratio of (i) Total Debt
as of the end of such period to (ii) Consolidated EBITDA for such period.

 

“LIBOR Rate”: The Thirty-Day LIBOR rate, as published in the Bloomberg page BBAM
for the last business day of the month immediately preceding the month for which
interest is being calculated or if such published rate ceases to be available,
such other published “LIBOR Rate” as the Lender may reasonably select.

 

“Lien”: With respect to any Person, any security interest, mortgage, pledge,
lien, charge, encumbrance, title retention agreement or analogous instrument or
device (including the interest of each lessor under any Capitalized Lease), in,
of or on any assets or properties of such Person, now owned or hereafter
acquired, whether arising by agreement or operation of law.

 

“Loan”: The Revolving Loan, Term Loan A or Term Loan B.

 

“Loan Documents”: This Agreement, the Security Documents, the Notes and all
other documents, instruments and agreements, including lockbox agreements,
control agreements, servicing agreements, financing statements, and deeds of
trust or mortgages, executed in connection herewith or therewith.

 

“Lockbox”: As defined in Section 7.3.

 

“Material Adverse Occurrence”: Any occurrence of whatsoever nature (including,
without limitation, any adverse determination in any litigation, arbitration, or
governmental investigation or proceeding) which could reasonably be expected to
materially and adversely affect (a) the financial condition or operations of the
Borrowers and their Subsidiaries taken as a whole, (b) impair the ability of the
Borrowers and their Subsidiaries, taken as a whole, to perform their obligations
under any Loan Document, or any writing executed pursuant thereto, (c) the
validity or enforceability of the material obligations of any Borrower or any
Subsidiary under any Loan Document, (d) the rights and remedies of the Lender
against any Borrower or any Subsidiary, (e) the timely payment of the principal
of and interest on the Loans or other amounts payable by the Borrowers
hereunder, or (f) the validity of the joint and several nature of the
obligations of the Borrowers with respect to all of the Obligations.

 

“Maximum Rate”: As defined in Section 8.19.

 

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“Medicaid”: Collectively, the healthcare assistance program established by Title
XIX of the Social Security Act (42 U.S.C. §§1396 et seq.) and any statutes
succeeding thereto, and all laws, rules, regulations, manuals, orders,
guidelines or requirements pertaining to such program, including (a) all federal
statutes (whether set forth in Title XIX of the Social Security Act or
elsewhere) affecting such program, (b) all state statutes and plans for medical
assistance enacted in connection with such program and federal rules and
regulations promulgated in connection with such program, and (c) all applicable
provisions of all rules, regulations, manuals, orders and administrative,
reimbursement, guidelines and requirements of all government authorities
promulgated in connection with such program (whether or not having the force of
law), in each case as the same may be amended, supplemented or otherwise
modified from time to time.

 

“Medicare”: Collectively, the health insurance program for the aged and disabled
established by Title XVIII of the Social Security Act (42 U.S.C. §§1395 et seq.)
and any statutes succeeding thereto, and all laws, rules, regulations, manuals,
orders or guidelines pertaining to such program, including (a) all federal
statutes (whether set forth in Title XVIII of the Social Security Act or
elsewhere) affecting such program, and (b) all applicable provisions of all
rules, regulations, manuals, orders and administrative, reimbursement,
guidelines and requirements of all governmental authorities promulgated in
connected with such program (whether or not having the force of law), in each
case as the same may be amended, supplemented or otherwise modified from time to
time.

 

“Mortgages”: Each of the mortgages, deeds of trust, leasehold mortgages,
leasehold deeds of trust, collateral assignments of leases or other real estate
security documents with respect to the Encumbered Real Estate.

 

“Multiemployer Plan”: A multiemployer plan, as such term is defined in Section
4001 (a) (3) of ERISA, which is maintained (on the Closing Date, within the five
years preceding the Closing Date, or at any time after the Closing Date) for
employees of a Borrower or any ERISA Affiliate.

 

“Net Collectible Value” or “NCV”: With respect to any Type of Eligible
Receivables, the percentage determined by the Lender, in its reasonable credit
judgment, by which the gross amount of such Eligible Receivables is multiplied
to determine the net collectible value of such Receivables. Net Collectible
Value is generally calculated in the manner described in Exhibit H. The initial
Net Collectible Value for each Obligor Type shall be as set forth on Exhibit H.
The Lender may adjust Net Collectible Value for any Type of Receivables as
provided in Section 2.15.

 

“Net Insurance/Condemnation Proceeds”: Any cash payments or proceeds received by
the Borrowers or any of their Subsidiaries (i) under any casualty insurance
policy in respect of a covered loss thereunder or (ii) as a result of the taking
of any assets of the Borrowers or any of their Subsidiaries by any Person
pursuant to the power of eminent domain, condemnation or otherwise, or pursuant
to a sale of any such assets to a purchaser with such power under threat of such
a taking, in each case net of any actual and documented fees, expenses and costs
incurred by the Borrowers or any of their

 

14

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Subsidiaries in connection with the adjustment or settlement of any claims of
the Borrowers or such Subsidiaries in respect thereof, including (i) income
taxes reasonably estimated to be actually payable within two years of the date
of receipt of such payments or proceeds as a result of any gain recognized in
connection with the receipt of such payment or proceeds and (ii) payment of the
outstanding amount of principal, premium or penalty, if any, and interest of any
Indebtedness (other than the Loans) that is secured by a Lien on the stock or
assets in question and that is repaid as a result of receipt of such payments or
proceeds.

 

“Note”: Term Note(s) A, Term Note(s) B or the Revolving Note (collectively, the
“Notes”).

 

“Obligations”: The Borrowers’ obligations in respect of the due and punctual
payment of principal and interest on the Notes when and as due, whether by
acceleration or otherwise and all fees (including Revolving Commitment Fees,
Term Loan B Commitment Fees, Servicing Fees, the Initial Loans Origination Fee
and the Term Loan B Origination Fee), expenses, indemnities, reimbursements and
all other obligations of the Borrowers under this Agreement or any other Loan
Document, in all cases whether now existing or hereafter arising or incurred.

 

“Obligor”: Any Person that is obligated to make payment with respect to any
Receivables.

 

“Offset”: Any amount, including any overpayment made to any Borrower or any of
its Affiliates, with respect to any Obligor that is to be repaid by offset
against amounts then due to such Borrower by such Obligor. Offsets shall include
any amounts constituting penalties or assessments due to any state or federal
tax authorities, amounts deemed by any Obligor to be recoupments, inter-agency
or inter-creditor offsets and recoupments and any other amounts withheld or paid
to any person or entity other than the Lender to offset against any purported
liability of the Borrowers.

 

“Other Taxes”: As defined in Section 2.16(b).

 

“PBGC”: The Pension Benefit Guaranty Corporation, established pursuant to
Subtitle A of Title IV of ERISA, and any successor thereto or to the functions
thereof.

 

“Permitted Acquisitions”: (i) Any Acquisition by any Borrower where (a) the
business or division acquired is for use, or the Person acquired is engaged, in
a business similar to that engaged in by the Borrowers on the Closing Date, (b)
immediately before and after giving effect to such Acquisition, no Default or
Event of Default shall exist, (c) not less than ten (10) Business Days prior to
the consummation of such Acquisition, Lender shall have received pro forma
financial statements, certified by the chief financial officer of SHSI as to the
matters described in Section 4.5(b), giving effect to the Acquisition showing
that the Borrowers are, and are reasonably anticipated to remain in pro forma
compliance with all the financial ratios and restrictions set forth in Section
6.16, Section 6.17, Section 6.18, and Section 6.19, (d) reasonably prior to such

 

15

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Acquisition, the Lender shall have received drafts of each material document,
instrument and agreement to be executed in connection with such Acquisition
together with all lien search reports and lien release letters and other
documents as the Lender may require to evidence the termination of Liens on the
assets or business to be acquired, (e) no less than ten Business Days prior the
consummation of such Acquisition, the Lender shall have received the financial
statements of the Person or business to be acquired for the lesser time period
of the prior three years or the period from the inception of such Person or
business, in form and substance satisfactory to the Lender, and (f) the
provisions of Section 5.14 have been satisfied with respect to any Subsidiary to
be formed or acquired in connection with such Acquisition; or (ii) any other
Acquisition consented to in advance in writing by the Lender.

 

“Permitted Encumbrances”: As defined in Section 6.14.

 

“Permitted Investments”: As defined in Section 6.12.

 

“Permitted Refinancing Indebtedness”: Any Indebtedness of the Borrowers issued
or given in exchange for, or the proceeds of which are used to, extend,
refinance, renew, replace, substitute or refund Indebtedness incurred pursuant
to Section 6.13(b), Section 6.13(c), Section 6.13(d), Section 6.13(e), or
Section 6.13(f) or any Indebtedness issued to so extend, refinance, renew,
replace, substitute or refund any such Indebtedness, so long as (a) such
Indebtedness has a weighted average life to maturity greater than or equal to
the weighted average life to maturity of the Indebtedness being refinanced, (b)
such refinancing or renewal does not add any Borrower as guarantor, obligor or
grantor of security from that which applied to such Indebtedness being
refinanced or renewed, (c) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, substituted or refunded (plus all
accrued interest thereon and the amount of all fees, commissions, discounts,
costs, expenses and premiums incurred in connection therewith), and (d) such
refinancing or renewal Indebtedness has substantially the same (or, from the
perspective of Lender, more favorable) subordination provisions, if any, as
applied to the Indebtedness being renewed or refinanced.

 

“Person”: Any natural person, corporation, partnership, limited partnership,
limited liability company, joint venture, firm, association, trust,
unincorporated organization, government or governmental agency or political
subdivision or any other entity, whether acting in an individual, fiduciary or
other capacity.

 

“Plan”: Each employee benefit plan (whether in existence on the Closing Date or
thereafter instituted), as such term is defined in Section 3 of ERISA,
maintained for the benefit of employees, officers or directors of a Borrower or
of any ERISA Affiliate.

 

“Pledge Agreement”: Pledge Agreement dated as of October 15, 2004 made by the
Borrowers for the benefit of the Lender, substantially in the form attached
thereto as Exhibit E.

 

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“Prepayment Event”: Means:

 

(a) any sale, transfer or other disposition (including pursuant to a sale and
leaseback transaction) of any property or asset of any Borrower or any
Subsidiary, other than dispositions described in Section 6.2(a), Section 6.2(b),
Section 6.2(c) and Section 6.2(d); provided, however, that in the case of
dispositions permitted only pursuant to Section 6.2(d) that result in net
proceeds in excess of $1,500,000 in the aggregate for the term of this Agreement
such excess amount shall be subject to prepayment pursuant to Section 2.6(a);
and

 

(b) any casualty or other insured damage to, or any taking under power of
eminent domain or by condemnation or similar proceeding of, any property or
asset of any Borrower or any Subsidiary, but only to the extent that the Net
Insurance/Condemnation Proceeds therefrom have not been applied, or committed
pursuant to a written agreement (including any purchase orders) to be applied,
to repair, restore or replace such property or asset within 180 days after such
event, or within such other time as agreed to by the Lender with respect to the
repair, restoration, or replacement of any real property.

 

“Privacy and Security Rules”: As defined in Section 4.13.

 

“Prohibited Transaction”: The respective meanings assigned to such term in
Section 4975 of the Code and Section 406 of ERISA.

 

“Qualifying Appraisal”: As defined in Section 2.17.

 

“Qualified Transferee”: (a) The Lender or any Affiliate of the Lender that
extends or invests in commercial loans, and (b) any commercial bank, savings and
loan association or savings bank or any other entity having total assets in
excess of $500,000,000, which extends credit or buys loans as one of its
businesses, and which, through its applicable lending office, is capable of
lending to Borrower without the imposition of any withholding or similar taxes;
provided that no Person proposed to become a Lender after the Closing Date and
reasonably determined by the Borrowers’ Agent to be acting in the capacity of a
vulture fund or distressed debt purchaser shall be a Qualified Transferee.

 

“Rate Protection Agreement”: Any interest rate swap, cap or option agreement, or
any other agreement pursuant to which any Borrower hedges interest rate risk
with respect to a portion of the Obligations.

 

“Real Estate Collateral Coverage”: The amount equal to the net book value of the
Encumbered Real Estate, unless there exists a Qualifying Appraisal for such
property issued no more than one year prior to any date of determination, in
which case the applicable amount shall be the appraised value.

 

“Receivables”: Any right to payment, whether constituting an account, chattel
paper, instrument, general intangible, payment intangible, healthcare insurance

 

17

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receivable, contract or otherwise, arising from the sale, rental or lease of
healthcare goods or equipment, or the provision of services and any ancillary
sales, including all rights and remedies to payment relating thereto, together
with any and all proceeds in any way derived, directly or indirectly therefrom.
The term “Receivables” shall include amounts due under capitation and similar
agreements, amounts due the Borrowers for cost adjustments or undercharges for
prior services, amounts due as any part of a disproportionate share or risk
share payment, workmen’s compensation claims, or other right to payment for any
work, service, work in progress or other thing of value performed by the
Borrowers whether billed or not by the Borrowers, and any other claims to
payment held by the Borrowers.

 

“Receivables Collateral Coverage”: The amount equal to the Net Collectible Value
of all Eligible Receivables.

 

“Regulatory Change”: Any change after the Closing Date in federal, state or
foreign laws or regulations or the adoption or making after such date of any
interpretations, directives or requests applying to a class of banks including
the Lender under any federal, state or foreign laws or regulations by any court
or governmental or monetary authority charged with the interpretation or
administration thereof.

 

“Remittance Account”: As defined in Section 2.2(a).

 

“Reportable Event”: A reportable event as defined in Section 4043 of ERISA and
the regulations issued under such Section, with respect to a Plan, excluding,
however, such events as to which the PBGC by regulation has waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event, provided that a failure to meet the minimum
funding standard of Section 412 of the Code and of Section 302 of ERISA shall be
a Reportable Event regardless of the issuance of any waiver in accordance with
Section 412(d) of the Code.

 

“Required Control Agreements”: The Control Agreements described on Schedule
1.1(b) hereto by and among the Lender and each Borrower, bank, issuer or
securities intermediary listed thereon.

 

“Restricted Payments”: With respect to any Borrower and its Subsidiaries,
collectively, all dividends or other distributions of any nature (cash, Equity
Interests other than common stock of such Borrower, assets or otherwise), and
all payments on any class of Equity Interests (including warrants, options or
rights therefor) issued by such Borrower, whether such Equity Interests are
authorized or outstanding on the Closing Date or at any time thereafter and any
redemption or purchase of, or distribution in respect of, any of the foregoing,
whether directly or indirectly.

 

“Revolving Commitment”: The obligation of the Lender to make Advances to the
Borrowers.

 

“Revolving Commitment Amount”: Initially $15,000,000 but as the same may be
reduced from time to time pursuant to Section 2.8.

 

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“Revolving Commitment Fees”: As defined in Section 2.9.

 

“Revolving Loan” and “Revolving Loans”: As defined in Section 2.1(a).

 

“Revolving Loan Limit”: At any time, the lesser of (i) Availability, and (ii)
the Revolving Commitment Amount.

 

“Revolving Note”: As defined in Section 2.1(a); a promissory note of the
Borrowers evidencing the obligation of the Borrowers to repay the Revolving
Loan.

 

“Security Agreement”: Security Agreement dated as of October 15, 2004 made by
the Borrowers for the benefit of the Lender, substantially in the form attached
thereto as Exhibit D.

 

“Security Documents”: The Security Agreement, the Required Control Agreements,
the Pledge Agreement, the Mortgages and any other security agreements, pledge
agreements, control agreements, mortgages, financing statements and other
security documents entered into by the parties hereto or any other Persons or
authorized to be filed or recorded pursuant to or in connection with this
Agreement.

 

“Senior Officer”: As to any Person, the Chief Executive Officer, President,
Executive Vice President, Vice President, Chief Financial Officer, or
Controller, of such Person.

 

“Servicing Fees”: As defined in Section 2.11.

 

“SHSI”: SunLink Health Systems, Inc., an Ohio corporation.

 

“SHSI Affiliate Distributions”: Distributions, payments or prepayments by SHSI
or, in the case of the UK Obligations the applicable Borrowers, with respect to
(a) the repurchase or redemption by SHSI of its issued and outstanding stock,
and (b) the UK Obligations, for which the aggregate amount of all such
distributions under clauses (a) and (b) during the term of this Agreement shall
not exceed $5,000,000 in the aggregate.

 

“Specified Lien”: As defined in Section 8.18(j).

 

“Subordinated Debt”: Any Indebtedness of any Borrower, now existing or hereafter
created, incurred or arising, which is subordinated in right of payment to the
payment of the Obligations in a manner and to an extent (a) that the Lender has
approved in writing prior to the creation of such Indebtedness, or (b) as to any
Indebtedness of any Borrower existing on the date of this Agreement, that the
Lender has approved as Subordinated Debt in a writing delivered by the Lender to
the Borrowers’ Agent on or prior to the Closing Date.

 

“Subsidiary”: Any corporation or other entity of which Equity Interests having
ordinary voting power for the election of a majority of the board of directors
or other Persons performing similar functions are owned by any Borrower either
directly or through one or more Subsidiaries, excluding Existing Foreign
Subsidiaries.

 

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“Taxes”: As defined in Section 2.16(a).

 

“Termination Date”: The earliest of (a) October 15, 2009, (b) the date on which
the Revolving Commitment is terminated pursuant to Section 7.2 hereof or (c) the
date on which the Revolving Commitment Amount is reduced to zero pursuant to
Section 2.8 hereof.

 

“Term Loans”: Term Loan A and Term Loan B.

 

“Term Loan A”: As defined in Section 2.1(b).

 

“Term Loan A Commitment”: The agreement of the Lender to make Term Loan A to the
Borrowers in the amount specified in Section 2.1(b) upon the terms and subject
to the conditions of this Agreement.

 

“Term Loan B”: As defined in Section 2.1(c).

 

“Term Loan B Closing Date”: Any Business Day between the date of this Agreement
and the date selected by the Borrowers for the making of Term Loan B, but no
later than thirty (30) days after the date of this Agreement; provided, that all
the conditions precedent to the obligation of the Lender to make Term Loan B or
such Draws, as set forth in Article III, have been, or, on such Term Loan B
Closing Date, will be, satisfied. The Borrowers’ Agent shall give the Lender not
less than three (3) Business Days prior notice of the day selected as the Term
Loan B Closing Date.

 

“Term Loan B Commitment”: The agreement of the Lender to make Term Loan B to the
Borrowers in the amount specified in Section 2.1(c) upon the terms and subject
to the conditions of this Agreement.

 

“Term Loan B Commitment Fees”: As defined in Section 2.10.

 

“Term Loan B Draw”: As defined in Section 2.1(c).

 

“Term Loan B Origination Fee”: The fee payable to the Lender in an amount
determined by applying a rate of 1.00% to the Term Loan B Commitment of the
Lender.

