EX-4.20






Exhibit 4.20




First Amended and Restated 7 3/4% Convertible Secured Note, dated as of April 30, 2009, in favor of MHR Capital

Partners Master Account LP issued by NationsHealth, Inc., NationsHealth Holdings, L.L.C., United States

Pharmaceutical Group, L.L.C., Diabetes Care & Education, Inc., and National Pharmaceuticals and Medical

Products (USA), LLC





 











 





EXECUTION VERSION




FIRST AMENDED AND RESTATED

7 3/4% CONVERTIBLE SECURED NOTE




			
	 	 	 
	$7,551,403
	 	April 30, 2009 (the “Effective Date”)
	 	 	 
	 
	 	Original Issue Date: February 28, 2005
	 	 	 
	N-1	 	 





THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), OR ANY APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS (I)
THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE
SECURITIES LAW WITH RESPECT THERETO, (II) PURSUANT TO RULE 144 OF THE SECURITIES ACT OR (III) UPON
THE ADVICE OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER, THAT REGISTRATION UNDER THE SECURITIES
ACT OR ANY APPLICABLE STATE SECURITIES LAW IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER.



THIS PROMISSORY NOTE IS SUBORDINATED TO CERTAIN SENIOR INDEBTEDNESS OF THE ISSUERS IN THE MANNER
AND TO THE EXTENT SET FORTH IN THE INTERCREDITOR AGREEMENT (AS DEFINED BELOW) AND THE COMVEST
SUBORDINATION AGREEMENT (AS DEFINED BELOW) AND ALL RIGHTS, REMEDIES AND OBLIGATIONS UNDER THIS NOTE
AND THE OTHER NOTES DOCUMENTS ARE SUBJECT TO THE TERMS OF THE INTERCREDITOR AGREEMENT AND THE
COMVEST SUBORDINATION AGREEMENT.




          FOR VALUE RECEIVED, NATIONSHEALTH, INC., a Delaware corporation (the “Company”),
NATIONSHEALTH HOLDINGS, L.L.C., a Florida limited liability company and a wholly-owned subsidiary
of the Company (“NH LLC”), UNITED STATES PHARMACEUTICAL GROUP, L.L.C., a Delaware limited
liability company and an indirect wholly-owned subsidiary of the Company (“USPG”), DIABETES
CARE & EDUCATION, INC., a South Carolina corporation (“Diabetes”) and NATIONAL
PHARMACEUTICALS AND MEDICAL PRODUCTS (USA), LLC, a Florida limited liability company
(“National” and jointly and severally with the Company, NH LLC, USPG and Diabetes, the
“Issuers”), hereby promise to pay to the order of MHR Capital Partners Master Account LP,
an Anguilla, British West Indies limited partnership (the “Holder”), at c/o MHR Fund
Management LLC, 40 West 57th Street, 24th Floor, New York, New York 10019, the principal amount of
Seven Million Five Hundred Fifty One Thousand Four Hundred Three Dollars ($7,551,403) in lawful
money of the United States of America, on the terms set forth in Section 2 hereof. This First
Amended and Restated Promissory Note (this “Note”) amends and restates that certain
Promissory Note, dated as of February 5, 2007, issued by the Company, NH LLC and USPG (the
“Initial Issuers”) to the Holder in the aggregate principal amount of $7,551,403 (the
“Original Note,” and collectively with such other convertible notes issued pursuant to the
Purchase Agreement (defined herein),




 









 




the “Original Notes”) and is being issued by the Issuers along with substantially
identical convertible notes also designated as First Amended and Restated 7 3/4% Convertible
Secured Notes (the “Other Notes,” and together with this Note, the “Notes”) in an
original aggregate principal amount of $15,000,000. The Notes are being issued pursuant to that
certain Consent and Waiver to the Convertible Notes, dated April 30, 2009 among the Issuers and the
holders thereto (together with the Holder, the “Holders”), pursuant to which, inter alia,
the Holders have agreed to waive the Change of Control in Section 5(b) hereof upon the conversion
of the Bridge Loans (as defined herein) subject to the terms and conditions of the Bridge Notes (as
defined herein) and the Consent and Waiver (the “Bridge Loan Conversion”). Pursuant to the
Original Notes, the Initial Issuers granted a security interest to the Collateral Agent (defined
herein) for the benefit of the Holders pursuant to Section 4 of the Original Notes and each of the
Initial Issuers acknowledges, confirms and reaffirms the perfected security interest of the
Collateral Agent, as amended and restated hereby. The Obligations are secured by a security
interest in the assets of the Issuers pursuant to Section 4 of the Notes and will also be secured
by a security interest in the assets of any future Subsidiaries pursuant to Section 6(l) of the
Notes for the benefit of the Holders.




          1. Definitions. The following terms shall have the meanings ascribed to them below:




          “Acquisition” shall mean the acquisition by the Company of obligations or stock or
securities of, or any other interest in, or all or substantially all of the assets of, any Person
or any joint venture.




          “Active Diabetes Customer” shall mean, as of the end of any calendar month, a Diabetes
Customer of the Issuers who has purchased diabetes medicines or supplies within the 180 day period
ending on the last day of such calendar month.




          “Additional Shares of Common Stock” shall have the meaning specified in Section
3(d)(iv).




          “Affiliate” shall mean, as to any Person, any other Person (a) that, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is under common
control with, such Person, (b) who is a director or officer (i) of such Person, (ii) of any
Subsidiary of such Person, or (iii) of any Person described in clause (a) above with respect to
such Person, or (c) which, directly or indirectly through one or more intermediaries, is the
beneficial or record owner (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as
amended, as the same is in effect on the date hereof) of ten percent (10%) or more of any class of
the outstanding voting stock, securities or other equity or ownership interests of such Person. For
purposes of this definition, the term “control” (and the correlative terms, “controlled by” and
“under common control with”) shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies, whether through ownership of
securities or other interests, by Contract or otherwise. “Affiliate” shall include any Subsidiary.




          “Bridge Loan Agreement” shall mean that certain Bridge Loan Agreement by and between
Parent, the Company, USPG, NH LLC, Diabetes and National dated as of April 30,




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2009, as amended or modified in effect from time to time in accordance with the ComVest
Subordination Agreement and the ComVest Senior Subordination Agreement.




          “Bridge Loan Documents” shall mean the Bridge Loan Documents as defined in the Bridge
Loan Agreement.




          “Bridge Loans” shall mean the loans made by Parent under the Bridge Loan Agreement.




          “Bridge Notes” shall mean the 10% Secured Convertible Subordinated Promissory Notes
issued pursuant to the Bridge Loan Agreement.




          “Business Day” shall mean any day, other than a Saturday or Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by Law, regulation or
executive order to close.




          “Capital Lease” shall mean, as to any Person, a lease of any interest in any kind of
property or asset by that Person as lessee that is, should be or should have been recorded as a
“capital lease” in accordance with GAAP.




          “Capital Stock” shall mean the capital stock of or other equity interests in a Person.




          “Closing Date” shall mean the date of the closing of the Merger.




          “Collateral” shall mean, collectively, all of the real, personal and mixed property in
which Liens are purported to be granted pursuant to the Collateral Documents as security for the
Obligations.




          “Collateral Agent” means MHR Capital Partners (500) LP.