 

“Term Notes”: Term Note A and Term Note B.

 

“Term Note A”: The Note described in Section 2.1(b)(iii), evidencing the
obligation of the Borrowers to repay Term Loan A.

 

“Term Note(s) B”: The Note(s) described in Section 2.1(c)(iii), evidencing the
obligation of the Borrowers to repay Term Loan B.

 

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“Total Liabilities”: At the time of any determination, the amount, on a
consolidated basis, of all items of Indebtedness of the Borrowers and their
Subsidiaries that would constitute “liabilities” for balance sheet purposes in
accordance with GAAP.

 

“Total Debt”: At the time of any determination, the aggregate stated balance
sheet amount of the Funded Debt of the Borrowers and their Subsidiaries
determined on a consolidated basis.

 

“Total Outstandings”: At the time of any determination, the sum of the unpaid
principal balance of the Revolving Note, the unpaid principal balance of Term
Note(s) A and the unpaid principal balance of Term Note(s) B and all interest,
cost or expenses due to the Lender under this Agreement and the other Loan
Documents.

 

“Transactions Rule”: As defined in Section 4.13.

 

“TRICARE”: Collectively, a program of medical benefits covering former and
active members of the uniformed services and certain of their dependents,
financed and administered by the United States Departments of Defense, Health
and Human Services and Transportation, which program was formerly known as
CHAMPUS (Civilian Health and Medical Program of the Uniformed Services), and all
laws, rules, regulations, manuals, orders and administrative, reimbursement and
other guidelines of all governmental authorities promulgated in connection with
such program (whether or not having the force of law), in each case as the same
may be amended, supplemented or otherwise modified from time to time.

 

“Type”: Relative to any Receivables, each applicable aging category (e.g., 0-30
days, 31-60 days, 61-90 days, etc.) up to and exceeding the Cut-off Period,
Obligor type (e.g., Medicare, Medicaid, MediCal, institutional payors,
commercial insurance payors, or individual/self pay (if applicable)), and/or
other category or subset of Receivables used by the Lender to calculate the Net
Collectible Value applicable to Receivables pursuant to the Lender’s NCV
calculation methodology described in Exhibit H.

 

“UCC”: The Uniform Commercial Code, as adopted in the State of Minnesota, as
amended or supplemented from time to time.

 

“UK Subsidiaries”: KRUG International (“U.K.”), Ltd., a company organized under
the laws of the United Kingdom, and Bradley International Holdings, Ltd., a
company organized under the laws of the United Kingdom.

 

“UK Obligations”: The inter-company payables and other obligations, including,
without limitation, any contingent obligations (including those arising under
certain preferred stock issued and outstanding to KRUG International (“U.K.”),
Ltd. by Sunlink Healthcare, LLC, formerly know as Sunlink Healthcare, Inc.) due
from the Borrowers or any of them to, or on behalf of, the UK Subsidiaries, as
set forth on Schedule 6.15 hereto.

 

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“Unused Revolving Commitment”: As of any date of determination, the amount by
which the Revolving Commitment Amount exceeds the principal amount of unpaid
Advances owing on such date.

 

“United States”: Shall have the meanings specified in Section 7701 of the
Internal Revenue Code.

 

“U.S. Taxes”: As defined in Section 2.16(e).

 

“Working Capital”: The amount of the excess, if any, of the Consolidated Current
Assets over the Consolidated Current Liabilities of the Borrowers.

 

Section 1.2 Accounting Terms and Calculations. Except as may be expressly
provided to the contrary herein, all accounting terms used herein shall be
interpreted and all accounting determinations hereunder shall be made in
accordance with GAAP. To the extent any change in GAAP affects any computation
or determination required to be made pursuant to this Agreement, such
computation or determination shall be made as if such change in GAAP had not
occurred unless the Borrowers and the Lender agree in writing on an adjustment
to such computation or determination to account for such change in GAAP.

 

Section 1.3 Computation of Time Periods. In this Agreement, in the computation
of a period of time from a specified date to a later specified date, unless
otherwise stated the word “from” means “from and including” and the word “to” or
“until” each means “to but excluding”.

 

Section 1.4 Other Definitional Terms. The words “hereof,” “herein” and
“hereunder” and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement. References to Sections, Exhibits, Schedules and like references are
to this Agreement unless otherwise expressly provided. The words “include,”
“includes” and “including” shall be deemed to be followed by the phrase “without
limitation.” Unless the context in which used herein otherwise clearly requires,
“or” has the inclusive meaning represented by the phrase “and/or.” All
incorporation by reference of covenants, terms, definitions or other provisions
from other agreements are incorporated into this Agreement as if such provisions
were fully set forth herein, and such incorporation shall include all necessary
definitions and related provisions from such other agreements but including only
amendments thereto agreed to by the Lender, and shall survive any termination of
such other agreements until the obligations of the Borrowers under this
Agreement and the Notes are irrevocably paid in full, and the commitments of the
Lender to advance funds to any Borrower are terminated. Whenever the word
“knowledge” or a word of similar import relating to the knowledge or awareness
of the Borrowers is used in this Agreement or the other Loan Documents, such
phrase shall mean or refer to the actual knowledge of a Senior Officer of
Borrower having responsibility for such matters and assumes that each Borrower
maintains and applies appropriate policies and procedures to ensure that each
Senior Officer is advised of all material matters and occurrences within the
responsibility of such Senior Officer.

 

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ARTICLE II

TERMS OF THE CREDIT FACILITIES

 

Section 2.1 Lending Commitments. On the terms and subject to the conditions
hereof, the Lender agrees to make the following lending facilities available to
the Borrowers:

 

(a) Revolving Credit. A revolving loan facility (each a “Revolving Loan” and,
collectively, the “Revolving Loans”) available to the Borrowers, jointly and
severally, on a revolving basis as advances (each, an “Advance”) at any time and
from time to time from the Closing Date to the Termination Date, during which
period the Borrowers may borrow, repay and reborrow in accordance with the
provisions hereof within the limits of the Revolving Loan Limit. The Lender
shall have no obligation to make, and the Borrowers shall have no right to
obtain or to permit to remain outstanding, any Advance or Advances that would
cause the total outstanding Advances to exceed the Revolving Commitment Amount
or cause the Total Outstandings to exceed the Borrowing Base or to violate
Section 6.18. The Borrowers shall jointly and severally execute and deliver to
the Lender a note to evidence the Revolving Loans. The note shall be in the
principal amount of the Revolving Commitment Amount, dated the Closing Date and
substantially in the form of Exhibit A (the “Revolving Note”).

 

(b) Term Loan A. A term loan to the Borrowers, jointly and severally, available
in one draw on the Closing Date, in an amount equal to $10,000,000 (“Term Loan
A”); provided, that the Lender shall have no obligation to make, and the
Borrowers shall have no right to obtain or to permit to remain outstanding, any
amount of Term Loan A that would cause Total Outstandings to exceed the
Borrowing Base or to violate Section 6.18.

 

(i) The Borrowers, jointly and severally, shall repay Term Loan A through
periodic payments as indicated in Section 2.5(a) below.

 

(ii) The final installment of Term Loan A shall in all events equal the entire
remaining principal balance of Term Loan A and shall be due and payable in full
on the Termination Date. Amounts borrowed under this Section 2.1(b) and repaid
may not be reborrowed.

 

(iii) Term Loan A shall be evidenced by a promissory note substantially in the
form of Exhibit B (“Term Note A”), and the Borrowers shall jointly and severally
execute and deliver Term Note A to the Lender. Term Note A shall represent the
joint and several obligation of each Borrower to pay Term Loan A, together with
interest thereon.

 

(iv) The aggregate principal amount of Term Loan A advanced to each Borrower
shall be the primary obligation of that Borrower (but shall also be guaranteed,
jointly and severally, by all other Borrowers pursuant to Section 8.18).

 

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(c) Term Loan B. A term loan to the Borrowers, jointly and severally, in an
amount of up to $5,000,000 (“Term Loan B”) available as multiple draws (each, a
“Term Loan B Draw”) at any time and from time to time commencing on the Term
Loan B Closing Date to the Termination Date; provided, that the Lender shall
have no obligation to make, and the Borrowers shall have no right to obtain or
to permit to remain outstanding, any Term Loan B Draw or Term Loan B Draws that
would cause the total Term Loan B Draws made to Borrowers to exceed the Term
Loan B Commitment or cause the Total Outstandings to exceed the Borrowing Base
or to violate Section 6.18.

 

(i) The Borrowers, jointly and severally, shall repay Term Loan B through
periodic payments as indicated Section 2.5(b) below.

 

(ii) The final installment of Term Loan B shall in all events equal the entire
remaining principal balance of Term Loan B and shall be due and payable in full
on the Termination Date. Amounts borrowed under this Section 2.1(c) and repaid
may not be reborrowed.

 

(iii) Term Loan B shall be evidenced by one promissory note for each Term Loan B
Draw, substantially in the form of Exhibit C (the “Term Note B”), and, the
Borrowers shall jointly and severally execute and deliver each Term Note B to
the Lender. Each Term Note B shall represent the joint and several obligation of
each Borrower to pay the Term Loan B Draw, together with interest thereon.

 

(iv) The aggregate principal amount of Term Loan B advanced to each Borrower
shall be the primary obligation of that Borrower (but shall also be guaranteed,
jointly and severally, by all other Borrowers pursuant to Section 8.18).

 

Section 2.2 Procedure for Loans. This is the procedure for obtaining Loans:

 

(a) Procedure for Revolving Loans. Any request by the Borrowers’ Agent for an
Advance hereunder shall be in writing, or by telephone and in writing, and must
be given so as to be received by the Lender not later than 1:00 p.m. (Dallas
time) one (1) Business Day prior to the requested Advance Date. Each request for
an Advance hereunder shall be irrevocable and shall be deemed a representation
by each Borrower that on the requested Advance Date and after giving effect to
the requested Advance the applicable conditions specified in Article III have
been and will be satisfied, except for those conditions waived in writing by the
Lender with respect to such request. Each request for an Advance hereunder shall
specify (i) the requested Advance Date and (ii) the amount of the Advance to be
made on such date which shall be in a minimum amount of $100,000 or, if more,
integral multiples of $100,000 in excess thereof. The Lender may rely on any
telephone request by a Senior Officer of the Borrowers’ Agent for an Advance
hereunder which it believes in good faith to be genuine (provided that the
Borrowers’ Agent shall also be required to promptly confirm each telephone
request in writing); and each Borrower hereby waives the right to dispute the
Lender’s record of the

 

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terms of such telephone request. Unless the Lender determines that any
applicable condition specified in Article III has not been satisfied, the Lender
will make available to the Borrowers’ Agent by remittance to the deposit account
designated by the Borrowers’ Agent from time to time in writing to the Lender,
provided that such deposit account is subject to a security interest in favor of
the Lender (the “Remittance Account”) in Immediately Available Funds not later
than 3:00 p.m. (Dallas time) on the requested Advance Date the amount of the
requested Advance.

 

(b) Procedure for Term Loan A. The Borrowers’ Agent shall deliver a written
notice of borrowing, no later than 11:00 p.m. (Dallas time) one (1) Business Day
prior to the Closing Date. The request for Term Loan A hereunder shall be
irrevocable and shall be deemed a representation by each Borrower that on the
Closing Date and after giving effect to Term Loan A the applicable conditions
specified in Article III have been and will be satisfied, except for those
conditions waived in writing by the Lender with respect to such request. Unless
the Lender determines that any applicable condition specified in Article III has
not been satisfied, the Lender will make available to the Borrowers’ Agent by
2:00 p.m. (Dallas time) on the Closing Date the amount of Term Loan A by
remittance to the Remittance Account.

 

(c) Procedure for Term Loan B. Any request by the Borrowers’ Agent for a Term
Loan B Draw hereunder shall be in writing and must be given so as to be received
by the Lender not later than 1:00 p.m. (Dallas time) three (3) Business Days
prior to the requested Draw Date. Each request for a Term Loan B Draw hereunder
shall be irrevocable and shall be deemed a representation by each Borrower that
on the requested Draw Date and after giving effect to the requested Term Loan B
Draw the applicable conditions specified in Article III have been and will be
satisfied, except for those conditions waived in writing by the Lender with
respect to such request. Each request for a Term Loan B Draw hereunder shall
specify (i) the requested Draw Date and (ii) the amount of the Term Loan B Draw
to be made on such date which shall be in a minimum amount of $500,000 or, if
more, integral multiples of $100,000 in excess thereof. Unless the Lender
determines that any applicable condition specified in Article III has not been
satisfied, the Lender will make available to the Borrowers’ Agent by 2:00 p.m.
(Dallas time) on the requested Draw Date the amount of the requested Term Loan B
Draw by remittance to the Remittance Account.

 

Section 2.3 Records. The Lender shall enter in its ledgers and records the
amount of Term Loan A, Term Loan B and the Advances made and the repayments made
thereon, and the Lender is authorized by each Borrower to enter on a schedule
attached to Term Note A, Term Note B or the Revolving Note, as appropriate, a
record of such Term Loans, Advances and repayments; provided, however that the
failure by the Lender to make any such entry or any error in making such entry
shall not limit or otherwise affect the obligation of the Borrowers hereunder
and on the Notes, and, in all events, the principal amounts owing by the
Borrowers in respect of the Revolving Note shall be the aggregate amount of all
Revolving Loans made by the Lender less all payments of principal thereof made
by the Borrowers and the principal amount owing by the Borrowers in respect of
the Term Notes shall be the aggregate amount of the Term Loans less all payments
of principal thereof made by the Borrowers.

 

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Section 2.4 Interest Rates, Interest Payments and Default Interest.

 

(a) The Advances. Interest shall accrue and be payable on the Revolving Loans as
follows:

 

(i) Subject to subsection (a)(ii) below, each Advance shall bear interest on the
unpaid principal amount thereof at a varying rate per annum equal to the sum of
(A) the LIBOR Rate, plus (B) the Applicable Revolving Margin.

 

(ii) Upon the occurrence and during the continuation of an Event of Default,
each Advance shall, at the option of the Lender, bear interest until paid in
full at a rate per annum equal to the sum of (A) the LIBOR Rate, plus (B) the
Applicable Revolving Margin, plus (C) 2.0%.

 

(iii) Interest shall be payable on the last day of each month, upon any
permitted prepayment (on the amount prepaid) made in connection with a reduction
of the Revolving Commitment Amount, and on the Termination Date; provided that
interest under subsection (a)(ii) of this Section shall be payable on demand.

 

(b) The Term Loans. Interest shall accrue and be payable on the Term Loans as
follows:

 

(i) Subject to subsection (b)(ii) below, the Term Loans shall bear interest on
the unpaid principal balance thereof at a varying rate per annum equal to the
sum of (A) the LIBOR Rate, plus (B) the Applicable Term Margin.

 

(ii) Upon the occurrence and during the continuation of an Event of Default, the
Term Loans shall, at the option of the Lender, bear interest until paid in full
at a rate per annum equal to the sum of (A) the LIBOR Rate, plus (B) the
Applicable Term Margin, plus (C) 2.0%.

 

(iii) Interest shall be payable (A) on the last day of each month; (B), upon any
permitted prepayment (on the amount prepaid); and (C) on the scheduled maturity
date of the Term Notes; provided that interest under subsection (b)(ii) of this
Section shall be payable on demand.

 

Section 2.5 Repayment. The unpaid principal balance of the Revolving Note,
together with all accrued and unpaid interest thereon, shall be due and payable
on the Termination Date. The principal of the Term Loans shall be payable as
follows:

 

(a) The principal of Term Loan A shall be payable in (i) equal installments of
FIFTY-FIVE THOUSAND FIVE HUNDRED FIFTY-FIVE DOLLARS AND 56/100 CENTS
($55,555.56) on the first Business Day of each month commencing on November 1,
2004, and (ii) one balloon payment on the Termination Date equal to any unpaid
principal balance, together with all accrued and unpaid interest.

 

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(b) The principal of each Term Loan B Draw shall be payable in (i) equal
installments, calculated on the basis of a 15-year straight line amortization of
principal outstanding thereunder, on the first Business Day of each month
commencing the first month after such Term Loan B Draw is made, and (ii) one
balloon payment on the Termination Date equal to any unpaid principal balance,
together with all accrued and unpaid interest.

 

Section 2.6 Prepayments.

 

(a) Mandatory Prepayments for a Prepayment Event. If at any time a Prepayment
Event occurs, the Borrowers shall immediately pay to the Lender the net cash
proceeds realized by such Prepayment Event. Any such prepayments shall be
applied to the Loans in accordance with Section 2.6(d).

 

(b) Other Mandatory Prepayments. If at any time the Total Outstandings exceed
the Borrowing Base, the Borrowers shall immediately repay to the Lender the
amount of such excess.

 

(c) Optional Prepayments. The Borrowers may prepay Advances or the Term Loans,
in whole or in part, at any time, without premium or penalty. Any such
prepayment of the Term Loans and any prepayments in full of all Advances and
termination of the Revolving Commitment must be accompanied by accrued and
unpaid interest on the amount prepaid. Each partial prepayment on any of the
Term Loans shall be in a minimum amount of $100,000 or an integral multiple
thereof. Amounts paid (unless following an acceleration or upon termination of
the Revolving Commitment in whole) or prepaid on the Revolving Loan under this
subsection (c) may be reborrowed upon the terms and subject to the conditions
and limitations of this Agreement. Amounts prepaid on the Term Loans may not be
reborrowed.

 

(d) Application of Proceeds. With respect to any prepayments made by any
Borrower pursuant to Section 2.6(c), the Borrowers’ Agent may elect to have any
such prepayment applied to the Advances or the Term Loans. With respect to any
prepayments made by any Borrower pursuant to Section 2.6(a), (b), or (c) (other
than optional prepayments of Advances as elected by Borrower pursuant to the
immediately preceding sentence), such prepayments shall first be applied in
payment of Term Loan B, and, in each instance, pro rata against all remaining
payments thereon, and, at any time after Term Loan B shall have been prepaid in
full, such prepayments shall, second, be applied in payment of Term Loan A, and,
in each instance, pro rata against all remaining payments thereon, and, at any
time after Term Loan A shall have been prepaid in full, such prepayments shall,
third, be applied to reduce the outstanding principal balance of the Advances if
applicable (without any reduction of the Revolving Commitment Amount).
Notwithstanding the foregoing, at any time that Term Loan A remains outstanding
the Lender may elect, by notice to the Borrowers’ Agent at least one Business
Day prior to any prepayment of the Term Loans required or permitted to be made
by Borrowers for the account of such Lender pursuant to this Section 2.6, to
cause all or a portion of such prepayment to be applied instead to prepay Term
Loan A, in which case such prepayment shall be applied pro rata against
remaining payments of Term Loan A.

 

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Section 2.7 Mandatory Prepayment of Term Loan B from Excess Cash Flow. Within
one hundred twenty (120) days after the end of each fiscal year commencing with
the fiscal year ended June 30, 2005 (it being understood that with respect to
fiscal year 2005, the time period for the calculation of Consolidated Excess
Cash Flow shall commence on the Closing Date and end on June 30, 2005),
Borrowers, jointly and severally, shall prepay the outstanding principal of Term
Loan B in an amount equal to fifty percent (50%) of the Consolidated Excess Cash
Flow for such fiscal year, which prepayment shall be applied pro rata against
remaining payments of Term Loan B. The calculation shall be based on the
consolidated audited Financial Statements for the Borrowers and their
Subsidiaries. Such prepaid amounts may not be reborrowed.

 

Section 2.8 Optional Reduction of Revolving Commitment Amount or Termination of
Revolving Commitment. The Borrowers may, at any time, upon not less than three
(3) Business Days prior written notice from the Borrowers’ Agent to the Lender,
reduce the Revolving Commitment Amount with any such reduction in a minimum
amount of $500,000, or, if more, in integral multiples of $100,000 in excess
thereof; provided, however, that the Borrowers may not at any time reduce the
Revolving Commitment Amount below the unpaid principal balance of the Revolving
Note. The Borrowers’ Agent may, at any time, upon not less than three (3)
Business Days prior written notice from the Borrowers’ Agent to the Lender,
terminate the Revolving Commitment in its entirety. Upon termination of the
Revolving Commitment pursuant to this Section, the Borrowers shall pay to the
Lender the full amount of all outstanding Advances, all accrued and unpaid
interest thereon, all unpaid Revolving Commitment Fees accrued to the date of
such termination and all other unpaid Obligations of the Borrowers to the Lender
hereunder.

 

Section 2.9 Revolving Commitment Fee. The Borrowers shall pay to the Lender fees
(the “Revolving Commitment Fees”) in an amount determined by applying a rate of
0.50% per annum to the average daily Unused Revolving Commitment of the Lender
for the period from the Closing Date to the Termination Date. Such Revolving
Commitment Fees are payable in arrears monthly on the last day of each month and
on the Termination Date.

 

Section 2.10 Term Loan B Commitment Fee. The Borrowers shall pay to the Lender
fees (the “Term Loan B Commitment Fees”) in an amount determined by applying a
rate of 0.50% per annum to difference between the average daily Term Loan B
balance and the Term Loan B Commitment of the Lender for the period from the
Closing Date to the Termination Date. Such Term Loan B Commitment Fees are
payable in arrears monthly on the last day of each month and on the Termination
Date.

 

Section 2.11 Servicing Fee. The Borrowers shall pay to the Lender fees (the
“Servicing Fees”) in an amount determined by applying a rate of 0.45% per annum
to the aggregate average daily balance of the Loans for the period from the
Closing Date to the Termination Date. Such Servicing Fees are payable in arrears
monthly on the last day of each month and on the Termination Date.

 

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Section 2.12 Computation. The Fees and interest on the Loans shall be computed
on the basis of actual days elapsed and a year of 360 days.

 

Section 2.13 Payments. Payments and prepayments of principal of, and interest
on, the Notes and all fees, expenses and other obligations under this Agreement
payable to the Lender shall be made without setoff or counterclaim in
Immediately Available Funds not later than 1:00 p.m. (Dallas time) on the dates
called for under this Agreement and the Notes to the Lender in accordance with
the wire instructions set forth on the attached Exhibit K. Funds received after
such time shall be deemed to have been received on the next Business Day.
Whenever any payment to be made hereunder or on the Notes shall be stated to be
due on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time, in the case of a payment of
principal, shall be included in the computation of any interest on such
principal payment.

 

Section 2.14 Use of Loan Proceeds. The proceeds of Term Loan A shall be used for
refinancing the Borrower’s existing Indebtedness, funding the payment of fees
and expenses hereunder and for general business purposes in a manner not in
conflict with any of the Borrowers’ covenants in this Agreement, but excluding
funding of permitted SHSI Affiliate Distributions and Permitted Acquisitions.
The proceeds of Term Loan B may be used for the SHSI Affiliate Distributions,
Permitted Acquisitions and for the purposes set forth in the immediately
preceding sentence. The proceeds of the Advances shall be used for refinancing
the Borrower’s existing indebtedness and general business purposes in a manner
not in conflict with any of the Borrowers’ covenants in this Agreement, but
excluding funding of permitted SHSI Affiliate Distributions and Permitted
Acquisitions.

 

Section 2.15 Adjustment of NCV. Until notice of a change has been delivered to
Borrowers’ Agent, the applicable NCV of Eligible Receivables by Obligor Type
shall be as set forth in Exhibit H. The Lender has the right, in its reasonable
credit judgment, to adjust any applicable NCV Percentage at any time, based upon
the criteria, and in accordance with the Lender’s methodology of calculating
such NCV, as set forth in Exhibit H. Each change in any NCV shall be effective
immediately upon receipt by the Borrower of the Lender’s notification of such
change to Borrower.

 

Section 2.16 Taxes.

 

(a) Any and all payments by the Borrowers hereunder or under the Notes shall be
made free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges of withholdings, and all liabilities
with respect thereto, excluding, in the case of the Lender, taxes imposed on its
overall net income and franchise taxes imposed on it in lieu of net income taxes
(all such non-excluded taxes, levies, imposts, deductions, charges, withholdings
and liabilities in respect of payments hereunder or under the Notes being
hereinafter referred to as “Taxes”).

 

(b) The Borrowers agree to pay any present or future stamp or documentary taxes
or any other excise or property taxes, charges or similar levies that arise from
any payment made hereunder or under the Notes or from the execution, delivery or
registration of, performing under, or otherwise with respect to, this Agreement
or the Notes (hereinafter referred to as “Other Taxes”).

 

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(c) The Borrowers shall indemnify the Lender for the full amount of Taxes or
Other Taxes imposed on or paid by the Lender and any penalties, interest and
expenses with respect thereto. Payments on this indemnification shall be made
within 30 days from the date the Lender makes written demand therefor.

 

(d) The Borrowers shall furnish to the Lender, upon Lender’s request, at
Lender’s address referred to on the signature page hereof a certified copies of
receipts evidencing payment of Taxes.

 

(e) If any Borrower shall be required by law or regulation to make any
deduction, withholding or backup withholding of any taxes, levies, imposts,
duties, fees, liabilities or similar charges of the United States, any
possession or territory of the United States (including the Commonwealth of
Puerto Rico) or any area subject to the jurisdiction of the United States (“U.S.
Taxes”) from any payments to the Lender pursuant to any Loan Document in respect
of the Obligations payable to the Lender the then or thereafter outstanding,
such Borrower shall make such withholdings or deductions and pay the full amount
withheld or deducted to the relevant taxation authority or other authority in
accordance with applicable law, unless such payments are being diligently
contested and such Borrower has established adequate reserves with respect to
such amounts.

 

Section 2.17 Appraisals. The Lender, in its sole discretion, may, and upon the
written request of the Borrowers’ Agent will, obtain an appraisal of any
Encumbered Real Estate, Encumbered Equipment or Eligible Inventory from an AMI
certified appraiser reasonably satisfactory to the Lender and the Borrowers’
Agent in case of the Encumbered Real Estate and any experienced equipment or
inventory appraiser reasonably satisfactory to the Lender and the Borrowers’
Agent in case of the Encumbered Equipment or Eligible Inventory, each of which
shall be conducted on a “going concern” basis in the case of assets of any
Borrower that is a going concern and otherwise on an orderly liquidation value
basis (a “Qualifying Appraisal”). Upon obtaining any such Qualifying Appraisal,
the Lender shall notify the Borrowers’ Agent of the appraised value of the
property that is the subject thereof and upon such notification such appraised
value shall be used to determine the Collateral Coverage Ratio for one year
after the date of the issuance of the appraisal in the case of Encumbered Real
Estate and Encumbered Equipment, and three months in the case of Eligible
Inventory, except as otherwise provided herein. Unless an Event of Default has
occurred and is continuing, (a) the Borrowers shall be responsible only for the
payment of costs and expenses for a Qualified Appraisal requested by it and (b)
no more than one appraisal shall be conducted for any particular item of
Collateral during each calendar year in the case of Encumbered Real Estate and
Encumbered Equipment, and each calendar quarter in the case of Eligible
Inventory. If an Event of Default has occurred and is continuing the Borrowers
shall be responsible for the payment of costs and expenses for a Qualified
Appraisal.

 

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Section 2.18 Wire Transfer Fee. The Borrowers shall pay to the Lender $20.00 for
each wire transfer initiated by the Lender in connection with this Agreement.

 

ARTICLE III

CONDITIONS PRECEDENT

 

Section 3.1 Conditions of Initial Transaction. The making of Term Loan A and the
initial Advance on the Revolving Loan shall be subject to the prior or
simultaneous fulfillment of the following conditions, unless waived in writing
by the Lender:

 

(a) Documents. The Lender shall have received the following:

 

(i) The Revolving Note and Term Note A, executed by a duly authorized officer
(or officers) of the Borrowers and dated the Closing Date.

 

(ii) The Security Documents (not including the Mortgages and Required Control
Agreements described in Part B of Schedule 1.1(b)), as described in Section
3.1(d), duly executed by the respective parties thereto.

 

(iii) A certificate of the Secretary or Assistant Secretary (or other
appropriate officer) of each Borrower dated as of the Closing Date and
certifying to the following:

 

(A) A true and accurate copy of the corporate (or other) resolutions of such
Borrower authorizing the execution, delivery and performance of the Loan
Documents to which such Borrower is a party contemplated hereby and thereby;

 

(B) The incumbency, names, titles and signatures of the officers of such
Borrower authorized to execute the Loan Documents to which such Borrower is a
party and to request Advances and Term Loans;

 

(C) A true and accurate copy of the Articles of Incorporation or Certificate of
Incorporation (or the equivalent) of each Borrower with all amendments thereto,
certified by the appropriate governmental official of the jurisdiction of
organization as of a date not more than thirty (30) days prior to the Closing
Date; and

 

(D) A true and accurate copy of the bylaws (or other constitutive documents) for
such Borrower.

 

(iv) A certificate of good standing for each Borrower in the jurisdiction of its
incorporation or organization, certified by the appropriate governmental
officials as of a date not more than thirty (30) days prior to the Closing Date.

 

(v) A certificate dated the Closing Date of the chief executive officer or chief
financial officer (or other appropriate officer) of each Borrower certifying

 

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that there has been no Material Adverse Occurrence since June 30, 2003 and
further certifying as to the matters set forth in Section 3.3(a) and Section
3.3(b) below.

 

(vi) An initial Compliance Certificate.

 

(vii) An initial Borrowing Base Certificate.

 

(viii) Certificates of insurance with respect to each of the businesses and real
properties of the Borrowers and their Subsidiaries in such amounts and with such
carriers as shall be reasonably acceptable to the Lender.

 

(ix) Financing statements for each Borrower as required by the Lender.

 

(x) Business Associate Agreement substantially in the form of Exhibit J, duly
executed by each Borrower listed on Exhibit J-1.

 

(b) Opinion. The Borrowers shall have requested Smith, Gambrell & Russell, LLP,
their counsel, to prepare a written opinion, addressed to the Lender and dated
the Closing Date, substantially in the form of Exhibit I-1 hereto, and such
opinion shall have been delivered to the Lender.

 

(c) Compliance. Each Borrower shall have performed and complied with all
agreements, terms and conditions contained in this Agreement required to be
performed or complied with by such Borrower prior to or simultaneously with the
Closing Date.

 

(d) Security Documents. All Security Documents (or financing statements with
respect thereto) except for the Mortgages, in form for filing and recording
shall have been received by the Lender to the satisfaction of the Lender; any
pledged collateral shall have been duly delivered to the Lender (including in
the case of certificates evidencing Equity Interests the delivery of undated
stock powers and other documents of transfer executed in blank); and the
priority and perfection of the Liens created by the Security Documents shall
have been established to the satisfaction of the Lender and its counsel.

 

(e) Other Matters. All corporate and legal proceedings relating to the Borrowers
and all instruments and agreements in connection with the transactions
contemplated by this Agreement shall be satisfactory in scope, form and
substance to the Lender and its counsel, and the Lender shall have received all
information and copies of all documents, including records of corporate
proceedings, as the Lender or its counsel may reasonably have requested in
connection therewith, such documents where appropriate to be certified by proper
corporate or governmental authorities.

 

(f) Fees and Expenses. The Lender shall have received all fees, including,
without limitation, the Initial Loans Origination Fee, and other amounts due and
payable by the Borrowers on or prior to the Closing Date, including the
reasonable fees and expenses of counsel to the Lender payable pursuant to
Section 8.2.

 

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Any one or more of the conditions set forth above which have not been satisfied
by the Borrowers on or prior to the date of disbursement of the initial Loan
under this Agreement shall not be deemed permanently waived by the Lender unless
the Lender shall waive the same in a writing which expressly states that the
waiver is permanent, and in all cases in which the waiver is not stated to be
permanent the Lender may at any time subsequent thereto insist upon compliance
and satisfaction of any such condition as a condition to any subsequent Loan
hereunder and failure by the Borrowers to comply with any such condition within
five (5) Business Day’s written notice from the Lender to the Borrowers’ Agent
shall constitute an Event of Default under this Agreement.

 

Section 3.2 Conditions to Term Loan B Closing. The making of the initial Term
Loan B Draw shall be subject to the prior or simultaneous fulfillment of the
following conditions, unless waived in writing by the Lender:

 

(a) Documents. The Lender shall have received the following:

 

(i) A Term Note B in the amount of the initial Term Loan B Draw, executed by a
duly authorized officer (or officers) of the Borrowers and dated the Term Loan B
Closing Date.

 

(ii) The Mortgages duly executed by the respective parties thereto.

 

(iii) The other Security Documents, as described in Section 3.2(d) including the
Required Control Agreements described in Part B of Schedule 1.1(b) (unless
satisfactory evidence is provided of the closure of any Deposit Accounts
described therein), duly executed by the respective parties thereto.

 

(iv) A certificate of the Secretary or Assistant Secretary (or other appropriate
officer) of each Borrower dated as of the Term Loan B Closing Date and
certifying that there have been no amendments, or revisions of:

 

(A) The resolutions of such Borrower authorizing the Term Loan B transaction;
and

 

(B) The Articles of Incorporation and Certificate of Incorporation (or the
equivalent) or the bylaws (or other governing documents) for such Borrower;

 

(v) A certificate of good standing for each Borrower in the jurisdiction of its
incorporation or organization, certified by the appropriate governmental
officials as of a date not more than thirty (30) days prior to the Term Loan B
Closing Date.

 

(vi) A certificate dated the Term Loan B Closing Date of the chief executive
officer or chief financial officer (or other appropriate officer) of each
Borrower certifying as to the matters set forth in Section 3.3(a) and Section
3.3(b) below.

 

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(vii) A Compliance Certificate dated as of the Term Loan B Closing Date.

 

(viii) Landlord’s waivers or bailee’s waivers for locations identified on
Schedule 3.2.

 

(b) Opinion. The Borrowers shall have requested their counsel, to prepare
written opinions, addressed to the Lender and dated the Term Loan B Closing
Date, covering the matters set forth in Exhibit I-2 hereto, and such opinion
shall have been delivered to the Lender.

 

(c) Compliance. Each Borrower shall have performed and complied with all
agreements, terms and conditions contained in this Agreement required to be
performed or complied with by such Borrower prior to or simultaneously with the
Term Loan B Closing Date.

 

(d) Security Documents. All Security Documents (or financing statements with
respect thereto) shall have been appropriately filed or recorded to the
satisfaction of the Lender; any pledged collateral shall have been duly
delivered to the Lender (including in the case of certificates evidencing Equity
Interests the delivery of undated stock powers and other documents of transfer
executed in blank); any title insurance required by the Lender (with
endorsements required by the Lender) shall have been obtained and be
satisfactory to the Lender; and the priority and perfection of the Liens created
by the Security Documents shall have been established to the satisfaction of the
Lender and its counsel.

 

(e) Other Matters. All corporate and legal proceedings relating to the Borrowers
and all instruments and agreements in connection with the transactions
contemplated by this Agreement shall be satisfactory in scope, form and
substance to the Lender and its counsel, and the Lender shall have received all
information and copies of all documents, including records of corporate
proceedings, as the Lender or its counsel may reasonably have requested in
connection therewith, such documents where appropriate to be certified by proper
corporate or governmental authorities.

 

(f) Fees and Expenses. The Lender shall have received all fees, including,
without limitation, the Term Loan B Origination Fee, and other amounts due and
payable by the Borrowers on or prior to the Term Loan B Closing Date, including
the reasonable fees and expenses of counsel to the Lender payable pursuant to
Section 8.2.

 

Any one or more of the conditions set forth above which have not been satisfied
by the Borrowers on or prior to the date of disbursement of Term Loan B under
this Agreement shall not be deemed permanently waived by the Lender unless the
Lender shall waive the same in a writing which expressly states that the waiver
is permanent, and in all cases in which the waiver is not stated to be permanent
the Lender may at any time subsequent thereto insist upon

 

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compliance and satisfaction of any such condition as a condition to any
subsequent Loan hereunder and failure by the Borrowers to comply with any such
condition within fifteen (15) Business Days written notice from the Lender to
the Borrowers’ Agent shall constitute an Event of Default under this Agreement.

 

Section 3.3 Conditions Precedent to the Term Loans and all Advances. The
obligation of the Lender to make the Term Loans and any Advances hereunder
(including the initial Advance on the Revolving Loan) are further conditioned
upon the satisfaction of the following, except those conditions waived by the
Lender in writing:

 

(a) Representations and Warranties. The representations and warranties contained
in Article IV shall be true and correct in all material respects (except with
respect to those representations and warranties which are qualified as to
materiality in which case such specific materiality qualifiers shall apply) on
and as of the Closing Date, the Term Loan B Closing Date, on the date of each
Advance and on the date of each Term Loan B Draw, as the case may be, with the
same force and effect as if made on such date, unless such representation and
warranty expressly applies to an earlier date, in which case such representation
and warranty shall be deemed made as of such earlier date.

 

(b) No Default. No Default or Event of Default shall have occurred and be
continuing on the Closing Date, the Term Loan B Closing Date and on the date of
each Advance and each Term Loan B Draw, as the case may be, or will exist after
giving effect to the Loans made on such date.

 

(c) Notices and Requests; Notes. The Lender shall have received the Borrowers’
Agent’s request for such Term Loans or such Advance as required under Section
2.2, and a Term Note B in the amount of each Term Loan B Draw duly executed by
the Borrowers.