          “Collateral Documents” means the Notes, the Subsidiary Security Agreements and all
other instruments or documents delivered by any of the Issuers or their Subsidiaries pursuant to
the Notes or any of the other Notes Documents in order to grant to the Collateral Agent, on behalf
of the Holders, a Lien on any real, personal or mixed property of such Person as security for the
Obligations.




          “ComVest” shall mean ComVest Investment Partners III, L.P.




          “ComVest Cure” shall have the meaning specified in Section 6(e).




          “ComVest Senior Subordination Agreement” shall mean, that certain Senior Subordination
Agreement dated as of April 30, 2009 by and between Parent and CapitalSource Finance LLC, as
amended or modified and in effect from time to time.




          “ComVest Subordination Agreement” shall mean, that certain Subordination Agreement
dated as of April 30, 2009 among Parent, the Holders, the Collateral Agent and the Issuers, as
amended or modified and in effect from time to time.




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          “Consolidated Senior Leverage Ratio” means, as of the last day of any Fiscal Quarter,
the ratio of (i) Senior Indebtedness as at such day to (ii) EBITDA for the consecutive four Fiscal
Quarters ending on such day.




          “Contract” means any contract, agreement, indenture, note, bond, mortgage, loan,
instrument, lease, license, commitment or other arrangement, understanding or undertaking,
commitment or obligation, whether written or oral.




          “Conversion Amount” shall mean the portion of the principal amount of this Note being
converted plus any accrued and unpaid interest thereon through the Conversion Date each as
specified in the notice of conversion in the form attached as Exhibit A hereto (the
“Notice of Conversion”).




          “Conversion Date” shall mean, for any conversion, the date specified in the Notice of
Conversion so long as the copy of the Notice of Conversion is faxed (or delivered by other means
resulting in notice) to the Company at or before 11:59 p.m., New York City time, on the Conversion
Date indicated in the Notice of Conversion; provided, however, that if the Notice
of Conversion is not so faxed or otherwise delivered before such time, then the Conversion Date
shall be the date the Holder faxes or otherwise delivers the Notice of Conversion to the Company.




          “Conversion Price” shall mean $3.40 per share of common stock, par value $.0001 per
share of the Company (“Common Stock”), subject to adjustment as set forth herein.




          “Conversion Shares” shall have the meaning specified in Section 3(a).




          “Convertible Securities” shall mean any Capital Stock or security convertible into or
exchangeable for Common Stock.




          “Customer Acquisition and Related Costs” shall mean costs incurred by the Company in
the development of its customer base related to marketing activities, which costs include, without
limitation, advertising, promotion, call center and data collection expenses.




          “Credit Agreement” shall mean the Fourth Amended and Restated Revolving Credit and
Security Agreement, dated as of April 30, 2009 among the Issuers and CapitalSource Finance LLC, as
it may be amended, modified, replaced or refinanced from time to time in accordance with the
Intercreditor Agreement.




          “Daily Market Price” shall mean, as of any date of determination, the closing sale
price for the Common Stock (or such other applicable subject security), for the Trading Day of such
date of determination (subject to equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events during such Trading Day and further subject to adjustment as
provided herein) on the principal United States securities exchange or trading market where the
Common Stock (or such other applicable subject security) is listed or traded as reported by
Bloomberg, or if the foregoing does not apply, the closing sale price for the Common Stock (or such
other applicable subject security) in the OTC Bulletin Board for such security as reported by
Bloomberg, or, if no sale price is reported for such security by Bloomberg, the closing sale price
as reported in the “pink sheets” by the Pink Sheets LLC, in each case for such date or, if such
date was not a Trading Day for such security, on the next preceding date which was a



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Trading Day. If the Daily Market Price cannot be calculated for such security as of either of
such dates on any of the foregoing bases, the Daily Market Price of such security on such date
shall be the fair market value as reasonably determined by an investment banking firm selected by
the Holders of a majority of the principal amount and interest of the Notes outstanding and
reasonably acceptable to the Company, with the costs of such appraisal to be borne by the Company.




          “Default” shall mean any event, fact, circumstance or condition that, with the giving
of applicable notice or passage of time or both, would constitute or be or result in an Event of
Default.




          “Deferred Purchase Price Obligations” means any and all obligations of the Company
incurred as permitted under the Notes for amounts deferred, financed or withheld in respect of the
purchase price for any Diabetes Business Acquisition, including Indebtedness which consists of
purchase money financing by the seller and amounts withheld or escrowed as potential set-offs
against customer terminations, purchase price adjustments or otherwise.




          “Delivery Period” shall have the meaning specified in Section 3(c).




          “Diabetes Business Acquisition” shall mean the acquisition by the Company of Diabetes
Customer lists.




          “Diabetes Customers” shall mean any and all customers and patients of the Company for
the purchase of diabetes medicines, supplies and other products, whether now existing or
hereinafter acquired or arising.




          “Distribution” shall mean any fee, payment, bonus or other remuneration of any kind,
and any repayment of or debt service on loans or other Indebtedness.




          “Dollars” and the sign “$” mean the lawful money of the United States of
America.




          “DTC” shall have the meaning specified in Section 3(c).




          “DTC Transfer” shall have the meaning specified in Section 3(c).




          “EBITDA” shall mean, the sum for any period, without duplication, of the following for
the Issuers and each Subsidiary, on a consolidated basis: Net Income, (I) plus (a) Interest
Expense, (b) taxes on income, whether paid, payable or accrued, (c) depreciation expense, (d)
amortization expense, (e) all other non-cash, non-recurring charges and expenses, excluding
accruals for cash expenses made in the ordinary course of business, (f) loss from any sale of
assets, other than sales in the ordinary course of business, (g) one-time, non-recurring charges
and expenses incurred by the Company in connection with the Transactions (“Merger Expenses”),
provided that such non-recurring charges and expenses shall not exceed $1,500,000 during the term
of this Note, and (h) severance expenses incurred by the Company in an amount not to exceed
$1,000,000 for any twelve month period and an aggregate of $2,000,000 during the term of this Note,
and in the case of (a) through (h) above, all of the foregoing determined without duplication and
in accordance with GAAP (II) minus (a) gains from any sale of assets,



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other than sales in the ordinary course of business, (b) other extraordinary or non-recurring
gains and (c) non-cash items added in the calculation of Net Income.




          “Equity Contribution” shall mean, in connection with the consummation of the Merger,
the contribution by the Senior Management and MHR, directly or indirectly, of rollover equity to or
of the Company on the Closing Date pursuant to the Rollover Documents (assuming the conversion into
Common Stock of all Options and Convertible Securities outstanding on the Closing Date other than
convertible debt instruments) and the purchase or contribution by ComVest and its Affiliates,
directly or indirectly, of cash equity and the Bridge Loan to the Company pursuant to the Merger
Agreement, the Bridge Note and the Series A Preferred Stock Purchase Agreement, by and between
Parent and the Company, dated as of the April 30, 2009 (assuming the conversion into Common Stock
of all Options and Convertible Securities outstanding on the Closing Date other than convertible
debt instruments).




          “Event of Default” shall have the meaning specified in Section 2(d).




          “Extraordinary Event” shall have the meaning specified in Section 3(d)(iii).