 

Section 3.4 Conditions Subsequent. Whether or not the Borrowers’ Agent or any
Borrower shall request a Term Loan B Draw by November 15, 2004, the Borrower
shall (a) satisfy the conditions specified in Sections 3.2(a)(ii), (iii) and
(viii), Section 3.2(b), Section 3.2(d) and Section 3.2(e), (b) deliver to the
Lender, evidence, reasonably satisfactory to the Lender that Healthmont of
Georgia, Inc., a Tennessee corporation, has filed its corporation annual report
with the Secretary of State for the State of Tennessee and is in good standing,
and (c) shall provide evidence satisfactory to the Lender of the termination or
release of all Liens of record that are not Permitted Encumbrances.

 

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES

 

To induce the Lender to enter into this Agreement and to make Term Loans and
Advances hereunder, each Borrower represents and warrants to the Lender for
itself and each other Borrower:

 

Section 4.1 Organization, Standing, Etc. Each Borrower is a duly organized and
validly existing and in good standing under the laws of the jurisdiction named
in the opening paragraph hereof. Each Borrower has all requisite power and
authority to carry on its business as now conducted, to enter into this
Agreement and to issue the Notes and to perform its obligations under the Loan
Documents. Each Subsidiary is duly organized and validly existing and in good
standing under the laws of the jurisdiction of its organization and has all
requisite power and authority to carry on its business as now conducted. Each of
the Borrowers and the Subsidiaries is duly qualified and in good standing as a
foreign corporation (or other organization) in each jurisdiction in which the
character of the properties owned, leased or operated by it or the business
conducted by it makes such qualification necessary and the failure so to qualify
could reasonably be expected to result in or be a Material Adverse Occurrence.

 

Section 4.2 Authorization and Validity. The execution, delivery and performance
by each Borrower and each Subsidiary of the Loan Documents to which it is a
party have been duly authorized by all necessary corporate action by such
Borrower or such Subsidiary. This Agreement constitutes, and the Notes and other
Loan Documents when executed will constitute, the legal, valid and binding
obligations of each Borrower executing the same, enforceable against each
Borrower in accordance with their respective terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency, moratorium and
other similar laws affecting creditors’ rights generally and subject to
limitations on the availability of equitable remedies.

 

Section 4.3 No Conflict; No Default. The execution, delivery and performance by
each Borrower of the Loan Documents will not (a) violate any provision of any
law, statute, rule or regulation or any order, writ, judgment, injunction,
decree, determination or award of any court, governmental agency or arbitrator
presently in effect having applicability to such Borrower, (b) violate or
contravene any provision of the Articles or Certificates of Incorporation,
bylaws or partnership agreement of such Borrower, or (c) result in a breach of
or constitute a default under any indenture, loan or credit agreement or any
other agreement, lease or instrument to which such Borrower is a party or by
which it or any of its properties may be bound or result in the creation of any
Lien thereunder. No Borrower nor any Subsidiary is in default under or in
violation of any such law, statute, rule or regulation, order, writ, judgment,
injunction, decree, determination or award or any such indenture, loan or credit
agreement or other agreement, lease or instrument in any case in which the
consequences of such default or violation could constitute a Material Adverse
Occurrence.

 

Section 4.4 Government Consent. No order, consent, approval, license,
authorization or validation of, or filing, recording or registration with, or
exemption by, any governmental or public body or authority is required on the
part of any Borrower to authorize, or is required in connection with the
execution, delivery and performance of, or the legality, validity, binding
effect or enforceability of, the Loan Documents, except for any necessary filing
or recordation of or with respect to any of the Security Documents. No order,
consent, approval, license, authorization or validation of, or filing, recording
or registration with, or exemption by, any governmental or public body or
authority is required on the part of any Subsidiary to authorize, or is required
in connection with the execution, delivery and performance of, or the legality,
validity, binding effect or enforceability of, the Loan Documents to which it is
a party, except for any necessary filing or recordation of or with respect to
any of the Security Documents.

 

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Section 4.5 Financial Statements and Condition.

 

(a) All financial statements, certificates and reports delivered by the
Borrowers to the Lender (including, without limitation, all such financial
statements delivered in connection with the Lender’s due diligence and
underwriting with respect to this transaction), have been prepared in accordance
with GAAP on a consistent basis (except for the absence of footnotes and subject
to year-end audit adjustments as to the interim statements) and fairly present
the financial condition of the Borrowers and their Subsidiaries as at such dates
and the results of their operations and changes in financial position for the
respective periods then ended. As of the dates of such financial statements, no
Borrower or any Subsidiary had any material obligation, contingent liability,
liability for taxes or long-term lease obligation which is not reflected in such
financial statements or in the notes thereto. Since June 30, 2004, there has
been no Material Adverse Occurrence.

 

(b) All financial projections and certificates delivered by the Borrowers to the
Lender (including, without limitation, all such financial statements delivered
in connection with the Lender’s due diligence and underwriting with respect to
this transaction) have been prepared in good faith, based on assumptions which
were reasonable when made, all of which material assumptions are stated therein,
and reflect reasonable estimates of the Borrowers of the results of operation
and other information projected therein. To the knowledge of the Borrowers, no
facts exist that (individually or in the aggregate) would result in any material
change in any of such projections.

 

Section 4.6 Litigation. Except as set forth on Schedule 4.6, there are no
actions, suits or proceedings pending or, to the knowledge of any Borrower,
threatened against or affecting any Borrower or any Subsidiary or any of their
properties before any court or arbitrator, or any governmental department,
board, agency or other instrumentality which, if determined adversely to any
Borrower or any Subsidiary, would constitute a Material Adverse Occurrence, and
there are no unsatisfied judgments against any Borrower or Subsidiary, the
satisfaction or payment of which would constitute a Material Adverse Occurrence.

 

Section 4.7 Conduct of Business; Permits. The primary business of the Borrowers
is, and will at all times continue to be, the provision of healthcare services,
healthcare products, ancillary healthcare support and/or healthcare goods and
equipment. The Borrowers have all necessary permits, licenses, agreements,
accreditations, certifications, contracts and governmental consents necessary to
operate and conduct their business as it is presently being conducted, subject
to minor exceptions and deficiencies which could not reasonably be expected to
result in a Material Adverse Occurrence.

 

Section 4.8 Environmental, Health and Safety Laws. There does not exist any
violation by any Borrower or any Subsidiary of any applicable federal, state or
local law, rule or regulation or order of any government, governmental
department, board, agency or other

 

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instrumentality relating to environmental, pollution, health or safety matters
which has, will or threatens to impose a material liability on a Borrower or a
Subsidiary or which has required or would require a material expenditure by a
Borrower or a Subsidiary to cure. No Borrower nor any Subsidiary has received
any notice to the effect that any part of its operations or properties is not in
material compliance with any such law, rule, regulation or order or notice that
it or its property is the subject of any governmental investigation evaluating
whether any remedial action is needed to respond to any release of any toxic or
hazardous waste or substance into the environment, which non-compliance or
remedial action could reasonably be expected to constitute a Material Adverse
Occurrence. Except as set out on Schedule 4.8 attached hereto, no Borrower has
knowledge that it or its property or any Subsidiary or the property of any
Subsidiary will become subject to environmental laws or regulations during the
term of this Agreement, compliance with which could reasonably be expected to
require Capital Expenditures which would constitute a Material Adverse
Occurrence.

 

Section 4.9 Compliance With Health Care Laws.

 

(a) Each Borrower and each of its respective Subsidiaries has complied during
the past three years and presently complies in all material respects with all
applicable statutes, laws, ordinances, rules and regulations of all applicable
governmental authorities affecting the conduct of each Borrower and its
respective Subsidiaries with respect to its health care businesses (including,
without limitation, Section 1128B(b) of the Social Security Act, as amended, 42
U.S.C. Section 1320a-7(b), commonly referred to as the “Federal Anti-Kickback
Statute;” and Section 1877 of the Social Security Act, as amended, 42 U.S.C.
Section 1395nn, commonly referred to as the “Stark Statute” (collectively,
“Health Care Laws”)).

 

(b) Each Borrower and each of its respective Subsidiaries has maintained in all
material respects all records required to be maintained by the Joint Commission
on Accreditation of Health Care Organizations (if necessary for the services
provided by any Borrower or for any program in which any of them participate),
the Food and Drug Administration, Drug Enforcement Agency, State Boards of
Pharmacy and the Medicare, Medicaid and other governmental health care programs
as and as to the extent required by the Health Care Laws. Each Borrower and each
of its respective Subsidiaries has all applicable permits (including, without
limitation, such permits as are required under such federal, state and other
health care laws) to receive reimbursement under Medicare, Medicaid and other
governmental health care programs. Each Borrower and each of its respective
Subsidiaries has in place a compliance plan to ensure compliance with the Health
Care Laws.

 

(c) None of the Borrowers nor any of their respective Subsidiaries are or, to
the best knowledge of each Borrower and each of its respective Subsidiaries, are
likely to become the subject of investigations, restrictions, deficiencies,
required plans of corrective action, corporate integrity agreements or other
such remedial measures with respect to Medicare and/or Medicaid certifications,
licensure or the Health Care Laws. None of the Borrowers nor any of their
respective Subsidiaries have been convicted of, charged with or investigated for
any material Medicare, Medicaid or other governmental

 

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health program-related offense, or have been debarred, excluded or suspended
from participation in Medicare, Medicaid or any other governmental health care
program, or have been subject to any order or consent decree of, or material
criminal or civil fine or penalty imposed by, any court or governmental
authority related to the Health Care Laws. Each Borrower and each of its
respective Subsidiaries is in compliance with Medicare Conditions of
Participation, is a participating provider in good standing with Medicare and
Medicaid, and has no knowledge of any material overpayments from Medicare or
another governmental health care program other than those for which appropriate
reserves have been taken on the books and records of the Borrowers. None of the
Borrowers nor any of their respective Subsidiaries have arranged or contracted
with (by employment or otherwise) any individual or entity that any Borrower or
any of its Subsidiaries knows or should know is excluded from participation in a
federal health care program, as defined in 42 U.S.C. § 1320a-7b(f), for the
provision of items or services for which payment may be made under such federal
health care program. To the best knowledge of each Borrower and each of its
respective Subsidiaries, there is no basis upon which any of the Borrowers or
any of their respective Subsidiaries may be subject to permissive exclusion from
participation in a federal health care program pursuant to 42 C.F.R. 1001.1001.

 

Section 4.10 Compliance with Health Plans. None of the Borrowers nor any of
their respective Subsidiaries are in material default or breach under any
agreement or arrangement with any nongovernmental health plan, insurance
company, employer or third party payor that is currently doing business with a
Borrower or its respective Subsidiaries (collectively, “Third Party Payors” and
individually, “Third Party Payor”). Each Borrower and each of its respective
Subsidiaries has provided services and billed all Third Party Payors for such
services in material compliance with its agreement and arrangement with such
Third Party Payors, as well as any applicable rules and regulations of such
Third Party Payors. None of the Borrowers nor any of their respective
Subsidiaries have received notice that any Third Party Payor intends to
terminate, limit or restrict its relationship with any of the Borrowers or their
respective Subsidiaries.

 

Section 4.11 Physician Agreements. None of the Borrowers nor any of their
respective Subsidiaries have in place any agreement, contract or other
arrangement with any physician or physician group other than those in writing
that are in substantial compliance with the form agreements provided to the
Lender prior to the date hereof.

 

Section 4.12 Funds from Restricted Grants. Except as described on Schedule 4.12,
none of the Collateral is subject to, and each of the Borrowers shall indemnify
and hold the Lender harmless from and against, any liability in respect of
amounts received by any Borrower, any of their respective Subsidiaries or others
for the purchase or improvement of the Collateral or any part thereof under
restricted or conditioned grants or donations, including, without limitation,
monies received under the Public Health Service Act, 42 U.S.C. Section 291 et
seq.

 

Section 4.13 HIPAA Compliance. To the extent applicable to a Borrower and for so
long as (a) any of the Borrowers or any of their respective Subsidiaries is a
“covered entity” as defined in 45 C.F.R. § 160.103, (b) any Borrower, any
Subsidiary of any Borrower and/or any of

 

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their respective businesses or operations are subject to or covered by the HIPAA
Administrative Requirements codified at 45 C.F.R. Parts 160 & 162 (the
“Transactions Rule”) and/or the HIPAA Security and Privacy Requirements codified
at 45 C.F.R. Parts 160 & 164 (the “Privacy and Security Rules”), and/or (c) any
Borrower or any Subsidiary of a Borrower sponsors any “group health plans” as
defined in 45 C.F.R. § 160.103, the applicable Borrower or Subsidiary of a
Borrower, as the case may be has: (i) completed, or will complete on or before
any applicable compliance date, thorough and detailed surveys, audits,
inventories, reviews, analyses and/or assessments, including risk assessments,
(collectively “Assessments”) of all material areas of its business and
operations subject to HIPAA and/or that could be materially and adversely
affected by the failure of a Borrower or Subsidiary of a Borrower, as the case
may be, to be HIPAA Compliant to the extent these Assessments are appropriate or
required for a Borrower or Subsidiary of a Borrower, as the case may be, to be
HIPAA Compliant; (ii) developed, or will develop on or before any applicable
compliance date, a detailed plan and time line for becoming HIPAA Compliant (a
“HIPAA Compliance Plan”); and (iii) implemented, or will implement on or before
any applicable compliance date, those provisions of its HIPAA Compliance Plan
necessary to ensure that such Borrower or Subsidiary of a Borrower, as the case
may be, is HIPAA Compliant.

 

Section 4.14 ERISA. Each Plan is in substantial compliance with all applicable
requirements of ERISA and the Code and with all material applicable rulings and
regulations issued under the provisions of ERISA and the Code setting forth
those requirements. No Reportable Event has occurred and is continuing with
respect to any Plan. All of the minimum funding standards applicable to such
Plans have been satisfied and there exists no event or condition which would
reasonably be expected to result in the institution of proceedings to terminate
any Plan under Section 4042 of ERISA. With respect to each Plan subject to Title
IV of ERISA (other than the KRUG Pension Plan), as of the most recent valuation
date for such Plan, the present value (determined on the basis of reasonable
assumptions employed by the independent actuary for such Plan and previously
furnished in writing to the Lender) of such Plan’s projected benefit obligations
did not exceed the fair market value of such Plan’s assets. With respect to the
KRUG Pension Plan, the amount by which the present value of such Plan’s benefit
obligations (determined as of September 30, 2004 on a plan termination basis
using GATT assumptions) exceeds the fair market value of the Plan’s assets, is
set forth on Schedule 4.14 (hereinafter, the “KRUG Pension Plan Deficiency”).

 

Section 4.15 Federal Reserve Regulations. No Borrower nor any Subsidiary is
engaged principally or as one of its important activities in the business of
extending credit for the purpose of purchasing or carrying margin stock (as
defined in Regulation U of the Board). The value of all margin stock owned by
each Borrower does not constitute more than 25% of the value of the assets of
such Borrower.

 

Section 4.16 Title to Property; Leases; Liens; Subordination. Each Borrower and
each Subsidiary has (a) good and marketable fee simple title or leasehold estate
in and to the Encumbered Real Estate and (b) good and sufficient title to the
Collateral other than Encumbered Real Estate. Schedule 4.16 is a list of all
real properties owned or leased by the Borrowers and their Subsidiaries as of
the date hereof. None of the Encumbered Real Estate is subject to a Lien, except
for Permitted Encumbrances. No Borrower has subordinated any of its rights in
and to that portion of the Collateral constituting an obligation owing to it to
the rights of any other person.

 

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Section 4.17 Taxes. Each Borrower and each Subsidiary has filed all federal,
state and local tax returns required to be filed and has paid or made provision
for the payment of all taxes due and payable pursuant to such returns and
pursuant to any assessments made against it or any of its property and all other
taxes, fees and other charges imposed on it or any of its property by any
governmental authority (other than taxes, fees or charges the amount or validity
of which is currently being contested in good faith by appropriate proceedings
and with respect to which reserves in accordance with GAAP have been provided on
the books of such Borrower). No tax Liens have been filed and no material claims
are being asserted with respect to any such taxes, fees or charges. The charges,
accruals and reserves on the books of the Borrowers in respect of taxes and
other governmental charges are adequate and the Borrowers know of no proposed
material tax assessment against it or any Subsidiary or any basis therefor.

 

Section 4.18 Trademarks, Patents. Each Borrower and each Subsidiary possesses or
has the right to use all of the patents, trademarks, trade names, service marks
and copyrights, and applications therefor, and all technology, know-how,
processes, methods and designs used in or necessary for the conduct of its
business, without known conflict with the rights of others.

 

Section 4.19 Existing Foreign Subsidiaries. Except for the UK Obligations, no
Borrower has any obligations to, or liabilities to any Person on account of, the
Existing Foreign Subsidiaries.

 

Section 4.20 Force Majeure. Since the date of the most recent financial
statement referred to in Section 5.1 hereof, the business, properties and other
assets of the Borrowers and the Subsidiaries have not been materially and
adversely affected in any way as the result of any fire or other casualty,
strike, lockout, or other labor trouble, embargo, sabotage, confiscation,
condemnation, riot, civil disturbance, activity of armed forces or act of God.

 

Section 4.21 Investment Company Act. No Borrower nor any Subsidiary is an
“investment company” or a company “controlled” by an investment company within
the meaning of the Investment Company Act of 1940, as amended.

 

Section 4.22 Public Utility Holding Company Act. No Borrower nor any Subsidiary
is a “holding company” or a “subsidiary company” of a holding company or an
“affiliate” of a holding company or of a subsidiary company of a holding company
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.

 

Section 4.23 Retirement Benefits. Except as required under Section 4980B of the
Code, Section 601 of ERISA or applicable state law, no Borrower nor any
Subsidiary is obligated to provide post-retirement medical or insurance benefits
with respect to employees or former employees.

 

Section 4.24 Full Disclosure. Neither the financial statements referred to in
Section 5.1 hereof nor any other certificate, written statement, exhibit or
report furnished by or on behalf of the Borrowers in connection with or pursuant
to this Agreement contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make the statements contained
therein not misleading.

 

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Section 4.25 Subsidiaries. Schedule 4.25 sets forth as of the date of this
Agreement a list of all Subsidiaries and Existing Foreign Subsidiaries and the
number and percentage of the shares of each class of Equity Interests owned
beneficially or of record by the Borrowers or any Subsidiary or Existing Foreign
Subsidiary therein, and the jurisdiction of incorporation of each Subsidiary and
Existing Foreign Subsidiary.

 

Section 4.26 Restrictions on Subsidiaries. Except for restrictions contained in
this Agreement or any other agreement with respect to Indebtedness of the
Borrowers permitted hereunder as in effect on the date hereof, there are no
contractual or consensual restrictions on the Borrowers or any of their
Subsidiaries which prohibit or otherwise restrict (i) the transfer of cash or
other assets (A) between the Borrowers and any of their Subsidiaries or (B)
between any Subsidiaries of the Borrowers, or (ii) the ability of the Borrowers
or Subsidiaries to incur Indebtedness or grant Liens to the Lender in the
Collateral.

 

Section 4.27 Labor Matters. There are no pending or, to the knowledge of the
Borrowers, any threatened strikes, lockouts or slowdowns against the Borrowers
or any Subsidiary. No Borrower nor any Subsidiary has been or is in violation in
any material respect of the Fair Labor Standards Act or any other applicable
Federal, state, local or foreign law dealing with such matters. All payments due
from any Borrower or any Subsidiary on account of wages and employee health and
welfare insurance and other benefits (in each case, except for de minimus
amounts), have been paid or accrued as a liability on the books of such Borrower
or such Subsidiary. The consummation of the transactions contemplated under the
Loan Documents will not give rise to any right of termination or right of
renegotiation on the part of any union under any collective bargaining agreement
to which any Borrower or any Subsidiary is bound.

 

Section 4.28 Deposit Accounts. A complete list of all of Borrower’s Deposit
Accounts (including account numbers and addresses for each Deposit Account bank)
is set forth on Schedule 4.28.

 

Section 4.29 Offsets. Except as set forth on Schedule 4.29 attached hereto,
there is no basis for (a) any Offsets asserted or threatened to be asserted
against Borrower or any of its Subsidiaries by any Obligor (including but not
limited to amounts due to Medicare or the IRS), or (b) any overdue or delinquent
liabilities or Indebtedness which could give rise to a right of a federal
Governmental Authority or any other Person to offset or levy with respect to
such liabilities or Indebtedness against any Receivables, or payments due
thereon.

 

Section 4.30 Solvency. After the making of any Loan and after giving effect
thereto, (a) the fair value of the assets of each Borrower, at a fair valuation,
will exceed its debts and liabilities, subordinated, contingent or otherwise;
(b) the present fair saleable value of the property of each Borrower will be
greater than the amount that will be required to pay the probable liability of
its debts and other liabilities, subordinated, contingent or otherwise, as such
debts and other liabilities become absolute and matured; (c) each Borrower will
be able to pay its debts and liabilities, subordinated, contingent or otherwise,
as such debts and liabilities become

 

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absolute and matured; and (d) no Borrower will have unreasonably small capital
with which to conduct the business in which it is engaged as such business is
proposed to be conducted following the Closing Date.

 

Section 4.31 Management Procedures. The Borrowers have (and will continue to
have and maintain) such appropriate and customary risk management and
information sharing procedures and policies so as to allow the Senior Officers
to be and remain informed about the material aspects of the operations of the
Borrowers’ businesses for which each is primarily responsible.

 

Section 4.32 For-Profit Entities. Each Borrower conducts its business as a for
profit enterprise, and is not and has not filed to be qualified under Section
501(c)(3) of the Code.

 

ARTICLE V

AFFIRMATIVE COVENANTS

 

Until all obligations of the Lender hereunder to make the Term Loans and
Advances shall have expired or been terminated and the Notes and all of the
other Obligations have been paid in full, unless the Lender shall otherwise
consent in writing:

 

Section 5.1 Financial Statements and Reports. The Borrowers’ Agent will furnish
to the Lender:

 

(a) As soon as available and in any event within one hundred twenty (120) days
after the end of each fiscal year of the Borrower, the consolidated financial
statements of the Borrowers and the Subsidiaries consisting of at least
statements of income, cash flow and changes in stockholders’ equity, and a
consolidated balance sheet as at the end of such year, setting forth in each
case in comparative form corresponding figures from the previous annual audit,
certified without qualification by independent certified public accountants of
recognized national standing selected by the Borrowers and acceptable to the
Lender, together with any management letters, management reports or other
supplementary comments or reports to SHSI or its board of directors furnished by
such accountants.

 

(b) [Reserved]

 

(c) As soon as available and in any event within 45 days after the end of each
fiscal quarter, unaudited consolidated statements of income, cash flow and
changes in stockholders’ equity for the Borrowers and the Subsidiaries for such
quarter and for the period from the beginning of such fiscal year to the end of
such quarter, and a consolidated balance sheet of the Borrowers as at the end of
such quarter, setting forth in comparative form figures for the corresponding
period for the preceding fiscal year, accompanied by a certificate signed by the
chief financial officer of the SHSI stating that such financial statements
present fairly the financial condition of the Borrowers and the Subsidiaries and
that the same have been prepared in accordance with GAAP (except for the absence
of footnotes and subject to year-end audit adjustments as to the interim
statements).

 

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(d) As soon as available and in any event within 30 days after the end of each
fiscal month, unaudited consolidated statements of income, for the Borrowers and
the Subsidiaries for such month, and a consolidated balance sheet of the
Borrowers as at the end of such month, setting forth in comparative form figures
for the corresponding period for the preceding fiscal year presenting fairly the
financial condition of the Borrowers and the Subsidiaries and prepared in
accordance with GAAP (except for the absence of footnotes and subject to
year-end audit adjustments as to the interim statements).

 

(e) As soon as available and in any event within 30 days after the end of each
fiscal month, unaudited operating reports for each facility operated by a
Borrower or a Subsidiary, in form and substance satisfactory to the Lender,
including, without limitation, monthly aging reports for all Receivables, a
report of Consolidated EBITDA for such period and a Borrowing Base Certificate,
accompanied by a certificate of the chief financial officer of SHSI that such
reports present fairly and accurately the financial information that is the
subject thereof.

 

(f) Upon request by the Lender, copies of (A) Borrowers’ annual federal income
tax returns as filed with the Internal Revenue Service, (B) Borrowers’ payroll
tax return as filed with the Internal Revenue Service on Form 941 for any
calendar quarter requested, together with documentation of payment of any sums
due in respect of payroll taxes, and (C) any applicable sale tax filings,
together with documentation of payment of any sums due in respect of sales
taxes.

 

(g) As soon as practicable and in any event within forty-five (45) days after
the end of each fiscal quarter, a Compliance Certificate in the form attached
hereto as Exhibit G signed by the chief financial officer of SHSI demonstrating
in reasonable detail compliance (or noncompliance, as the case may be) with
Section 6.10, Section 6.16, Section 6.17, Section 6.18, and Section 6.19, as at
the end of such quarter and stating that as at the end of such quarter there did
not exist any Default or Event of Default or, if such Default or Event of
Default existed, specifying the nature and period of existence thereof and what
action the Borrowers proposes to take with respect thereto.

 

(h) As soon as practicable and in any event within forty-five (45) days after
the beginning of each fiscal year of the Borrowers, statements of forecasted
consolidated income for the Borrowers and the Subsidiaries for each fiscal month
in such fiscal year and a forecasted consolidated balance sheet of the Borrowers
and the Subsidiaries, together with supporting assumptions, as at the end of
each fiscal month, all in reasonable detail and reasonably satisfactory in scope
to the Lender.

 

(i) Immediately upon any Senior Officer of any Borrower becoming aware of any
Default or Event of Default, a notice describing the nature thereof and what
action Borrowers propose to take with respect thereto.

 

(j) Immediately upon any Senior Officer of any Borrower becoming aware of the
occurrence, with respect to any Plan, of any Reportable Event or any Prohibited
Transaction, a notice specifying the nature thereof and what action the
Borrowers propose to take with respect thereto, and, when received, copies of
any notice from PBGC of intention to terminate or have a trustee appointed for
any Plan.

 

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(k) Immediately upon any Senior Officer of any Borrower becoming aware of any
matter that has resulted or is reasonably likely to result in a Material Adverse
Occurrence, a notice from the Borrowers’ Agent describing the nature thereof and
what action Borrowers propose to take with respect thereto.

 

(l) Immediately upon any Senior Officer of any Borrower becoming aware of (i)
the commencement of any action, suit, investigation, proceeding or arbitration
before any court or arbitrator or any governmental department, board, agency or
other instrumentality, including without limitation, any agency of the
Department of Health and Human Services or its Office of Inspector General,
affecting a Borrower or any Subsidiary or any property of such Person, or to
which a Borrower or any Subsidiary is a party (other than litigation where the
insurance insures against the damages claimed and the insurer has assumed
defense of the litigation without reservation) and in which an adverse
determination or result could constitute a Material Adverse Occurrence; or (ii)
any adverse development which occurs in any litigation, arbitration or
governmental investigation or proceeding previously disclosed by a Borrower or
any Subsidiary which, if determined adversely to a Borrower or a Subsidiary
would constitute a Material Adverse Occurrence, a notice from the Borrowers’
Agent describing the nature and status thereof and what action the Borrowers
propose to take with respect thereto.

 

(m) Promptly upon the mailing or filing thereof, copies of all financial
statements, reports and proxy statements mailed to any Borrower’s shareholders,
and copies of all registration statements, periodic reports and other documents
filed with the Securities and Exchange Commission (or any successor thereto) or
any national securities exchange.

 

(n) Within three (3) Business Days after a Senior Officer of any Borrower
becoming aware of any of the following for which an adverse determination or
result could reasonably be expected to constitute or result in a Material
Adverse Occurrence:

 

(i) Notice of any investigation or pending or threatened proceedings relating to
any violation by any Borrower or any Subsidiary, of any Health Care Laws
(including, without limitation, any investigation or proceeding involving
violation of any of the Medicare and/or Medicaid fraud and abuse provisions);

 

(ii) Copies of any written recommendation from any Governmental Authority or
other regulatory body that a Borrower or any Subsidiary should have its
licensure or accreditation revoked, have its eligibility to participate in, or
to accept assignments or rights to reimbursement revoked under any governmental
health care program, including, without limitation, CHAMPVA, TRICARE, Medicare
and Medicaid;

 

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(iii) Notice of any claim to recover any alleged material overpayments with
respect to any Receivables, except with respect to those for which an
appropriate reserve has been established, including, without limitation,
payments received from any private insurance carrier and from any governmental
health care program, including, without limitation, CHAMPVA, TRICARE, Medicare
and Medicaid;

 

(iv) Notice of termination of eligibility of a Borrower, any Subsidiary, or any
health care facility to which a Borrower provides services to participate in any
reimbursement program of any private insurance carrier or other Obligor
applicable to it;

 

(v) Notice of any material reduction in the level of reimbursement expected to
be received with respect to any Receivables;

 

(vi) Notice of any reimbursement payment contract or process that results or may
result in any claim against a Borrower or any Subsidiary (including on account
of overpayments, settlement payments, appeals, repayment plan requests); and

 

(vii) Copies of any report or communication from any Governmental Authority in
connection with any inspection of any facility of a Borrower or any Subsidiary.

 

(o) Prior notice of any proposed replacement of the Borrowers’ accountants and
such information that Lender may reasonably request in connection therewith,
including, without limitation, the reasons for such replacement.

 

(p) From time to time, such other information regarding the business, operation
and financial condition of any Borrower and the Subsidiaries as the Lender may
reasonably request.

 

Section 5.2 Existence. Each Borrower will maintain, and cause each Subsidiary to
maintain, its corporate existence in good standing under the laws of its
jurisdiction of organization and its qualification to transact business in each
jurisdiction where failure so to qualify would permanently preclude such
Borrower or such Subsidiary from enforcing its rights with respect to any
material asset or could reasonably be expected to result in or be a Material
Adverse Occurrence; provided, however, that nothing herein shall prohibit the
merger or liquidation of any Subsidiary allowed under Section 6.1.

 

Section 5.3 Insurance. The Borrowers will keep the Collateral insured with
financially sound and reputable insurers against loss or damage by fire, theft,
explosion, sprinklers, and all other hazards and risks, and in such amounts, as
are ordinarily insured against by other owners in similar businesses. The
Borrowers shall maintain business interruption, public liability, and other
property damage insurance relating to The Borrowers’ ownership and use of the
Collateral, as well as insurance against larceny, embezzlement, and criminal
misappropriation. All policies or insurance shall be in such form, with such
companies, and in

 

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such amounts as may be reasonably satisfactory to the Lender. Contemporaneously
with the execution of this Agreement, and within fifteen (15) days of any date
when any additional or replacement insurance coverage is obtained or any such
policy is renewed (and in any event no less frequently than annually), the
Borrowers shall deliver to the Lender true copies of certificates of insurance
with respect to such policies or additional insurance or replacement policies,
which certificates (i) in the case of property and casualty policies, shall
contain an endorsement or rider satisfactory to the Lender showing the Lender as
loss payee and additional insured thereof, and (ii) in the case of general
liability policies, shall contain an endorsement or rider showing the Lender as
an additional insured. Every policy of insurance referred to in this Section 5.3
shall contain an agreement by the insurer that it will not cancel such policy
except after thirty (30) days prior written notice to the Lender and that any
loss payable thereunder shall be payable notwithstanding any act or negligence
of the Borrowers, or any of them, or the Lender that might, absent such
agreement, result in a forfeiture of all or a part of such insurance payment and
notwithstanding occupancy or use of the real property for purposes more
hazardous than permitted by the terms of such policy. The Borrowers shall
deliver to the Lender, within five (5) Business Days of any request by the
Lender, certified copies of such policies of insurance and evidence of the
payment of all premiums therefor.

 

Section 5.4 Payment of Taxes and Claims. Each Borrower shall file, and cause
each Subsidiary to file, all tax returns and reports which are required by law
to be filed by it and will pay, and cause each Subsidiary to pay, before they
become delinquent all taxes, assessments and governmental charges and levies
imposed upon it or its property and all claims or demands of any kind (including
but not limited to those of suppliers, mechanics, carriers, warehouses,
landlords and other like Persons) which, if unpaid, might result in the creation
of a Lien upon its property; provided that the foregoing items need not be paid
if they are being contested in good faith by appropriate proceedings, and as
long as such Borrower’s or such Subsidiary’s title to its property is not
materially adversely affected, its use of such property in the ordinary course
of its business is not materially interfered with and adequate reserves with
respect thereto have been set aside on Borrowers’ or such Subsidiary’s books in
accordance with GAAP.

 

Section 5.5 Inspection; Collateral Audits. Each Borrower shall permit any Person
designated by the Lender to visit and inspect during normal business hours any
of the properties, books and financial records of such Borrower and the
Subsidiaries, to examine and to make copies of the books of accounts and other
financial records of such Borrower and the Subsidiaries, and to discuss the
affairs, finances and accounts of such Borrower and the Subsidiaries with, and
to be advised as to the same by, its officers at such times and intervals as the
Lender may designate, subject to the condition that such times and intervals
shall be reasonable. The Lender may conduct Collateral audits no less frequently
than once each quarter and the Borrowers shall pay to the Lender a fee of $750
for each day of any such Collateral audit. Notwithstanding the foregoing, unless
an Event of Default has occurred and is continuing, the Borrowers shall be
responsible for the payment of costs and expenses for an inspection and
examination of the properties, books and financial records of the Borrowers only
two times each calendar year.

 

Section 5.6 Maintenance of Properties. Each Borrower will maintain, and cause
each Subsidiary to maintain its properties used or useful in the conduct of its
business in good

 

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condition, repair and working order, and supplied with all necessary equipment,
and make all necessary repairs, renewals, replacements, betterments and
improvements thereto, all as may be necessary so that the business carried on in
connection therewith may be properly conducted at all times.

 

Section 5.7 Books and Records. Each Borrower will keep, and will cause each
Subsidiary to keep, adequate and proper records and books of account in which
full and correct entries will be made of its dealings, business and affairs.

 

Section 5.8 Compliance; Permits. Each Borrower will comply, and will cause each
Subsidiary to comply, in all material respects with all laws, rules,
regulations, orders, writs, judgments, injunctions, decrees or awards to which
it may be subject, including, without limitation, all Health Care Laws;
provided, however, that failure so to comply shall not be a breach of this
covenant if such failure does not constitute a Material Adverse Occurrence and
such Borrower or such Subsidiary is acting in good faith and with reasonable
dispatch to cure such noncompliance. The Borrowers shall maintain all necessary
permits, licenses, agreements, accreditations, certifications, contracts and
governmental consents necessary to operate and conduct their business as it is
being conducted, subject to minor exceptions and deficiencies which could not
reasonably be expected to have a Material Adverse Occurrence.

 

Section 5.9 ERISA. Each Borrower will (a) maintain, and cause each Subsidiary to
maintain, each Plan in compliance with all material applicable requirements of
ERISA and of the Code and with all material applicable rulings and regulations
issued under the provisions of ERISA and of the Code; provided, however, that
the Borrowers shall be permitted to terminate the KRUG Pension Plan in
accordance with the provisions and requirements of ERISA, the Code and the KRUG
Pension Plan, and (b) will not permit any of the ERISA Affiliates to (i) engage
in any transaction in connection with which such Borrower or any of the ERISA
Affiliates would be subject to either a civil penalty assessed pursuant to
Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either
case in an amount exceeding $50,000, (ii) fail to make full payment when due of
all amounts which, under the provisions of any Plan, such Borrower or any ERISA
Affiliate is required to pay as contributions thereto, or permit to exist any
accumulated funding deficiency (as such term is defined in Section 302 of ERISA
and Section 412 of the Code), whether or not waived, with respect to any Plan in
an aggregate amount exceeding $50,000 or (iii) fail to make any payments in an
aggregate amount exceeding $50,000 to any Multiemployer Plan that such Borrower
or any of the ERISA Affiliates may be required to make under any agreement
relating to such Multiemployer Plan or any law pertaining thereto.

 

Section 5.10 Environmental Matters; Reporting. Each Borrower will observe and
comply with, and cause each Subsidiary to observe and comply with, all laws,
rules, regulations and orders of any government or government agency relating to
health, safety, pollution, hazardous materials or other environmental matters to
the extent non-compliance could result in a material liability or otherwise
constitute a Material Adverse Occurrence. The Borrowers’ Agent will give the
Lender prompt written notice of any violation as to any environmental matter by
any Borrower or any Subsidiary and of the commencement of any judicial or
administrative proceeding relating to health, safety or environmental matters
(a) in which an adverse determination or result could result in the revocation
of or have a material adverse effect on any

 

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operating permits, air emission permits, water discharge permits, hazardous
waste permits or other permits held by any Borrower or any Subsidiary which are
material to the operations of such Borrower or such Subsidiary, or (b) which
will or threatens to impose a material liability on such Borrower or such
Subsidiary to any Person or which will require a material expenditure by the
Borrower or such Subsidiary to cure any alleged problem or violation.

 

Section 5.11 Accreditation. To the extent applicable to a Borrower in the
conduct of its business, such Borrower shall maintain its qualification for
participation in, and payment under, third party payors and government health
care programs, including, without limitation, Medicare, Medicaid, TRICARE, and
CHAMPVA that provide for payment or reimbursement for services, except to the
extent such loss or relinquishment could not reasonably be expected to have a
material adverse effect on the business, operations, condition (financial or
otherwise), prospects or properties of the Borrowers taken as a whole. If
required, Medicaid/Medicare cost reports will be properly filed by each
Borrower. In addition, to the extent each Borrower or its respective Subsidiary
is qualified as a Critical Access Hospital pursuant to 42 C.F.R. Part 485,
Subpart F, et. seq. (Conditions of Participation: Critical Access Hospitals),
each Borrower and its respective Subsidiaries as applicable shall file such
information with the appropriate authorities to maintain its status as a
Critical Access Hospital, except to the extent such loss or relinquishment could
not reasonably be expected to have a material adverse effect on the business,
operations, condition (financial or otherwise), prospects or properties of the
Borrowers taken as a whole. Each Borrower will promptly furnish or cause to be
furnished to the Lender copies of all reports and correspondence, if any, it
sends or receives relating to any material loss or revocation (or material
threatened loss or revocation) of any qualification described in this Section
5.11.