          “Fiscal Quarter” shall mean a fiscal quarter of any fiscal year.




          “First Priority Lien Indebtedness” shall mean Senior Indebtedness of the Issuers and
their Subsidiaries secured by a first priority Lien on any assets or property of the Issuers or any
such Subsidiaries, including the Indebtedness of the Issuers under the Credit Agreement permitted
to be incurred by the Company under Section 6(c).




          “GAAP” shall mean generally accepted accounting principles in the United States of
America in effect from time to time as applied by nationally recognized accounting firms.




          “Governmental Authority” shall mean any federal, state, municipal, national, local or
other governmental department, court, commission, board, bureau, agency or instrumentality or
political subdivision thereof, or any entity or officer exercising executive, legislative, or
judicial, regulatory or administrative functions of or pertaining to any government or any court,
in each case, whether of the United States or a state, territory or possession thereof, a foreign
sovereign entity or country or jurisdiction or the District of Columbia.




          “Hedge Agreement” means any and all transactions, agreements or documents now existing
or hereafter entered into by the Company or its Subsidiaries, which provide for an interest rate,
credit, commodity or equity swap, cap, floor, collar, forward foreign exchange transaction,
currency swap, cross currency rate swap, currency option, or any combination of, or option with
respect to, these or similar transactions, for the purpose of hedging exposure to fluctuations in
interest or exchange rates, loan, credit exchange, security or currency valuations or commodity
prices.




          “Indebtedness” of any Person shall mean, without duplication, (a) all obligations for
borrowed money, (b) all obligations evidenced by bonds, debentures, notes or other similar
instruments and all reimbursement or other obligations in respect of letter of credit, bankers
acceptances, interest rate swaps, hedges, derivatives or other financial products, (c) all
obligations as a lessee under Capital Leases, (d) all obligations or liabilities of others secured
by



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a Lien on any asset of a Person or its Subsidiaries, irrespective of whether such obligation
or liability is assumed, (e) all obligations to pay the deferred purchase price of assets (other
than Deferred Purchase Price Obligations not to exceed $250,000 outstanding at any time), (f) all
obligations owing under Hedge Agreements, (g) all notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for borrowed money, and (h) all
obligations or liabilities of others which such Person has directly or indirectly guaranteed,
endorsed (otherwise than for collection or deposit in the ordinary course of business), discounted
or sold with recourse or agreed (contingently or otherwise) to purchase or repurchase or otherwise
acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way
of loan, stock, equity or other ownership interest purchase, capital contribution or otherwise) or
otherwise to become directly or indirectly liable. For the avoidance of any doubt, Indebtedness
does not include trade payables incurred in the ordinary course of business and repayable in
accordance with customary trade practices and any obligations as a lessee under leases that are not
Capital Leases.




          “Intercreditor Agreement” shall have the meaning specified in Section 4(f).




          “Interest Expense” shall mean, for any period, total interest expense and fees
(including attributable to Capital Leases in accordance with GAAP and capitalized interest) of the
Issuers and their Subsidiaries on a consolidated basis with, with respect to all outstanding
Indebtedness but excluding all commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers’ acceptance financing and net costs under Interest Rate
Agreements.




          “Interest Rate Agreement” shall mean any interest rate swap, cap or collar agreement
or other similar agreement or arrangement designed to hedge the position with respect to interest
rates.




          “Inventory” shall mean all “inventory” (as defined in the UCC) of the Issuers and the
Subsidiaries (or, if referring to another Person, of such other Person), now owned or hereafter
acquired, and all documents of title or other documents representing any of the foregoing, and all
collateral security and guaranties of any kind, now or hereafter in existence, given by any Person
with respect to any of the foregoing.




          “Investor Rights Agreement” shall mean the Investor Rights Agreement dated as of April
30, 2009 by and among Parent, Mark Lama, RGGPLS, LLC, MHR and the Senior Management.




          “Landlord Waiver and Consent” shall mean a waiver/consent in form and substance
satisfactory to the Holders from the owner/lessor of any premises not owned by the Issuers or their
Subsidiaries at which any of the Collateral is now or hereafter located for the purpose of
providing the Collateral Agent (for the benefit of the Holders) access to such Collateral, in each
case as such may be modified, amended or supplemented from time to time.




          “Law” means any foreign, federal, state or local law (including common law), statute,
code, ordinance, rule, regulation, Order or other similar requirement.




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          “Leasehold Property” means any leasehold interest of any of the Company or its
Subsidiaries as lessee under any lease of real property, other than any such leasehold interest
designated from time to time by the Collateral Agent in its sole discretion as not being required
to be included in the Collateral.




          “Lien” shall mean any interest in an asset securing an obligation owed to, or a claim
by, any Person other than the owner of the asset, irrespective of whether (a) such interest is
based on the common law, civil law, statute, or Contract, (b) such interest is recorded or
perfected, and (c) such interest is contingent upon the occurrence of some future event or events
or the existence of some future circumstance or circumstances. Without limiting the generality of
the foregoing, the term “Lien” includes the lien, hypothecation or security interest arising from a
mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement,
security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment
from security purposes and also includes reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting property.




          “Maturity Date” shall have the meaning specified in Section 2(b).




          “Merger Agreement” shall mean the Agreement and Plan of Merger, dated as of April 30,
2009, by and among Parent, Merger Sub and the Company as amended or supplemented pursuant to which
Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving,
and upon the closing of which Merger, Parent, the members of Senior Management and MHR shall own
shares of the Company Capital Stock.




          “Merger Documents” shall mean the collective reference to the Merger Agreement, all
material exhibits and schedules thereto and all agreements expressly contemplated thereby.




          “Merger Sub” shall mean NationsHealth Acquisition Corp., a Delaware corporation.




          “MHR” shall have the meaning specified in Section 6(e).




          “MHR Warrants” shall mean the warrants to purchase Common Stock issued to MHR on the
Closing Date pursuant to the Transactions.




          “Mortgage” means a security instrument (whether designated as a deed of trust or a
mortgage or by any similar title) executed and delivered by the Company or any Subsidiary pursuant
to Section 4(i), in such form as may be approved by the Collateral Agent in its sole discretion, in
each case with such changes thereto as may be recommended by the Collateral Agent’s local counsel
based on local laws or customary local mortgage or deed of trust practices.




          “Net Income” shall mean, for any period, the net income (or loss) of the Issuers and
their Subsidiaries on a consolidated basis for such period taken as a single accounting period
determined in conformity with GAAP (and, with respect to expensing of Customer Acquisition and
Related Costs, as currently applied by the Company consistent with past practice), provided that
there shall be excluded (i) the income (or loss) of any Person (other than a Subsidiary of the



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Issuers) in which any other Person (other than the Issuers or any of their Subsidiaries) has a
joint interest, except to the extent of the amount of dividends or other distributions actually
paid to an Issuer by such Person, (ii) the income (or loss) of any Person accrued prior to the date
it becomes a Subsidiary of an Issuer or is merged into or consolidated with an Issuer or any of its
Subsidiaries or that Person’s assets are acquired by an Issuer or any of its Subsidiaries, (iii)
the income of any Subsidiary of the Issuers to the extent that the declaration or payment of
dividends or similar distributions by that Subsidiary of that income is not at the time permitted
by operation of the terms of its charter or any agreement, instrument, Order, statute, rule or
governmental regulation applicable to that Subsidiary, (iv) compensation expense resulting from the
issuance of Capital Stock, stock options or stock appreciation rights issued to former or current
employees, including officers, of an Issuer or any Subsidiary, or the exercise of such options or
rights, in each case to the extent the obligation (if any) associated therewith is not expected to
be settled by the payment of cash by an Issuer or such Subsidiary or any Affiliate thereof, and (v)
compensation expense resulting from the repurchase of Capital Stock, options and rights described
in clause (iv) of this definition of Net Income.




          “Notes Documents” shall mean the Notes, the Transaction Documents as defined in the
Purchase Agreement, the Consent and Waiver, dated as of April 30, 2009, the Waiver Warrants, the
Subsidiary Security Agreements, the Subsidiary Guaranties, and the other Collateral Documents.




          “Obligations” shall mean all obligations of every nature of the Issuers and
Subsidiaries from time to time owed to the Holders, the Collateral Agent or any of them, in each
case, under the Notes Documents, whether for principal, interest, fees, expenses, indemnification
or otherwise (including, without limitation, interest and other amounts that, but for the filing of
a petition in bankruptcy with respect to any Issuer or any Subsidiary, would accrue on such
obligations, whether or not a claim is allowed against such Issuer or Subsidiary for such amounts
in the related bankruptcy proceeding), including to the extent all or any part of such payment is
avoided or recovered directly or indirectly from any Holder or the Collateral Agent as a
preference, fraudulent transfer or otherwise.




          “Officer’s Certificate” as applied to any Person that is a corporation, partnership,
trust or limited liability company, means a certificate executed on behalf of such Person by one or
more Officers of such Person or one or more Officers of a general partner or a managing member if
such general partner or managing member is a corporation, partnership, trust or limited liability
company.




          “Options” shall mean warrants or other rights to subscribe for or to purchase, or any
options for the purchase of, Common Stock or any stock or security convertible into or exchangeable
for Common Stock.




          “Order” means any order, injunction, judgment, doctrine, decree, ruling, writ,
assessment or arbitration award of a Governmental Authority.




          “Original Issue Date” shall mean February 28, 2005.




          “Par Redemption Price” shall have the meaning specified in Section 5(a)(ii).




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          “Parent” shall mean ComVest NationsHealth Holdings, LLC.




          “Permits” means any approvals, authorizations, consents, licenses, permits or
certificates of a Governmental Authority.




          “Permitted Liens” means the following: (i) Liens with respect to the Notes and the
other Obligations, (ii) Liens with respect to Senior Indebtedness allowed to be incurred under
Section 6(c), (iii) Liens imposed by Law for taxes (other than payroll taxes), assessments or
charges of any Governmental Authority for claims not yet due or which are being contested in good
faith by appropriate proceedings and with respect to which adequate reserves or other appropriate
provisions are being maintained by such Person in accordance with GAAP to the satisfaction of the
Holders of a majority of the principal and interest of the Notes outstanding, in their sole
discretion, (iv) (A) statutory Liens of landlords (provided that any such landlord has
executed a Landlord Waiver and Consent in form and substance satisfactory to the Holders of a
majority of the principal and interest of the Notes outstanding) and of carriers, warehousemen
(provided that any such warehousemen have executed a Warehouse Waiver and Consent in form
and substance satisfactory to the Holders of a majority of the principal and interest of the Notes
outstanding), mechanics, materialmen, and (B) other Liens imposed by Law or that arise by operation
of Law in the ordinary course of business from the date of creation thereof, in each case only for
amounts not yet due or which are being contested in good faith by appropriate proceedings and with
respect to which adequate reserves or other appropriate provisions are being maintained by such
Person in accordance with GAAP to the satisfaction of the Holders of a majority of the principal
and interest of the Notes outstanding, in their sole discretion, (v) Liens (A) incurred or deposits
made in the ordinary course of business (including, without limitation, surety bonds and appeal
bonds) in connection with workers’ compensation, unemployment insurance and other types of social
security benefits or to secure the performance of tenders, bids, leases, Contracts (other than for
the repayment of Indebtedness), statutory obligations and other similar obligations, or (B) arising
as a result of progress payments under government contracts, (vi) purchase money Liens, including,
without limitation, UCC-1 notice filings by equipment lessors and the like, in connection with the
purchase by such Person of equipment in the normal course of business, (vii) Liens securing
Subordinated Indebtedness allowed to be incurred under Section 6(c) junior to the Lien under the
Notes and (viii) Liens described on Schedule I to this Note.




          “Person” shall mean an individual, a partnership, a corporation, a limited liability
company, a business trust, a joint stock company, a trust, an unincorporated association, a joint
venture, or any other entity of whatever nature.




          “Preferred Stock” shall mean with respect to any Person, any and all preferred or
preference stock or other preferred equity interests (however designated) of such Person whether no
outstanding or issued after the date hereof.




          “Premium Redemption Price” shall have the meaning specified in Section 5(a)(ii).




          “Purchase Agreement” shall mean that certain Investment Unit Purchase Agreement, dated
February 28, 2005, among the Issuers and the Holders.




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          “Redemption Warrant” shall have the meaning specified in Section 5(a)(ii).




          “Right of First Refusal and Tag and Co-Sale Agreement” shall mean the Right of First
Refusal and Tag and Co-Sale Agreement dated as of April 30, 2009 by and among Parent, Mark Lama,
RGGPLS, LLC, MHR and the Senior Management.




          “Rollover Documents” shall mean the Exchange and Rollover Agreement dated as of April
30, 2009 by and among the Company, MHR and the Senior Management.




          “RGGPLS Cure” shall have the meaning specified in Section 6(e).




          “Senior Indebtedness” means, as of any date of determination, the aggregate stated
balance sheet amount of all Indebtedness of the Issuers and their Subsidiaries, other than (i) the
Notes and (ii) Subordinated Indebtedness, determined on a consolidated basis in accordance with
GAAP and incurred in compliance with Section 6(c) hereof, which Senior Indebtedness shall (x)
include (A) Indebtedness under the Credit Agreement (including extensions, modifications,
refinancings, renewals and refundings thereof in accordance with the Intercreditor Agreement) and
(B) the Bridge Loans but not any refinancings or replacements thereof (other than refinancings or
replacements thereof with Senior Indebtedness due to CapitalSource Finance LLC under the Credit
Agreement and which, when aggregated with all other Indebtedness outstanding under the Credit
Agreement, does not exceed the principal amount permitted under Section 6(c)(iii)) and (y)
otherwise be in the form of credit extensions or other obligations on terms and conditions
customarily provided at such time by senior secured lenders, unless the instrument under which such
Indebtedness is incurred expressly provides that it is subordinated in right of payment to the
Obligations. For the avoidance of doubt, Senior Indebtedness (other then the Bridge Loans but not
any refinancings or replacement thereof) shall not include any financing arrangements in the form
of convertible debt or that would customarily be considered “mezzanine”, “sub debt” or similar
financing arrangements.




          “Senior Management” shall mean Glenn Parker, Lewis Stone, Timothy Fairbanks and such
other executives party to the Rollover Documents.