 

Section 5.12 Further Assurances. Each Borrower shall promptly correct any defect
or error that may be discovered in any Loan Document by it, or if when
discovered by the Lender, by the Lender or in the execution, acknowledgment or
recordation thereof. Promptly upon request by the Lender, each Borrower also
shall, and shall cause each Subsidiary to do, execute, acknowledge, deliver,
record, re-record, file, re-file, register and re-register, any and all deeds,
conveyances, mortgages, deeds of trust, trust deeds, assignments, estoppel
certificates, financing statements and continuations thereof, notices of
assignment, transfers, certificates, assurances and other instruments as the
Lender may reasonable require from time to time in order: (a) to carry out more
effectively the purposes of the Loan Documents; (b) to perfect and maintain the
validity, effectiveness and priority of any security interests intended to be
created by the Loan Documents including, without limitation, the delivery of a
landlord waiver from any landlord required by the Lender; and (c) to better
assure, convey, grant, assign, transfer, preserve, protect and confirm unto the
Lender the rights granted now or hereafter intended to be granted to the Lender
under any Loan Document or under any other instrument executed in connection
with any Loan Document or that any Borrower may be or become bound to convey,
mortgage or assign to the Lender in order to carry out the intention or
facilitate the performance of the provisions of any Loan Document. The
Borrowers’ Agent shall furnish to the Lender evidence satisfactory to the Lender
of every such recording, filing or registration.

 

Section 5.13 Compliance with Terms of Material Contracts. Each Borrower shall,
and shall cause each Subsidiary to, make all payments and otherwise perform all
obligations in

 

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respect of all material contracts to which such Borrower or any Subsidiary is a
party unless such payments or obligations are being properly and diligently
contested and an appropriate reserve with respect thereto is made in the
accounting records of the Borrowers.

 

Section 5.14 Joinder of Domestic Subsidiaries. The Borrowers’ Agent shall
promptly notify the Lender at any time that any Person becomes a Subsidiary and
provide to the Lender such information about the Subsidiary as the Lender may
reasonably request. The Borrower shall promptly cause each Domestic Subsidiary
(other than the Captive Insurance Subsidiary and any Domestic Subsidiary
qualified as a non-profit enterprise under Section 501(c)(3) of the Code)(a) to
become a Borrower by executing and delivering to the Lender a signature page
hereto and to each Note, and (b) to execute and deliver to the Lender (i)
signature pages to the Security Agreement, Pledge Agreement and such other Loan
Documents as the Lender may require and (ii) any Mortgages requested by Lender
on real property interests held by such Domestic Subsidiary. Such Domestic
Subsidiary shall also deliver to the Lender such other documents of the types
described in Section 3.1(a)(iii), (iv), (v), (vii) and (viii), Section 3.1(b),
Section 3.2(a)(viii) and Section 3.2(b). All signature pages, agreements,
documents and instruments delivered to the Lender pursuant hereto shall be in
form, content and scope reasonably satisfactory to the Lender.

 

Section 5.15 Regions Bank Account. The Borrowers shall within thirty (30) days
of the date of this Agreement, close all accounts held at Regions Bank and
transfer all amounts held therein to Bank of North Georgia to an account subject
to a Required Control Agreement.

 

ARTICLE VI

NEGATIVE COVENANTS

 

Until any obligation of the Lender hereunder to make the Term Loan and Advances
shall have expired or been terminated and the Notes and all of the other
Obligations have been paid in full, unless the Lender shall otherwise consent in
writing:

 

Section 6.1 Merger. No Borrower will merge or consolidate or enter into any
similar reorganization or transaction with any Person other than another
Borrower or liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution) or permit any Subsidiary to do any of the foregoing; provided,
however, any Subsidiary may be merged with or liquidated into a Borrower or any
wholly-owned Subsidiary (if such Borrower or such wholly-owned Subsidiary is the
surviving corporation).

 

Section 6.2 Disposition of Assets. No Borrower will, nor permit any Subsidiary
to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise
dispose of (whether in one transaction or a series of transactions) any property
(including accounts and notes receivable, with or without recourse) or enter
into any agreement to do any of the foregoing, except dispositions listed below
so long as no Default or Event of Default has occurred and is continuing or
would be caused by such disposition:

 

(a) dispositions of inventory, or used, worn-out or surplus equipment all in the
ordinary course of business;

 

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(b) the sale of equipment to the extent that such equipment is exchanged for
credit against the purchase price of similar replacement equipment, or the
proceeds of such sale are applied within ninety (90) days thereof to the
purchase price of such replacement equipment;

 

(c) dispositions to another Borrower hereunder, subject to Liens in favor of the
Lender (if any) which shall continue in favor of the Lender; and

 

(d) other dispositions of property during the term of this Agreement whose net
book value in the aggregate does not exceed 5% of the Borrowers’ total
consolidated assets as shown on the consolidated balance sheet of the Borrowers
for their most recent prior fiscal quarter.

 

Section 6.3 Plans. (a) No Borrower will permit, nor allow any Subsidiary to
permit, any event to occur or condition to exist which would permit any Plan to
terminate under any circumstances which would cause the Lien provided for in
Section 4068 of ERISA to attach to any assets of any Borrower or any Subsidiary;
and (b) except with respect to the KRUG Pension Plan Deficiency disclosed on
Schedule 4.14, no Borrower will permit, as of the most recent valuation date for
any Plan subject to Title IV of ERISA, the present value (determined on the
basis of reasonable assumptions employed by the independent actuary for such
Plan and previously furnished in writing to the Lender) of such Plan’s projected
benefit obligations to exceed the fair market value of such Plan’s assets.

 

Section 6.4 Change in Nature of Business. No Borrower will, nor permit any
Subsidiary to, make any material change in the nature of the business of such
Borrower or such Subsidiary, as carried on at the date hereof.

 

Section 6.5 Negative Pledges; Subsidiary Restrictions. No Borrower will, nor
permit any Subsidiary to, enter into any agreement, bond, note or other
instrument with or for the benefit of any Person other than the Lender which
would (i) prohibit such Borrower or such Subsidiary from granting, or otherwise
limit the ability of the such Borrower or such Subsidiary to grant, to the
Lender any Lien on any assets or properties of such Borrower or such Subsidiary,
or (ii) require such Borrower or such Subsidiary to grant a Lien to any other
Person if such Borrower or such Subsidiary grants any Lien to the Lender. No
Borrower will permit any Subsidiary to place or allow any restriction, directly
or indirectly, on the ability of such Subsidiary to (a) pay dividends or any
distributions on or with respect to such Subsidiary’s capital stock or (b) make
loans or other cash payments to such Borrower.

 

Section 6.6 Restricted Payments. Except as otherwise expressly permitted under
the terms of this Agreement, no Borrower will make any Restricted Payments;
provided, however that, so long as no Default or Event of Default has occurred
and continues to exist, or would result from any of the following, the Borrowers
shall be permitted to (i) distribute cash (by loan, dividend or distribution) to
SHSI, (ii) make the SHSI Affiliate Distributions; provided that not less than
ten (10) Business Days prior to the consummation of any proposed repurchase or
redemption by SHSI of any of its issued and outstanding stock, Lender shall have
received pro forma financial statements, certified by the chief financial
officer of SHSI as to the matters

 

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described in Section 4.5(b), giving effect to such repurchase or redemption
showing that the Borrowers are reasonably anticipated to remain in pro forma
compliance with all the financial ratios and covenants set forth in Section
6.16, Section 6.17, Section 6.18 and Section 6.19, (iii) make payments to the
KRUG Pension Plan sufficient to fund the KRUG Pension Plan Deficiency therein
relating to the excess of the benefit obligations over the plan assets in an
amount not to exceed $900,000 (the “KRUG Pension Plan Deficiency Payments”); and
(iv) make annual payments sufficient to fund the Borrowers’ Self Insured
Retention Fund insurance program (A) during the first year of this Agreement, in
an amount up to the actuarially determined unpaid liability (the “Estimated
Insurance Liability”) and (B) in each year of the Agreement thereafter, in an
amount equal to the increase in the Estimated Insurance Liability, in each case
as set forth in an actuarial report issued by an independent actuary selected by
the Borrowers and reasonably satisfactory to the Lender; provided that prior to
such funding the Borrowers deliver to the Lender the actuarial report evidencing
the amount of the Estimated Insurance Liability for such period.

 

Section 6.7 Transactions with Affiliates. No Borrower will, nor permit any
Subsidiary to, enter into any transaction with any Affiliate of such Borrower,
except upon fair and reasonable terms no less favorable than such Borrower, or
such Subsidiary, would obtain in a comparable arm’s-length transaction with a
Person not an Affiliate; provided, however, the Borrowers shall be permitted to
(i) make the transfers, distributions, payments or prepayments permitted under
Section 6.6 hereof to its Subsidiaries and Affiliates, (ii) make the SHSI
Affiliate Distributions and (iii) make loans to other Borrowers.

 

Section 6.8 Accounting Changes. No Borrower will, nor permit any Subsidiary to,
make any significant change in accounting treatment or reporting practices,
except as required by GAAP, or change its fiscal year or the fiscal year of any
Subsidiary.

 

Section 6.9 Deposit Accounts. No Borrower will, nor permit any Subsidiary to (a)
establish any Deposit Accounts other than those described on Schedule 4.28,
except for Deposit Accounts as to which the applicable Borrower(s) or
Subsidiary(ies), as applicable, shall have delivered to the Lender a Control
Agreement in form and substance satisfactory to the Lender, (b) violate directly
or indirectly any bank agency agreement, Control Agreement or lockbox agreement
in favor of the Lender or (c) revoke or attempt to revoke any instructions or
directions given by it under any Control Agreement or lockbox agreement with
respect to or altering the rights of the Lender thereunder.

 

Section 6.10 Capital Expenditures. The Borrowers will not make, or permit any
Subsidiary to make, Capital Expenditures in an amount exceeding $5,000,000 on a
consolidated basis in any fiscal year not including any Permitted Investments.

 

Section 6.11 Subordinated Debt. No Borrower will, nor permit any Subsidiary to,
(a) make any scheduled payment of the principal of or interest on any
Subordinated Debt which would be prohibited by the terms of such Subordinated
Debt and any related subordination agreement; (b) directly or indirectly make
any prepayment on or purchase, redeem or defease any Subordinated Debt or offer
to do so (whether such prepayment, purchase or redemption, or offer with respect
thereto, is voluntary or mandatory, unless expressly permitted pursuant to an

 

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intercreditor or subordination agreement entered into between the holder of any
such Subordinated Debt and the Lender); (c) amend or cancel the subordination
provisions applicable to any Subordinated Debt; (d) take or omit to take any
action if as a result of such action or omission the subordination of such
Subordinated Debt, or any part thereof, to the Obligations might be terminated,
impaired or adversely affected; or (e) omit to give the Lender prompt notice of
any notice received from any holder of Subordinated Debt, or any trustee
therefor, or of any default under any agreement or instrument relating to any
Subordinated Debt by reason whereof such Subordinated Debt might become or be
declared to be due or payable.

 

Section 6.12 Investments. No Borrower will, nor permit any Subsidiary to,
acquire for value, make, have or hold any Investments, except for (collectively,
“Permitted Investments”):

 

(a) Investments existing on the date of this Agreement and disclosed on Schedule
6.12 hereto.

 

(b) Travel advances to management personnel and employees in the ordinary course
of business.

 

(c) Investments in readily marketable direct obligations issued or guaranteed by
the United States or any agency thereof and supported by the full faith and
credit of the United States.

 

(d) Certificates of deposit or bankers’ acceptances issued by any commercial
bank organized under the laws of the United States or any State thereof which
has (i) combined capital and surplus of at least $100,000,000, and (ii) a credit
rating with respect to its unsecured indebtedness from a nationally recognized
rating service that is satisfactory to the Lender.

 

(e) Commercial paper given the highest rating by a nationally recognized rating
service.

 

(f) Repurchase agreements relating to securities issued or guaranteed as to
principal and interest by the United States with a term of not more than ninety
(90) days; provided, however, that all such agreements shall require physical
delivery of the securities securing such repurchase agreement, except those
delivered through the Federal Reserve Book Entry System.

 

(g) Other readily marketable Investments in debt securities which are reasonably
acceptable to the Lender.

 

(h) Investments by SHSI in a Captive Insurance Subsidiary; provided, however,
that the consolidated stockholders’ equity of any such Captive Insurance
Subsidiary shall not exceed at any time $1,000,000.

 

(i) Permitted Acquisitions.

 

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(j) Any other Investment if the aggregate consideration therefor does not exceed
$500,000.

 

Any Investments under clauses (c), (d), (e) or (f) above must mature within one
year of the acquisition thereof by a Borrower or a Subsidiary.

 

Section 6.13 Indebtedness. No Borrower will, nor permit any Subsidiary to,
incur, create, issue, assume or suffer to exist any Indebtedness, except:

 

(a) The Obligations.

 

(b) Consolidated Current Liabilities, other than for borrowed money, incurred in
the ordinary course of business.

 

(c) Indebtedness existing on the date of this Agreement and disclosed on
Schedule 6.13 hereto.

 

(d) Indebtedness secured by Liens permitted under Section 6.14 hereof.

 

(e) Indebtedness owed to another Borrower.

 

(f) Indebtedness that may be incurred in connection with a Permitted
Acquisition, to the extent expressly approved by the Lender in writing.

 

(g) Permitted Refinancing Indebtedness, so long as no Default or Event of
Default is in existence at the time of the incurrence of such Permitted
Refinancing Indebtedness and immediately after giving effect thereto.

 

Section 6.14 Liens. No Borrower will, nor permit any Subsidiary to, create,
incur, assume or suffer to exist any Lien, or enter into, or make any commitment
to enter into, any arrangement for the acquisition of any property through
conditional sale, lease-purchase or other title retention agreements, with
respect to any property now owned or hereafter acquired by a Borrower or a
Subsidiary (collectively; “Permitted Encumbrances”), except:

 

(a) Liens granted to the Lender under the Security Documents to secure the
Obligations.

 

(b) Liens existing on the date of this Agreement and disclosed on Schedule 6.14
hereto.

 

(c) Deposits or pledges to secure payment of workers’ compensation, unemployment
insurance, old age pensions or other social security or similar statutory public
liability obligations, in the ordinary course of business of a Borrower or a
Subsidiary.

 

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(d) Liens for taxes, fees, assessments and governmental charges not delinquent
or to the extent that payment therefor shall not at the time be required to be
made in accordance with the provisions of Section 5.4.

 

(e) Liens of carriers, warehousemen, mechanics and materialmen, and other like
Liens arising in the ordinary course of business, for sums not due or to the
extent that payment therefor shall not at the time be required to be made in
accordance with the provisions of Section 5.4.

 

(f) Liens incurred or deposits or pledges made or given in connection with, or
to secure payment of, indemnity, performance or other similar bonds.

 

(g) Liens arising solely by virtue of any statutory or common law provision
relating to banker’s liens, rights of set-off or similar rights and remedies as
to deposit accounts or other funds maintained with a creditor depository
institution; provided that (i) such deposit account is not a dedicated cash
collateral account and is not subject to restriction against access by a
Borrower or a Subsidiary in excess of those set forth by regulations promulgated
by the Board, and (ii) such deposit account is not intended by a Borrower or any
Subsidiary to provide collateral to the depository institution.

 

(h) Encumbrances in the nature of zoning restrictions, easements and rights or
restrictions of record on the use of real property and landlord’s Liens under
leases on the premises rented, which do not materially detract from the value of
such property or impair the use thereof in the business of a Borrower or a
Subsidiary, the Liens and encumbrances, if any, described in the loan policies
of title insurance covering the Encumbered Real Estate delivered to and accepted
by Lender in connection with the Mortgages and leases entered into by Borrower
or a Subsidiary in the ordinary course of business.

 

(i) The interest of any lessor under any Capitalized Lease entered into after
the Closing Date or purchase money Liens on property acquired after the Closing
Date; provided, that, (i) the Indebtedness secured thereby is otherwise
permitted by this Agreement and (ii) such Liens are limited to the property
acquired and do not secure Indebtedness other than the related Capitalized Lease
or the purchase price of such property.

 

Section 6.15 Contingent Liabilities. No Borrower will, nor permit any Subsidiary
to, be or become liable on any Contingent Obligations except Contingent
Obligations existing on the date of this Agreement and disclosed on Schedule
6.15 and Contingent Obligations for the benefit of the Lender.

 

Section 6.16 Leverage Ratio. The Borrowers will not permit the Leverage Ratio,
as of the last day of any fiscal quarter, for the twelve (12) consecutive months
ending on that date to exceed 3.25 to 1.0.

 

Section 6.17 Minimum Liquidity. The Borrowers (on a consolidated basis) will not
permit at any time the sum of their (i) actual cash and Cash Equivalents and
(ii) the lesser of (A) Availability and (B) the Revolving Commitment Amount,
less outstanding Advances, to be less than $2,500,000.

 

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Section 6.18 Collateral Coverage Ratio. Commencing on November 15, 2004 and
continuing thereafter, the Borrowers will not permit the Collateral Coverage
Ratio to be less than 1.5 to 1.0 at any time.

 

Section 6.19 Fixed Charge Coverage Ratio. The Borrowers will not permit the
Fixed Charge Coverage Ratio, as of December 31, 2004 annualized for the three
months ended on that date to be less than 1.10 to 1.00, as of March 31, 2005
annualized for the six months ended on that date to be less than 1.10 to 1.00,
as of June 30, 2005 annualized for the nine months ended on that date to be less
than 1.10 to 1.00, and thereafter as of the last day of for any fiscal quarter,
for the twelve (12) consecutive months ending on that date to be less than 1.10
to 1.00.

 

Section 6.20 Executive Compensation. No Borrower will, nor permit any Subsidiary
to, make any payments of management, consulting or other fees for management or
similar services, or any payment on account of any Indebtedness owing to any
officer, employee, shareholder, director or other Affiliate of Borrower, except
reasonable compensation to officers, employees and directors of Borrower for
services rendered to such Borrower in the ordinary course of business. Without
limiting the foregoing, Borrower shall not pay or commit to pay cash
compensation to any member of Borrower’s senior management in an amount in any
fiscal year in excess of 110% of the aggregate cash compensation paid during the
prior fiscal year except as may be approved by the Compensation Committee of the
Board of Directors so long as the common stock of SHSI continues to be publicly
traded on the American Stock Exchange, the New York Stock Exchange or the NASDAQ
National Market.