          “Subordinated Indebtedness” means Indebtedness (secured or unsecured) incurred by the
Company and/or its Subsidiaries that is made expressly subordinated in right to payment to the
Obligations, as reflected in a written subordination agreement acceptable to the Holders and
approved by the Holders in writing; provided that no such Indebtedness shall provide at any time
for (1) the payment, prepayment, repayment, repurchase or defeasance, directly or indirectly, of
any principal or premium, if any, thereon until ninety-one (91) days after the Maturity Date or
later and (2) total cash interest at a rate in excess of the prevailing market rate for
subordinated debt at the time of issuance, except to the extent permitted by the terms of such
written subordination agreement.




          “Subsidiary” shall mean, (i) as to the Issuers, any Person in which more than 50% of
all equity, membership, partnership or other ownership interests is owned directly or indirectly by
an Issuer or one or more of its Subsidiaries, and (ii) as to any other Person, any Person in which
more than 50% of all equity, membership, partnership or other ownership interests is owned directly
or indirectly by such Person or by one or more of such Person’s Subsidiaries.




11









 








          “Subsidiary Guaranty” means a guaranty agreement executed by a Subsidiary pursuant to
Section 6(l), in form and substance satisfactory to the Holders, the Company and such Subsidiary,
guaranteeing payment of the Obligations and providing, without limitation, that such Subsidiary
shall be bound by the covenants set forth in this Note, and shall make such representations and
warranties as the Holders may reasonably require.




          “Subsidiary Security Agreement” means a pledge and security agreement executed by a
Subsidiary pursuant to Section 6(l), containing provisions substantially similar to the grant of
security in Section 4 hereof, and in form and substance satisfactory to the Holders, the Company
and such Subsidiary, securing payment of the Obligations.




          “Tax Put Right” shall have the meaning specified in Section 5(f).




          “Trading Day” shall mean any day on which the principal United States securities
exchange or trading market where the Common Stock (or such other applicable subject security) is
then listed or traded, is open for trading.




          “Transaction Documents” shall mean the Merger Documents, the Bridge Loan Documents,
the Credit Agreement and the other Loan Documents (as defined in the Credit Agreement), the Notes
Documents, the Rollover Documents, the Investor Rights Agreement, the Right of First Refusal and
Tag and Co-Sale Agreement, the Voting Agreement and all documents executed and delivered in
connection herewith and therewith.




          “Transactions” shall mean, collectively, the transactions to occur pursuant to or in
connection with the Transaction Documents, including (a) the consummation of the Merger; (b) the
Equity Contribution; (c) the execution and delivery of the Bridge Loan Documents and the borrowings
thereunder; (d) the execution and delivery and issuance of the Notes and execution and delivery of
the Notes Documents; (e) the issuance of the MHR Warrants, (f) the refinancing of the Credit
Agreement, and (g) the payment of all fees and expenses to be paid in connection with the
foregoing.




          “UCC” means the Uniform Commercial Code, as it exists on the date of this Note or as
it may hereafter be amended, in the State of New York.




          “Voting Agreement” means the Voting Agreement dated as of April 30, 2009, by and among
the Company, Parent, Mark Lama, RGGPLS, LLC, MHR and Senior Management.




          “Waiver Warrants” shall mean the warrants to purchase Common Stock issued to MHR on
the Effective Date.




          “Warehouse Waiver and Consent” shall mean a waiver/consent in form and substance
satisfactory to the Holders from any warehouseman, fulfillment house or other person owning a
facility not owned by the Issuers at which any inventory is now or hereafter located for the
purpose of providing the Collateral Agent (for the benefit of the Holders) access to such
inventory, in each case as such may be modified, amended or supplemented from time to time.




12









 








          2. Payments of Interest and Principal. Subject to the provisions of Section 3 below,
payments of principal plus interest on the unpaid principal balance of this Note outstanding from
time to time shall be payable in accordance with the following:




               (a) Interest. During the period commencing on the Original Issue Date and terminating
on the Maturity Date, interest on the unpaid principal amount of this Note shall accrue at a rate
equal to 7 3/4% per annum, compounded monthly, computed on the basis of actual days elapsed over a
360-day year, and shall be payable monthly (commencing on February 28, 2005 and thereafter on the
28th of each month) in cash up to and including the Maturity Date, subject to a ten (10) day grace
period; provided that if a required interest payment is not paid within such ten (10) day
grace period, interest shall be compounded from the date that such interest was due and payable
without regard to such grace period.



               (b) Principal. The principal balance outstanding on this Note, and any accrued and
unpaid interest thereon, shall be due and payable to the Holder on February 28, 2012 (the
“Maturity Date”). Contemporaneously with the repayment of this Note, the Holder shall
surrender this Note, duly endorsed, at the office of the Company.



               (c) Payments. All payments of principal, interest, fees and other amounts due
hereunder shall be made by the Issuers in lawful money of the United States of America by wire
transfer or by any other method approved in advance by the Holder to the account of the Holder at
the address of the Holder set forth in Section 10 hereof or at such other place designated by the
Holder in writing to the Company.



               (d) Acceleration of the Maturity Date. Notwithstanding anything to the contrary
contained herein, this Note and all other Obligations shall become due and payable together with
all accrued interest due on the outstanding principal amount hereunder, at the option of the
Holders of at least 25% of the principal amount and interest outstanding exercised, by written
notice to the Company, in the case of clauses (i) to (viii) below and without notice or any other
action by such Holders in the case of clauses (ix) or (x) below, in the event (each an “Event
of Default”) that (i) the Issuers fail to pay the principal of or interest on this Note as and
when due, subject to a ten (10) day grace period; (ii) any of the Issuers or their Subsidiaries
shall default in the performance of or otherwise breach any of its representations and warranties,
covenants or other obligations set forth in this Note, the Purchase Agreement or any of the Notes
Documents, and if such default is capable of cure, such default remains uncured beyond any
applicable cure period; provided that with respect to any breach or default of the
covenants in Section 6, there shall be a fifteen (15) calendar day cure period (to the extent such
breach or default is capable of cure) commencing from the earlier of (i) receipt by the Company of
written notice of such breach or default from the Holder and (ii) the time at which an authorized
officer of the Company or any Subsidiary knew or became aware of such breach or default; provided
further that with respect to the covenant set forth in Sections 6(a) there shall be no cure period
with respect to any breach or default that adversely affects the Holder; (iii) the Collateral Agent
(on behalf of the Holders) shall not have the right to enforce its remedies under Section 4 of this
Note or under any Subsidiary Security Agreement; (iv) the Holder shall not have a perfected
security interest in the Collateral pursuant to the terms set forth herein or in any Subsidiary
Security Agreement other than Holder’s action or inaction; (v) the Company fails when required to
remove any restrictive legend of any certificate relating to Conversion Shares, Redemption



13









 







Warrants, Waiver Warrants or any other securities issuable in accordance with the terms of the
Notes or the exercise or conversion of the Redemption Warrants, Waiver Warrants or any other
convertible securities issuable in accordance with the terms of the Notes, issued to the Holders,
and any such failure continues uncured for ten (10) Business Days after the Company has been
notified of such failure in writing by the Holder; (vi) the Issuers or any of their Subsidiaries
fail to pay, when due, or within any applicable grace period, any payment with respect to any
Indebtedness of the Issuers or their Subsidiaries having an outstanding principal amount in excess
of $250,000 (including, without limitation, any of the Other Notes), or otherwise is in breach or
violation of any agreement for Indebtedness in an amount in excess of $250,000 which breach or
violation permits the other party thereto to declare a default or otherwise accelerate amounts due
thereunder and which breach or violation is not waived or otherwise cured hereunder or under the
documents evidencing such Indebtedness, including, without limitation, by exercise of the RGGPLS
Cure or ComVest Cure, as applicable, pursuant to Section 6(e); (vii) the entry of a final judgment
against any of the Issuers or their Subsidiaries not covered by insurance of a financially sound
and reputable insurer that has not declined coverage, which is not subject to appeal by the Issuers
or their Subsidiaries and is not satisfied, stayed, vacated or discharged of record within thirty
(30) calendar days of being entered, in an amount in excess of $250,000, or the attachment or
seizure of or levy upon any property of the Issuers or their Subsidiaries valued in excess of
$250,000 to satisfy an obligation of the Issuers or their Subsidiaries; (viii) the Company provides
notice to any Holder of the Notes, including by way of public announcement, at any time, of its
intention not to issue, or otherwise refuses to issue, Conversion Shares to any Holder of the Note
upon conversion in accordance with the terms of the Notes or shares of Common Stock upon exercise
of the Waiver Warrants; (ix) any of the Issuers or their Subsidiaries shall file a petition under
bankruptcy, insolvency or debtor’s relief Law or make an assignment for the benefit of its
creditors or (x) proceedings shall be instituted against any of the Issuers or their Subsidiaries
before a court of competent jurisdiction under any federal or state bankruptcy Law that (X) is for
relief against the Issuers or their Subsidiaries in an involuntary case brought with respect to the
Issuers or their Subsidiaries in such court, (Y) seeks to appoint a custodian, receiver or other
similar official for all or substantially all the Issuers’ property or of their Subsidiaries or (Z)
seeks to liquidate the Issuers of their Subsidiaries, and such proceedings remain unstayed and in
effect for sixty (60) days. In the event that the Obligations hereunder are accelerated pursuant
to this Section 2(d), interest shall continue to accrue at 10 3/4% per annum as of the date of such
acceleration until such date as the Holder is paid in full under this Note.



          3. Conversion.




               (a) Conversion at the Option of the Holder. The Holder may, at any time and from time
to time on or after the Original Issue Date, convert all or any part of the outstanding principal
amount of this Note, plus all accrued interest thereon through the Conversion Date, into a number
of fully paid and nonassessable shares of Common Stock (“Conversion Shares”) upon surrender
of the Note. The number of shares of Common Stock issuable upon surrender of the Note shall be
determined in accordance with the following formula:



Conversion Amount

Conversion Price




14









 





               (b) Mechanics of Conversion. In order to effect a conversion pursuant to this Section
3, the Holder shall: (a) fax (or otherwise deliver) a copy of the fully executed Notice of
Conversion to the Company and (b) surrender or cause to be surrendered this Note, duly endorsed,
along with a copy of the Notice of Conversion as soon as practicable thereafter to the Company.
Upon receipt by the Company of a facsimile copy of a Notice of Conversion from a Holder, the
Company shall within two (2) business days send, via facsimile, a confirmation to such Holder
stating that the Notice of Conversion has been received, advising the Holder of any additional
documentation required by the transfer agent for the Common Stock to issue the Conversion Shares in
the manner provided in the Notice of Conversion (the “Additional Documentation”) and the
name and telephone number of a contact person at the Company regarding the conversion. The Company
shall not be obligated to issue Conversion Shares upon a conversion unless either this Note is
delivered to the Company as provided above, or the Holder notifies the Company that such
certificates have been lost, stolen or destroyed and delivers the documentation to the Company
required by Section 13. Such conversion shall be deemed to have been made effective as of the
Conversion Date and the rights of the Holder of the Notes being converted shall cease as of the
Conversion Date except for the rights to receive Conversion Shares, and the Person entitled to
receive the Conversion Shares shall be treated for all purposes as having become the record holder
of such Conversion Shares at such time and shall have all the rights and privileges of a holder of
Common Stock with respect to such Conversion Shares.



               (c) Delivery of Conversion Shares Upon Conversion. Upon the surrender of this Note
accompanied by a Notice of Conversion and any Additional Documentation, the Company shall, no later
than the later of (a) the second Business Day following the Conversion Date and (b) the third
Business Day following the date of such surrender (or, in the case of lost, stolen or destroyed
certificates, after provision of indemnity pursuant to Section 13) (the “Delivery Period”),
issue and deliver to the Holder or its nominee (x) that number of Conversion Shares issuable upon
conversion of the portion of this Note being converted and (y) a new Note in the form hereof
representing the balance of the principal amount hereof not being converted, if any. If the
Company’s transfer agent is participating in the Depositary Trust Company (“DTC”) Fast
Automated Securities Transfer program, and so long as the certificates therefor do not bear a
legend and the Holder thereof is not then required to return such certificate for the placement of
a legend thereon, the Company shall cause its transfer agent to electronically transmit the
Conversion Shares to the Holder by crediting the account of the Holder or its nominee with DTC, as
specified in the Notice of Conversion, through its DTC Deposit Withdrawal Agent Commission System
(“DTC Transfer”). If the aforementioned conditions to a DTC Transfer are not satisfied,
the Company shall deliver to the Holder physical certificates representing the Conversion Shares.
Further, the Holder may instruct the Company to deliver to the Holder physical certificates
representing the Conversion Shares in lieu of delivering such shares by way of DTC Transfer.



               (d) Adjustment to Conversion Price. The Conversion Price in effect at any time shall
be subject to adjustment from time to time upon the happening of certain events, as follows:




15









 








                    (i) Common Stock Dividends; Common Stock Splits; Reverse Common Stock Splits. If the
Company, at any time while this Note is outstanding, (A) shall pay a stock dividend on its Common
Stock, (B) subdivide outstanding shares of Common Stock into a larger number of shares, or (C)
combine outstanding shares of Common Stock into a smaller number of shares, the Conversion Price
shall be multiplied by a fraction the numerator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before such event and the denominator of
which shall be the number of shares of Common Stock outstanding after such event. Any adjustment
made pursuant to this Section 3(d)(i) shall become effective immediately after the record date for
the determination of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a subdivision, combination or
re-classification.



                    (ii) Subscription Rights. If the Company, at any time while this Note is outstanding,
shall fix a record date for the distribution to all of the holders of Common Stock evidence of its
indebtedness or assets or rights, options, warrants or other securities entitling them to subscribe
for, purchase, convert to, exchange for or to otherwise acquire any security (excluding those
referred to in Section 3(d)(i) above), then in each such case the Conversion Price at which this
Note shall thereafter be exercisable shall be determined by multiplying the Conversion Price in
effect immediately prior to the record date fixed for determination of shareholders entitled to
receive such distribution by a fraction, the denominator of which shall be the average Daily Market
Price of the Common Stock for the ten (10) Trading Days prior to the record date mentioned above,
and the numerator of which shall be such average Daily Market Price of the Common Stock for the ten
(10) Trading Days prior to such record date less the then fair market value at such record date of
the portion of such evidence of indebtedness or assets or rights, options, warrants or other
securities so distributed applicable to one outstanding share of Common Stock as determined by the
Board of Directors in good faith; provided, however, that in the event of a
distribution exceeding twenty percent (20%) of the net assets of the Issuers, such fair market
value shall be determined by an appraiser selected by the Holders of a majority of the principal
amount and interest of the Notes outstanding and reasonably acceptable to the Company. The Company
shall pay for all such appraisals. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date mentioned above.