 

Section 6.21 Restrictions on Leases, etc. No Borrower will, nor permit any
Subsidiary to, create, incur, assume, or suffer to exist, any obligation as a
lessee for the rental or hire of any real or personal property, other than: (a)
leases described on Schedule 6.22 attached hereto; (b) renewals of existing
operating leases, provided that the periodic payments thereunder shall not
exceed 110% of the periodic payments required under the original term thereof;
and (c) additional operating leases and Capitalized Leases requiring payments
(including taxes, insurance, maintenance, and similar expenses) in an aggregate
amount not to exceed $1,000,000 at any time.

 

Section 6.22 Loan Proceeds. No Borrower will, nor permit any Subsidiary to, use
any part of the proceeds of the Loans or Advances directly or indirectly, and
whether immediately, incidentally or ultimately, (a) to purchase or carry margin
stock (as defined in Regulation U of the Board) or to extend credit to others
for the purpose of purchasing or carrying margin stock or to refund Indebtedness
originally incurred for such purpose or (b) for any purpose which entails a
violation of, or which is inconsistent with, the provisions of Regulations U or
X of the Board.

 

Section 6.23 Sale and Leaseback Transactions. No Borrower will, nor permit any
Subsidiary to, enter into any arrangement, directly or indirectly, whereby it
shall sell or transfer any property, real or personal, and thereafter lease such
property for the same or a substantially similar purpose or purposes as the
property sold or transferred.

 

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Section 6.24 Hedging Agreements. No Borrower will, nor permit any Subsidiary to,
enter into any hedging arrangements, other than any Rate Protection Agreements
that are approved by the Lender.

 

ARTICLE VII

EVENTS OF DEFAULT AND REMEDIES

 

Section 7.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default:

 

(a) The Borrowers shall fail to make when due, whether by acceleration or
otherwise, any payment of principal of or interest on any of the Notes or any
other Obligation required to be made to the Lender pursuant to this Agreement
and not corrected within 3 days.

 

(b) The Borrowers shall fail to comply with Section 3.4, whether or not any
Borrower or the Borrowers’ Agent requests a Term Loan B Draw.

 

(c) Any representation or warranty made by or on behalf of any Borrower or any
Subsidiary in this Agreement or any other Loan Document or by or on behalf of
any Borrower or any Subsidiary in any certificate, statement, report or document
herewith or hereafter furnished to the Lender pursuant to this Agreement or any
other Loan Document shall prove to have been false or misleading in any material
respect on the date as of which the facts set forth are stated or certified.

 

(d) Any Borrower or any of its respective Subsidiaries shall fail to comply with
Sections 2.14, 5.2, 5.3, 5.5 or 5.12 hereof or any Section of Article VI hereof.

 

(e) Any Borrower shall fail to comply with any other agreement, covenant,
condition, provision or term contained in this Agreement (other than those
hereinabove set forth in this Section 7.1) and such failure to comply shall
continue for thirty (30) calendar days after whichever of the following dates is
the earliest: (i) the date any Borrower or the Borrowers’ Agent gives notice of
such failure to the Lender, (ii) the date any Borrower should have given notice
of such failure to the Lender pursuant to Section 5.1, or (iii) the date the
Lender gives notice of such failure to the Borrower.

 

(f) Any default (however denominated or defined) shall occur under any Security
Document and any applicable grace period thereunder shall have lapsed.

 

(g) Any Borrower or any Subsidiary shall become insolvent or shall generally not
pay its debts as they mature or shall apply for, shall consent to, or shall
acquiesce in the appointment of a custodian, trustee or receiver of such
Borrower or such Subsidiary or for a substantial part of the property thereof
or, in the absence of such application, consent or acquiescence, a custodian,
trustee or receiver shall be appointed for any Borrower or Subsidiary or for a
substantial part of the property thereof and shall not be discharged within
sixty (60) days, or any Borrower or any Subsidiary shall make an assignment for
the benefit of creditors.

 

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(h) Any bankruptcy, reorganization, debt arrangement or other proceedings under
any bankruptcy or insolvency law shall be instituted by or against any Borrower
or any Subsidiary and, if instituted against any Borrower or any Subsidiary,
shall have been consented to or acquiesced in by such Borrower or such
Subsidiary, or shall remain undismissed for sixty (60) days, or an order for
relief shall have been entered against such Borrower or such Subsidiary.

 

(i) Any dissolution or liquidation proceeding not permitted by Section 6.1 shall
be instituted by or against any Borrower or a Subsidiary, and, if instituted
against any Borrower or any Subsidiary, shall be consented to or acquiesced in
by such Borrower or such Subsidiary or shall remain for sixty (60) days
undismissed.

 

(j) A judgment or judgments for the payment of money in excess of the sum of
$500,000 in the aggregate shall be rendered against any Borrower or a Subsidiary
and either (i) the judgment creditor executes on such judgment (to the extent
not covered by independent third-party insurance as to which the insurer does
not dispute coverage) or (ii) such judgment remains unpaid or undischarged for
more than 60 days from the date of entry thereof or such longer period during
which execution of such judgment shall be stayed during an appeal from such
judgment.

 

(k) The maturity of any material Indebtedness of any Borrower (other than
Indebtedness under this Agreement) or a Subsidiary shall be accelerated, or any
Borrower or a Subsidiary shall fail to pay any such material Indebtedness when
due (after the lapse of any applicable grace period) or, in the case of such
Indebtedness payable on demand, when demanded (after the lapse of any applicable
grace period), or any event shall occur or condition shall exist and shall
continue for more than the period of grace, if any, applicable thereto and shall
have the effect of causing, or permitting the holder of any such Indebtedness or
any trustee or other Person acting on behalf of such holder to cause, such
material Indebtedness to become due prior to its stated maturity or to realize
upon any collateral given as security therefor. For purposes of this Section,
Indebtedness of any Borrower or a Subsidiary shall be deemed “material” if it
exceeds $500,000 as to any item of Indebtedness or in the aggregate for all
items of Indebtedness with respect to which any of the events described in this
Section 7.1(k) has occurred.

 

(l) Any execution or attachment shall be issued whereby any material part of the
property of any Borrower or any Subsidiary shall be taken or attempted to be
taken and the same shall not have been vacated or stayed within 30 days after
the issuance thereof.

 

(m) Any Security Document shall, at any time, cease to be in full force and
effect or shall be judicially declared null and void, or the validity or
enforceability thereof shall be contested by any Borrower, or the Lender shall
cease to have a valid and perfected security interest having the priority
contemplated thereunder in all of the collateral described therein, other than
by action or inaction of the Lender if (i) the aggregate value of the collateral
affected by any of the foregoing exceeds $500,000 and (ii) any of the foregoing
shall remain unremedied for ten (10) days or more after receipt of notice
thereof by the Borrowers’ Agent from the Lender.

 

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(n) The conviction by any Governmental Authority of a Borrower under any
criminal statute pursuant to which the penalties or remedies sought or available
include forfeiture of any material portion of the Collateral or any other assets
of Borrower which are necessary or material to the conduct of its business; the
indictment by any Governmental Authority of a Borrower regarding any matter that
may serve as the basis for the exclusion under 42 C.F.R. Part 1001, Subparts B
and C, of any Borrower, a Subsidiary or Affiliate of a Borrower from a federal
health care program, as defined in 42 C.F.R. § 1001.2; or the initiation or, as
Lender may reasonably and in good faith determine the threatened initiation, by
the United States Department of Health and Human Services Office of Inspector
General of an action to exclude a Borrower under 42 C.F.R. Part 1001, Subparts B
and C.

 

(o) Any Change of Control shall occur.

 

Section 7.2 Remedies. If (a) any Event of Default described in Sections 7.1 (g),
(h) or (i) shall occur with respect to any Borrower, the Commitments shall
automatically terminate and the Notes and all other Obligations shall
automatically become immediately due and payable; or (b) any other Event of
Default shall occur and be continuing, then, the Lender may (i) declare the
Commitments terminated, whereupon the Commitments shall terminate and (ii)
declare the outstanding unpaid principal balance of the Notes, the accrued and
unpaid interest thereon and all other Obligations to be forthwith due and
payable, whereupon the Notes, all accrued and unpaid interest thereon and all
such Obligations shall immediately become due and payable, in each case without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived, anything in this Agreement or in the Notes to the
contrary notwithstanding. Upon the occurrence of any of the events described in
clause (a) or (b) of the preceding sentence the Lender may exercise all rights
and remedies under any of the Loan Documents, and enforce all rights and
remedies under any applicable law.

 

Section 7.3 Lockbox; Rights Under Control Agreements. The Lender, at any time
after the occurrence of an Event of Default, whether or not any such Event of
Default continues to exist, may require that each Borrower instruct all current
and future account debtors and obligors on other Collateral to make all payments
directly to one or more lockboxes (each a “Lockbox”) controlled by the Lender or
to the extent not permitted by applicable law, shall make such other
arrangements as the Lender may require to cause transfer of Collateral proceeds
to a Collateral Account and the Lender may exercise its rights under Control
Agreements. All payments received in a Lockbox shall be transferred to one or
more special bank accounts (each a “Collateral Account”) controlled by the
Lender subject to withdrawal by the Lender only. After the Lender’s exercise of
its rights to direct account debtors or other obligors on any Collateral to make
payments directly to the Lender or to require a Borrower to establish a Lockbox,
each Borrower shall immediately deliver all full and partial payments on any
Collateral received by such Borrower to the Lender in their original form,
except for endorsements where necessary. Until such payments are so delivered to
the Lender, such payments shall be held in trust by the Borrowers for and as the
Lender’s property, and shall not be commingled with any

 

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funds of the Borrower. After an Event of Default has occurred and is continuing,
the Lender shall apply all collections against the Obligations in such order as
the Lender deems appropriate. Any application of any collection to the payment
of any Obligation is conditioned upon final payment of any check or other
instrument.

 

Section 7.4 Offset. In addition to the remedies set forth in Section 7.3, upon
the occurrence of any Event of Default and thereafter while the same be
continuing, each Borrower hereby irrevocably authorizes the Lender to set off
any Obligations against all deposits and credits of such Borrower with, and any
and all claims of such Borrower against, the Lender. Such right shall exist
whether or not the Lender shall have made any demand hereunder or under any
other Loan Document, whether or not the Obligations, or any part thereof, or
deposits and credits held for the account of the Borrowers is or are matured or
unmatured, and regardless of the existence or adequacy of any collateral,
guaranty or any other security, right or remedy available to the Lender. The
Lender agrees that, as promptly as is reasonably possible after the exercise of
any such setoff right, it shall notify the Borrowers’ Agent of its exercise of
such setoff right; provided, however, that the failure of the Lender to provide
such notice shall not affect the validity of the exercise of such setoff rights.
Nothing in this Agreement shall be deemed a waiver or prohibition of or
restriction on the Lender to all rights of banker’s Lien, setoff and
counterclaim available pursuant to law.

 

ARTICLE VIII

MISCELLANEOUS

 

Section 8.1 Modifications. Notwithstanding any provisions to the contrary
herein, no term of this Agreement may be amended without the written consent of
the Borrowers; provided that no amendment, modification or waiver of any
provision of this Agreement or consent to any departure by any Borrower
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such amendment, modification, waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.

 

Section 8.2 Expenses. Whether or not the transactions contemplated hereby are
consummated, the Borrowers agree to pay to the Lender upon demand: (a) the
reasonable costs of producing this Agreement, the other Loan Documents and other
agreements and instruments mentioned herein; (b) the reasonable costs and
expenses of the Lender incurred in connection with the administration, including
electronic interfaces fees and periodic auditing, Collateral monitoring,
modification and amendment of this Agreement; (c) any taxes (including interest
and penalties in respect thereto) payable by the Lender (other than taxes based
upon the Lender’s net income or profits) on or with respect to the transactions
contemplated by this Agreement; (d) the reasonable fees, expenses and
disbursements of the Lender’s counsel and any local counsel to the Lender
incurred in connection with the preparation, administration or interpretation of
the Loan Documents and other instruments mentioned herein, the closing of the
transactions contemplated hereby, and amendments, modifications, approvals,
consents or waivers hereto or hereunder; (e) the fees, expenses and
disbursements of the Lender incurred by the Lender in connection with the
preparation, administration or interpretation of the Loan Documents and other
instruments mentioned herein, including all title insurance premiums and
surveyor, engineering and appraisal charges; (f) any fees, costs, expenses and
bank charges, including bank

 

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charges for returned checks, incurred by the Lender in establishing, maintaining
or handling the Lockbox or that Collateral Account and any other accounts for
the disbursement of the Loans and/or the collection of any of the Collateral;
(g) all reasonable out-of-pocket expenses (including without limitation
reasonable attorneys’ fees and costs, which attorneys may be employees of the
Lender, and reasonable consulting, accounting, appraisal, investment banking and
similar professional fees and charges) incurred by the Lender in connection with
(i) the enforcement of or preservation of rights under any of the Loan Documents
against Borrower or the administration thereof, and (ii) any litigation,
proceeding or dispute whether arising hereunder or otherwise, in any way related
to the Lender’s relationship with Borrower or any of its Affiliates; and (h) all
reasonable fees, expenses and disbursements of the Lender incurred in connection
with UCC or title searches, UCC filings or mortgage recordings. All such costs
and expenses shall constitute Obligations hereunder secured by the Lender’s
Liens in the Collateral. The covenants of this Section 8.2 shall survive payment
and satisfaction of the Obligations.

 

Section 8.3 Waivers, etc. No failure on the part of the Lender or the holder of
a Note to exercise and no delay in exercising any power or right hereunder or
under any other Loan Document shall operate as a waiver thereof; nor shall any
single or partial exercise of any power or right preclude any other or further
exercise thereof or the exercise of any other power or right. The remedies
herein and in the other Loan Documents provided are cumulative and not exclusive
of any remedies provided by law.

 

Section 8.4 Notices.

 

(a) Except when telephonic notice is expressly authorized by this Agreement, any
notice or other communication to any party in connection with this Agreement
shall be in writing and shall be sent by manual delivery, facsimile
transmission, overnight courier or United States mail (postage prepaid)
addressed to such party at the address specified on the signature page hereof,
or at such other address as such party shall have specified to the other party
hereto in writing. All periods of notice shall be measured from the date of
delivery thereof if manually delivered, from the date of sending thereof if sent
by facsimile transmission, from the first Business Day after the date of sending
if sent by overnight courier, or from four days after the date of mailing if
mailed; provided, however, that any notice to the Lender under Article II hereof
shall be deemed to have been given only when received by the Lender.

 

(b) Notices and other communications to the Lender hereunder may be delivered or
furnished by e-mail pursuant to procedures approved by the Lender, provided that
the foregoing shall not apply to notices to the Lender pursuant to Article II.
The Lender or the Borrowers may, in its discretion, agree to accept notices and
other communications to it hereunder by e-mail pursuant to procedures approved
by it, provided that approval of such procedures may be limited to particular
notices or communications. Unless the Lender otherwise prescribes, notices and
other communications sent to an e-mail address shall be deemed received upon the
sender’s receipt of an acknowledgement from the intended recipient (such as by
the “return receipt requested” function, as available, return e-mail or other
written acknowledgement), provided that if such notice or other communication is
not sent during the normal business hours of the recipient, such notice or
communication shall be deemed to have been sent at the opening of business on
the next business day for the recipient.

 

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Section 8.5 Taxes. The Borrowers agree to pay, and save the Lender harmless from
all liability for, any stamp or other taxes which may be payable with respect to
the execution or delivery of this Agreement or the issuance of the Notes, which
obligation of the Borrowers shall survive the termination of this Agreement.

 

Section 8.6 Successors and Assigns.

 

(a) This Agreement shall be binding upon and inure to the benefit of the
Borrowers, the Lender, all future holders of the Notes, and their respective
successors and assigns, except that the Borrowers may not assign or transfer any
of their rights or obligations under this Agreement without the prior written
consent of the Lender.

 

(b) The Lender may, with the prior written consent of the Borrowers’ Agent
(which consent shall not be unreasonably withheld, delayed or denied), sell,
assign or transfer all or any part of the Loans or any participating interests
therein and the related rights and obligations under this Agreement or any of
the other Loan Documents to a Qualified Transferee in minimum amounts of not
less than $5,000,000, or an integral multiple of $1,000,000 in excess thereof,
pursuant to an assignment and assumption agreement reasonably acceptable to the
Borrowers’ Agent; provided, however, that the Lender may, without the consent of
the Borrowers’ Agent, transfer the Loans, or any part thereof, and the related
rights and obligations under this Agreement and the other Loan Documents in
connection with the sale of, or transfer of control of, Lender or the sale,
transfer or other disposition of all or substantially all of the assets of the
Lender. Any such sale, assignment or transfer of the Loans hereunder must be an
equal pro rata portion of each of the Revolving Commitment, Term Loan A
Commitment and Term Loan B Commitment and no such commitment may be separately
sold, assigned or transferred.

 

(c) Notwithstanding any other provision in this Agreement, the Lender may at any
time create a security interest in, or pledge, all or any portion of its rights
under and interest in this Agreement and any note held by it in favor of any
federal reserve bank in accordance with Regulation A of the Board or U. S.
Treasury Regulation 31 CFR § 203.14, and such Federal Reserve Bank may enforce
such pledge or security interest in any manner permitted under applicable law.

 

Section 8.7 Confidentiality of Information. The Lender shall use the same level
of efforts and care as it uses with respect to its own confidential information
to ensure that information about the Borrowers and their operations, affairs and
financial condition, not generally disclosed to the public or to trade and other
creditors, which is furnished to the Lender pursuant to the provisions hereof is
used only for the purposes of this Agreement and any other relationship between
the Lender and the Borrowers and shall not be divulged to any Person other than
the Lender, its Affiliates and their respective officers, directors, employees
and agents, except: (a) to their attorneys and accountants, (b) in connection
with the enforcement of the rights of the Lender hereunder and under the Loan
Documents or otherwise in connection with

 

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applicable litigation, (c) in connection with assignments and participations and
the solicitation of prospective assignees and participants referred to in the
immediately preceding Section, (d) if such information is generally available to
the public other than as a result of disclosure by the Lender, (e) to any direct
or indirect contractual counterparty in any hedging arrangement or such
contractual counterparty’s professional advisor, (f) to any nationally
recognized rating agency that requires information about the Lender’s investment
portfolio in connection with ratings issued with respect to the Lender, and (g)
as may otherwise be required or requested by any regulatory authority having
jurisdiction over the Lender or by any applicable law, rule, regulation or
judicial process, the opinion of the Lender’s counsel concerning the making of
such disclosure to be binding on the parties hereto; provided, however, that in
case of a required disclosure pursuant to the preceding clause (g), the Lender
shall notify Borrowers’ Agent of such required or requested disclosure to the
extent practicable, unless prohibited by law, and reasonably cooperate with the
Borrowers, at the Borrowers’ sole expense, to enjoin, stay or limit such
disclosure. The Lender shall not incur any liability to the Borrowers by reason
of any disclosure permitted by this Section.

 

Section 8.8 Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL
LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS
PRINCIPLES THEREOF. Whenever possible, each provision of this Agreement and the
other Loan Documents and any other statement, instrument or transaction
contemplated hereby or thereby or relating hereto or thereto shall be
interpreted in such manner as to be effective and valid under such applicable
law, but, if any provision of this Agreement, the other Loan Documents or any
other statement, instrument or transaction contemplated hereby or thereby or
relating hereto or thereto shall be held to be prohibited or invalid under such
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement, the other Loan Documents or any
other statement, instrument or transaction contemplated hereby or thereby or
relating hereto or thereto.

 

Section 8.9 Consent to Jurisdiction. AT THE OPTION OF THE LENDER, THIS AGREEMENT
AND THE OTHER LOAN DOCUMENTS MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA
STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND EACH BORROWER CONSENTS TO
THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE
IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT ANY BORROWER COMMENCES ANY ACTION
IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING
DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE
LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF
THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.

 

Section 8.10 Waiver of Jury Trial. EACH BORROWER AND THE LENDER IRREVOCABLY
WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL

 

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PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

 

Section 8.11 Survival of Agreement. All representations, warranties, covenants
and agreement made by each Borrower herein or in the other Loan Documents and in
the certificates or other instruments prepared or delivered in connection with
or pursuant to this Agreement or any other Loan Document shall be deemed to have
been relied upon by the Lender and shall survive the making of the Loan by the
Lender and the execution and delivery to the Lender by the Borrowers of the
Note, regardless of any investigation made by or on behalf of the Lender, and
shall continue in full force and effect as long as any Obligation is outstanding
and unpaid and so long as the Commitment has not been terminated; provided,
however, that the Borrowers obligations under Sections 8.2, 8.5 and 8.12 shall
survive payment in full of the Obligations and the termination of the
Commitment.

 

Section 8.12 Indemnification. The Borrowers hereby agree to defend, protect,
indemnify and hold harmless the Lender and its Affiliates and the directors,
officers, employees, attorneys and agents of the Lender and its Affiliates (each
of the foregoing being an “Indemnitee” and all of the foregoing being
collectively the “Indemnitees”) from and against any and all claims, actions,
damages, liabilities, judgments, costs and expenses (including all reasonable
fees and disbursements of counsel which may be incurred in the investigation or
defense of any matter) imposed upon, incurred by or asserted against any
Indemnitee, whether direct, indirect or consequential and whether based on any
federal, state, local or foreign laws or regulations (including securities laws,
environmental laws, commercial laws and regulations), under common law or on
equitable cause, or on contract or otherwise:

 

(a) by reason of, relating to or in connection with the execution, delivery,
performance or enforcement of any Loan Document, any commitments relating
thereto, or any transaction contemplated by any Loan Document; or

 

(b) by reason of, relating to or in connection with any credit extended or used
under the Loan Documents or any act done or omitted by any Person, or the
exercise of any rights or remedies thereunder, including the acquisition of any
collateral by the Lender by way of foreclosure of the Lien thereon, deed or bill
of sale in lieu of such foreclosure or otherwise;

 

provided, however, that the Borrowers shall not be liable to any Indemnitee for
any portion of such claims, damages, liabilities and expenses resulting from
such Indemnitee’s gross negligence or willful misconduct. In the event this
indemnity is unenforceable as a matter of law as to a particular matter or
consequence referred to herein, it shall be enforceable to the full extent
permitted by law.

 

This indemnification applies, without limitation, to any act, omission, event or
circumstance existing or occurring on or prior to the later of the Termination
Date or the date of payment in full of the Obligations, including specifically
Obligations arising under clause (b) of this Section. The indemnification
provisions set forth above shall be in addition to any liability

 

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the Borrowers may otherwise have. Without prejudice to the survival of any other
obligation of the Borrowers hereunder the indemnities and obligations of the
Borrowers contained in this Section shall survive the payment in full of the
other Obligations.

 

Upon compliance by the Borrowers with Section 3.4, the environmental indemnities
contained in the Mortgages shall supersede the indemnities specified herein with
respect to environmental laws.

 

Section 8.13 Captions. The captions or headings herein and any table of contents
hereto are for convenience only and in no way define, limit or describe the
scope or intent of any provision of this Agreement.

 

Section 8.14 Entire Agreement. This Agreement and the other Loan Documents
embody the entire agreement and understanding between the Borrowers and the
Lender with respect to the subject matter hereof and thereof. This Agreement
supersedes all prior agreements and understandings relating to the subject
matter hereof. Nothing contained in this Agreement or in any other Loan
Document, expressed or implied, is intended to confer upon any Persons other
than the parties hereto any rights, remedies, obligations or liabilities
hereunder or thereunder.

 

Section 8.15 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.

 

Section 8.16 Borrower Acknowledgements. Each Borrower hereby acknowledges that
(a) it has been advised by counsel in the negotiation, execution and delivery of
this Agreement and the other Loan Documents, (b) the Lender has no fiduciary
relationship to such Borrower, the relationship being solely that of debtor and
creditor, (c) no joint venture exists between such Borrower and the Lender, and
(d) the Lender undertakes no responsibility to such Borrower to review or inform
such Borrower of any matter in connection with any phase of the business or
operations of such Borrower and such Borrower shall rely entirely upon its own
judgment with respect to its business, and any review, inspection or supervision
of, or information supplied to, the Borrowers by the Lender is for the
protection of the Lender and neither such Borrower nor any third party is
entitled to rely thereon.

 

Section 8.17 Appointment of and Acceptance by Borrowers’ Agent. Each Borrower
other than SunLink Health Systems Inc. hereby appoints and authorizes the
Borrowers’ Agent to take such action as its agent on its behalf and to exercise
such powers under the Loan Documents as are delegated to the Borrowers’ Agent by
the terms thereof, together with such power that are reasonably incidental
thereto, and SunLink Health Systems, Inc. hereby accepts such appointment.

 

Section 8.18 Relationship Among Borrowers.

 

(a) Joint and Several Liability. EACH BORROWER AGREES THAT IT IS LIABLE, JOINTLY
AND SEVERALLY WITH EACH OTHER BORROWER, FOR THE PAYMENT OF ALL OBLIGATIONS OF
THE BORROWERS UNDER THIS AGREEMENT, AND THAT THE LENDER CAN ENFORCE SUCH
OBLIGATIONS AGAINST ANY OR ALL BORROWERS, IN THE LENDER’S SOLE AND UNLIMITED
DISCRETION.

 

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(b) Waivers of Defenses. The obligations of the Borrowers hereunder shall not be
released, in whole or in part, by any action or thing which might, but for this
provision of this Agreement, be deemed a legal or equitable discharge of a
surety or guarantor, other than irrevocable payment and performance in full of
the Obligations (except for contingent indemnity and other contingent
Obligations not yet due and payable) at a time after any obligation of the
Lender hereunder to make the Term Loans and Revolving Loan shall have expired or
been terminated. The purpose and intent of this Agreement is that the
Obligations constitute the direct and primary obligations of each Borrower and
that the covenants, agreements and all obligations of each Borrower hereunder be
absolute, unconditional and irrevocable. Each Borrower shall be and remain
liable for any deficiency remaining after foreclosure of any mortgage, deed of
trust or security agreement securing all or any part of the Obligations, whether
or not the liability of any other Person for such deficiency is discharged
pursuant to statute, judicial decision or otherwise.

 

(c) Other Transactions. The Lender is expressly authorized to exchange,
surrender or release with or without consideration any or all collateral and
security which may at any time be placed with it by the Borrowers or by any
other Person on behalf of the Borrowers, or to forward or deliver any or all
such collateral and security directly to the Borrowers for collection and
remittance or for credit. No invalidity, irregularity or unenforceability of any
security for the Obligations or other recourse with respect thereto shall
affect, impair or be a defense to the Borrowers’ obligations under this
Agreement. The liabilities of each Borrower hereunder shall not be affected or
impaired by any failure, delay, neglect or omission on the part of the Lender to
realize upon any of the Obligations of any other Borrower to the Lender, or upon
any collateral or security for any or all of the Obligations, nor by the taking
by the Lender of (or the failure to take) any guaranty or guaranties to secure
the Obligations, nor by the taking by the Lender of (or the failure to take or
the failure to perfect its security interest in or other lien on) collateral or
security of any kind. No act or omission of the Lender, whether or not such
action or failure to act varies or increases the risk of, or affects the rights
or remedies of a Borrower, shall affect or impair the obligations of the
Borrowers hereunder.

 

(d) Actions Not Required. Each Borrower, to the extent permitted by applicable
law, hereby waives any and all right to cause a marshaling of the assets of any
other Borrower or any other action by any court or other governmental body with
respect thereto or to cause the Lender to proceed against any security for the
Obligations or any other recourse which the Lender may have with respect thereto
and further waives any and all requirements that the Lender institute any action
or proceeding at law or in equity, or obtain any judgment, against any other
Borrower or any other Person, or with respect to any collateral security for the
Obligations, as a condition precedent to making demand on or bringing an action
or obtaining and/or enforcing a judgment against, such Borrower under this
Agreement.

 

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(e) No Subrogation. Notwithstanding any payment or payments made by any Borrower
hereunder or any setoff or application of funds of any Borrower by the Lender,
such Borrower shall not be entitled to be subrogated to any of the rights of the
Lender against any other Borrower or any other guarantor or any collateral
security or guaranty or right of offset held by the Lender for the payment of
the Obligations, nor shall such Borrower seek or be entitled to seek any
contribution or reimbursement from any other Borrower or any other guarantor in
respect of payments made by such Borrower hereunder, until all amounts owing to
the Lender by the Borrowers on account of the Obligations are irrevocably paid
in full. If any amount shall be paid to a Borrower on account of such
subrogation rights at any time when all of the Obligations shall not have been
irrevocably paid in full, such amount shall be held by that Borrower in trust
for the Lender, segregated from other funds of that Borrower, and shall,
forthwith upon receipt by the Borrower, be turned over to the Lender in the
exact form received by such Borrower (duly indorsed by the Borrower to the
Lender, if required), to be applied against the Obligations, whether matured or
unmatured, in such order as the Lender may determine.

 

(f) Application of Payments. Any and all payments upon the Obligations made by
the Borrowers or by any other Person, and/or the proceeds of any or all
collateral or security for any of the Obligations, may be applied by the Lender
on such items of the Obligations as the Lender may elect.

 

(g) Recovery of Payment. If any payment received by the Lender and applied to
the Obligations is subsequently set aside, recovered, rescinded or required to
be returned for any reason (including, without limitation, the bankruptcy,
insolvency or reorganization of a Borrower or any other obligor), the
Obligations to which such payment was applied shall, to the extent permitted by
applicable law, be deemed to have continued in existence, notwithstanding such
application, and each Borrower shall be jointly and severally liable for such
Obligations as fully as if such application had never been made. References in
this Agreement to amounts “irrevocably paid” or to “irrevocable payment” refer
to payments that cannot be set aside, recovered, rescinded or required to be
returned for any reason.

 

(h) Borrowers’ Financial Condition. Each Borrower is familiar with the financial
condition of the other Borrowers, and each Borrower has executed and delivered
this Agreement based on that Borrower’s own judgment and not in reliance upon
any statement or representation of the Lender. The Lender shall have no
obligation to provide any Borrower with any advice whatsoever or to inform any
Borrower at any time of the Lender’s actions, evaluations or conclusions on the
financial condition or any other matter concerning the Borrowers.

 

(i) Bankruptcy of the Borrowers. Each Borrower expressly agrees that, to the
extent permitted by applicable law, the liabilities and obligations of that
Borrower under this Agreement shall not in any way be impaired or otherwise
affected by the institution by or against any other Borrower or any other Person
of any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or any other similar proceedings for

 

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relief under any bankruptcy law or similar law for the relief of debtors and
that any discharge of any of the Obligations pursuant to any such bankruptcy or
similar law or other law shall not diminish, discharge or otherwise affect in
any way the obligations of that Borrower under this Agreement, and that upon the
institution of any of the above actions, such obligations shall be enforceable
against that Borrower.

 

(j) Limitation; Insolvency Laws. As used in this Section 8.18(j): (a) the term
“Applicable Insolvency Laws” means the laws of the United States or of any
State, province, nation or other governmental unit relating to bankruptcy,
reorganization, arrangement, adjustment of debts, relief of debtors,
dissolution, insolvency, fraudulent transfers or conveyances or other similar
laws (including, without limitation, 11 U. S. C. §547, §548, §550 and other
“avoidance” provisions of Title 11 of the United States Code) as applicable in
any proceeding in which the validity and/or enforceability of this Agreement
against any Borrower, or any Specified Lien is in issue; and (b) “Specified
Lien” means any security interest, mortgage, lien or encumbrance granted by any
Borrower securing the Obligations, in whole or in part. Notwithstanding any
other provision of this Agreement, if, in any proceeding, a court of competent
jurisdiction determines that with respect to any Borrower, this Agreement or any
Specified Lien would, but for the operation of this Section, be subject to
avoidance and/or recovery or be unenforceable by reason of Applicable Insolvency
Laws, this Agreement and each such Specified Lien shall be valid and enforceable
against such Borrower, only to the maximum extent that would not cause this
Agreement or such Specified Lien to be subject to avoidance, recovery or
unenforceability. To the extent that any payment to, or realization by, the
Lender on the Obligations exceeds the limitations of this Section and is
otherwise subject to avoidance and recovery in any such proceeding, the amount
subject to avoidance shall in all events be limited to the amount by which such
actual payment or realization exceeds such limitation, and this Agreement as
limited shall in all events remain in full force and effect and be fully
enforceable against such Borrower. This Section is intended solely to reserve
the rights of the Lender hereunder against each Borrower, in such proceeding to
the maximum extent permitted by Applicable Insolvency Laws and neither the
Borrowers, any guarantor of the Obligations nor any other Person shall have any
right, claim or defense under this Section that would not otherwise be available
under Applicable Insolvency Laws in such proceeding.

 

Section 8.19 Interest Rate Limitation. Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Loan, together with
all fees, charges and other amounts that are treated as interest on such Loan
under applicable law (collectively, the “Charges”), shall exceed the maximum
lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken,
received or reserved by the Lender in accordance with applicable law, the rate
of interest payable in respect of such Loan hereunder, together with all Charges
payable in respect thereof, shall be limited to the Maximum Rate and, to the
extent lawful, the interest and Charges that would have been payable in respect
of such Loan but were not payable as a result of the operation of this Section
shall be cumulated and the interest and Charges payable to the Lender in respect
of other Loans or periods shall be increased (but not above the Maximum Rate
therefor) until such cumulated amount, together with interest thereon at the
Federal Funds Effective Rate to the date of repayment, shall have been received
by the Lender.

 

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Section 8.20 Deposit on Termination of Commitments. In the event of the payment
in full of the Obligations and termination by the Borrowers of the Commitments
established hereunder, the Lender may, in its discretion, require Borrowers to
deposit with the Lender a reasonable amount, not to exceed $10,000, to cover any
and all reasonable costs and expenses which may be incurred by the Lender in
connection with terminating the Commitments and Lender’s Liens on the
Collateral. Upon the final payment in full of the Obligations and termination of
the Commitments hereunder, the Lender shall take all actions and execute all
documents reasonably required to terminate this Agreement and any and all Liens
of the Lender on the Collateral, and all reasonable costs and expenses incurred
by the Lender may be deducted from such deposit, with any remaining balance to
be returned by the Lender to the Borrowers’ Agent no later than sixty (60) days
after the final payment in full of the Obligations.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.

 

SUNLINK HEALTH SYSTEMS, INC.

As a Borrower and Borrowers’ Agent

By  

/s/ Mark J. Stockslager

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

Title

 

 

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SUNLINK HEALTHCARE, LLC

As a Borrower

By its Sole Member SunLink Health Systems, Inc.

By

 

 

/s/ Mark J. Stockslager

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

Title

 

 

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

DEXTER HOSPITAL, LLC

As a Borrower

By its Sole Member SunLink Healthcare, LLC

    By its Sole Member SunLink Health Systems, Inc.

By

 

 

/s/ Mark J. Stockslager

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

Title

 

 

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

CLANTON HOSPITAL, LLC

As a Borrower

By its Sole Member SunLink Healthcare, LLC

    By its Sole Member SunLink Health Systems, Inc.

By

 

 

/s/ Mark J. Stockslager

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

Title

 

 

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

SOUTHERN HEALTH CORPORATION OF ELLIJAY, INC.

As a Borrower

By

 

 

/s/ Mark J. Stockslager

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

Title

 

 

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[Signature Page 1 to Credit Agreement]

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SOUTHERN HEALTH CORPORATION OF

DAHLONEGA, INC.

As a Borrower

By  

/s/ Mark J. Stockslager

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Title  

 

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SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.

As a Borrower

By  

/s/ Mark J. Stockslager

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Title

 

 

 

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HEALTHMONT, INC.

As a Borrower

By  

/s/ Mark J. Stockslager

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Title  

 

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HEALTHMONT OF GEORGIA, INC.

As a Borrower

By  

/s/ Mark J. Stockslager

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Title  

 

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HEALTHMONT OF MISSOURI, INC.

As a Borrower

By  

/s/ Mark J. Stockslager

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Title  

 

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HEALTHMONT, LLC

As a Borrower

By its Sole Member SunLink Health Systems, Inc.

By  

/s/ Mark J. Stockslager

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Title  

 

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[Signature Page 2 to Credit Agreement]

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HEALTHMONT OF MISSOURI, LLC

As a Borrower

By its Sole Member HealthMont, LLC

    By its Sole Member SunLink Health Systems, Inc. By  

/s/ Mark J. Stockslager

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Title

 

 

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SUNLINK SERVICES, INC.

As a Borrower

By

 

 

/s/ Mark J. Stockslager

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Title

 

 

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OPTIMA HEALTHCARE CORPORATION

As a Borrower

By

 

 

/s/ Mark J. Stockslager

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Title

 

 

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KRUG PROPERTIES, INC.

As a Borrower

By

 

 

/s/ Mark J. Stockslager

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Title

 

 

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Address for All Borrowers

For Purposes of Notice:

900 Circle 75 Parkway

Suite 1300

Atlanta, GA 30339

Fax: (770) 933-7010

Attention: Joseph T. Morris, Chief

Financial Officer

 

RESIDENTIAL FUNDING CORPORATION

As a Lender

By  

/s/ Rossi W. Felix

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Title  

 

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Address for Lender:

2711 N. Haskell Ave., Suite 900

Dallas, Texas 75204

Fax: (214) 861-5402

Attention: Angela Brown

 

[Signature Page 3 to Credit Agreement]