                    (iii) Other Events. In case of (A) any reclassification of the Common Stock into
other securities of the Company, (B) any compulsory share exchange pursuant to which the Common
Stock is converted into other securities, cash or property or (C) any merger or consolidation with
or into any persons, or any sale or other disposition of all or substantially all of the assets of
the Issuers to any person (each of (A), (B) or (C), an “Extraordinary Event”), the Holder
shall have the right thereafter to convert this Note into shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common Stock following such
Extraordinary Event, that the Holder would have been entitled to receive had it converted this Note
immediately prior to such Extraordinary Event (without taking into account any limitations or
restrictions on the convertibility of the Notes). In the case of an Extraordinary Event, the terms
of any such Extraordinary Event shall include such terms so as to continue to give to the Holder
the right to receive the securities, cash or property set forth in this Section 3(d)(iii) upon any
conversion following such Extraordinary Event. This provision shall similarly apply to successive
Extraordinary Events. For the avoidance of doubt, nothing



16









 







contained in this clause (iii) shall be construed to impair the Issuers’ or Holders’ rights
under Section 5, including, without limitation, under Section 5(b).



                    (iv) Partial Redemption of Notes Pursuant to Section 5(c). Upon the happening of a
partial redemption of the Note pursuant to Section 5(c), the Conversion Price in effect immediately
prior to such redemption shall be reduced to the price determined by multiplying the Conversion
Price, in effect immediately prior to the redemption, by a fraction, the numerator of which shall
be the principal amount of the Note outstanding immediately after the partial redemption and the
denominator of which shall be the principal amount of the Note immediately prior to the partial
redemption.



                    (v) No Impairment. If any event shall occur as to which the provisions of this Section
3(d) are not strictly applicable but the failure to make any adjustment would adversely affect the
conversion rights under the Notes in accordance with the essential intent and principles of such
Section, then, in each such case, the Conversion Price of the Notes shall be adjusted in such
manner as the Board of Directors of the Company shall in good faith determine to be equitable under
the circumstances; provided, however, that no adjustment to the Conversion Price shall be made
under this clause (v) as a result of any bona fide sale of the Company’s Capital Stock to a third
party.



                    The Issuers will not, by amendment of their organizational documents or through any
consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the
terms of this Note, but will at all times in good faith assist in the carrying out of all such
terms and in the taking of all such action as may be necessary or appropriate in order to protect
the rights of the Holders hereunder against dilution of the type contemplated by the provisions of
this Section 3(d) or other impairment.



               (e) Record Date. In case the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in
Common Stock, Options or Convertible Securities or (ii) to subscribe for or purchase Common Stock,
Options or Convertible Securities, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the granting of such right
of subscription or purchase, as the case may be, provided, however, that any such
adjustment in the Conversion Price shall be reversed or shall not become effective, as applicable,
if the Company abandons the action to which the record date pertains.



               (f) Treasury Shares. The number of shares of Common Stock outstanding at any given
time shall not include shares owned or held by or for the account of the Company or any of its
wholly-owned Subsidiaries, and the disposition of any such shares (other than the cancellation or
retirement thereof) shall be considered an issue or sale of Common Stock for the purpose of Section
5(d).



               (g) Fractional Shares. Upon a conversion hereunder, the Company shall not be required
to issue stock certificates representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a



17









 







share based on the closing bid price at such time. If the Company elects not, or is unable,
to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction
of a share, one whole share of Common Stock.



               (h) Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of
the Conversion Price pursuant to Section 3, the Company, at its own expense, shall promptly compute
such adjustment or readjustment and prepare and furnish to each Holder a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time of the Holder,
furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii)
the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time would be received upon conversion
of the Note.



          4. Security; Remedies. Unless otherwise defined in this Note, each of the defined
terms used in this Section 4 shall have the meanings ascribed to them in the Credit Agreement as of
the date hereof.




               (a) To secure the prompt payment or performance in full when due, whether at stated maturity,
by required prepayment, declaration, acceleration, demand or otherwise, of all the Obligations,
each Issuer hereby grants and each Initial Issuer hereby confirms and continues to grant to the
Collateral Agent (for the benefit of the Holders) a continuing security interest in and Lien upon,
and pledges to the Collateral Agent (for the benefit of the Holders), all of its right, title and
interest in and to the following Collateral, which security interest is intended to be a security
interest, which is subordinate to any Liens securing Senior Indebtedness permitted to be incurred
pursuant to Section 6(c):



                    (i) all of such Issuer’s tangible personal property, including without limitation all present
and future Inventory and Equipment (including items of equipment which are or become Fixtures), now
owned or hereafter acquired;



                    (ii) all of such Issuer’s intangible personal property, including without limitation all
present and future Accounts, Contract rights, Permits, General Intangibles, Chattel Paper,
Documents, Instruments, Deposit Accounts, Investment Property, Letter-of-Credit Rights, Supporting
Obligations, rights to the payment of money or other forms of consideration of any kind, tax
refunds, insurance proceeds, now owned or hereafter acquired, and all intangible and tangible
personal property relating to or arising out of any of the foregoing;



                    (iii) all of such Issuer’s present and future Government Contracts and rights thereunder and
the related Government Accounts and proceeds thereof, now or hereafter owned or acquired by such
Issuer; provided, however, that the Holder shall not have a security interest in
any rights under any Government Contract of such Issuer or in the related Government Account where
the taking of such security interest is a violation of an express prohibition contained in the
Government Contract (for purposes of this limitation, the fact that a Government Contract is
subject to, or otherwise refers to, Title 31, §  203 or Title 41, § 15 of the United States Code
shall not be deemed an express prohibition against assignment thereof) or is prohibited by
applicable Law, unless in any case consent is otherwise validly obtained; and



18









 





                    (iv) any and all additions and accessions to any of the foregoing, and any and all
replacements, products and proceeds (including insurance proceeds) of any of the foregoing.



               (b) Notwithstanding the foregoing provisions of this Section 4, such grant of a security
interest shall not extend to, and the term “Collateral” shall not include, any General
Intangibles of Issuers to the extent that (i) such General Intangibles are not assignable or
capable of being encumbered as a matter of Law or under the terms of any license or other agreement
applicable thereto (but solely to the extent that any such restriction shall be enforceable under
applicable Law) without the consent of the licensor thereof or other applicable party thereto, and
(ii) such consent has not been obtained; provided, however, that the foregoing
grant of a security interest shall extend to, and the term “Collateral” shall include, each
of the following: (a) any General Intangible which is in the nature of an Account or a right to the
payment of money or a proceed of, or otherwise related to the enforcement or collection of, any
Account or right to the payment of money, or goods which are the subject of any Account or right to
the payment of money, (b) any and all proceeds of any General Intangible that is otherwise excluded
to the extent that the assignment, pledge or encumbrance of such proceeds is not so restricted, and
(c) upon obtaining the consent of any such licensor or other applicable party with respect to any
such otherwise excluded General Intangible, such General Intangible as well as any and all proceeds
thereof that might theretofore have been excluded from such grant of a security interest and from
the term “Collateral.”



               (c) Representations and Warranties.



                    (i) Upon the execution and delivery of the Original Notes on the Original Issue Date, and upon
the proper filing of the necessary financing statements, recordation of the Collateral Patent,
Trademark and Copyright Assignment in the United States Patent and Trademark Office and/or the
United States Copyright Office without any further action, the Holder had as of such date, and as
of the date hereof upon the execution and delivery of the Notes will continue to have, a good,
valid and perfected Lien and security interest in the Collateral of the Initial Issuers, which is
subordinate only to any Liens securing Senior Indebtedness permitted to be incurred pursuant to
Section 6(c) and subject to no transfer or other restrictions or Liens of any kind in favor of any
other Person except for Permitted Liens. Upon the execution and delivery of this Note (and in the
case of any future Subsidiary, upon the execution and delivery of the Subsidiary Guaranty and
Subsidiary Security Agreement), and upon the proper filing of the necessary financing statements,
recordation of the Collateral Patent, Trademark and Copyright Assignment in the United States
Patent and Trademark Office and/or the United States Copyright Office without any further action,
the Holder will have, a good, valid and perfected Lien and security interest in the Collateral of
Diabetes and National (and any future Subsidiary that executes and delivers a Subsidiary Guaranty
and Subsidiary Security Agreement), which is subordinate only to any Liens securing Senior
Indebtedness permitted to be incurred pursuant to Section 6(c) and subject to no transfer or other
restrictions or Liens of any kind in favor of any other Person except for Permitted Liens. Except
as expressly permitted by the Notes, each Issuer owns its interests in the Collateral free and
clear of any Liens and no financing statement relating to any of the Collateral is on file in any
public office except those (i) on behalf of the Holders, (ii) in connection with Permitted Liens
and/or (iii) those being terminated.



19









 





                    (ii) No Issuer (or predecessor by merger or otherwise of such Issuer), has within the
five-year period preceding the date hereof, had a different name from the name of such Issuer
listed on the signature pages hereof, except the names set forth on Schedule 4(c).



                    (iii) This Note shall create a continuing security interest in the Collateral and the security
interest created herein shall (i) remain in full force and effect until the payment and performance
in full of the Obligations, (ii) be binding upon Issuers and their respective successors and
assigns, and (iii) inure, together with the rights and remedies of the Holders and the Collateral
Agent hereunder, to the benefit of the Holders, the Collateral Agent and their successors,
transferees and assigns.



               (d) Collateral Administration.



                    (i) All Collateral (except Deposit Accounts) will at all times be kept by Issuer at the
locations set forth on Schedule 4(d) and shall not, without thirty (30) calendar days prior written
notice to the Collateral Agent, be moved therefrom unless the Collateral Agent has entered into the
necessary documents to perfect and enforce its security interest therein at such new location, and
in any case shall not be moved outside the continental United States.



                    (ii) Each Issuer shall keep accurate and complete records of its Accounts and all payments and
collections thereon and shall submit such records to the Collateral Agent on such periodic basis as
the Collateral Agent may request. Following the occurrence and during the continuance of an Event
of Default, if requested by the Collateral Agent, such Issuer shall execute and deliver to the
Collateral Agent formal written assignments (or, in the case of Medicaid/Medicare Account Debtors,
documents necessary to comply with the Federal Assignment of Claims Act) of all of its Accounts
weekly or daily as the Collateral Agent may request, including all Accounts created since the date
of the last assignment, together with copies of claims, invoices and/or other information related
thereto. To the extent that collections from such assigned accounts exceed the outstanding
principal amount together with any accrued interest due on the Notes and all First Priority Lien
Indebtedness, such excess amount shall not accrue interest in favor of such Issuer, but shall be
available to such Issuer upon such Issuer’s written request.



                    (iii) Following an occurrence or during the continuance of an Event of Default, any of the
Collateral Agent’s officers, employees, representatives or agents shall have the right, at any time
during normal business hours, in the name of the Collateral Agent, any designee of the Collateral
Agent or Issuers, to verify the validity, amount or any other matter relating to any Accounts or
Inventory of Issuer. Issuers shall cooperate fully with the Collateral Agent in an effort to
facilitate and promptly conclude such verification process.



                    (iv) To expedite collection, each Issuer shall endeavor in the first instance to make
collection of its Accounts for the Collateral Agent. The Collateral Agent shall have the right at
all times after the occurrence and during the continuance of an Event of Default to notify (a)
Account Debtors owing Accounts to Issuer other than Medicaid/Medicare Account Debtors that their
Accounts have been assigned to the Collateral Agent and to collect



20









 







such Accounts directly in its own name and to charge collection costs and expenses, including
reasonable attorney’s fees, to such Issuer, and (b) Medicaid/Medicare Account Debtors that such
Issuer has waived any and all defenses and counterclaims it may have or could interpose in any such
action or procedure brought by the Collateral Agent to obtain a court order recognizing the
collateral assignment or security interest and lien of the Collateral Agent in and to any Account
or other Collateral and that the Collateral Agent is seeking or may seek to obtain a court order
recognizing the collateral assignment or security interest and lien of the Collateral Agent in and
to all Accounts and other Collateral payable by Medicaid/Medicare Account Debtors.



                    (v) As and when determined by the Collateral Agent in its sole discretion but not more often
than four (4) times per year prior to the occurrence and continuance of an Event of Default, the
Collateral Agent may perform the searches described in clauses (a), (b) and (c) below against
Issuer, all at Issuer’s expense: (a) UCC searches with the Secretary of State of the jurisdiction
of organization of each Issuer and the Secretary of State and local filing offices of each
jurisdiction where Issuer maintain their respective executive offices, a place of business or
assets; (b) lien searches with the United States Patent and Trademark Office and the United States
Copyright Office; and (c) judgment, federal tax lien and corporate and partnership tax lien
searches, in each jurisdiction searched under clause (a) above.



                    (vi) Each Issuer (a) shall provide prompt written notice to its current bank to transfer all
items, collections and remittances to the Concentration Account, (b) shall provide prompt written
notice to each Account Debtor (other than Medicaid/Medicare Account Debtors) that the Collateral
Agent has been granted a lien and security interest in, upon and to all Accounts applicable to such
Account Debtor and shall direct each Account Debtor to make payments to the appropriate Lockbox
Account, and each Issuer hereby authorizes the Collateral Agent, upon any failure to send such
notices and directions within ten (10) calendar days after the date hereof (or ten (10) calendar
days after the Person becomes an Account Debtor), to send any and all similar notices and
directions to such Account Debtors, and (c) shall do anything further that may be lawfully required
by the Collateral Agent to create and perfect the Collateral Agent’s lien on any collateral and
effectuate the intentions of the Collateral Documents. At the Collateral Agent’s request, each
Issuer shall immediately deliver or make arrangements to deliver to the Collateral Agent all items
for which the Collateral Agent must receive possession to obtain a perfected security interest and
all notes, certificates, and documents of title, Chattel Paper, warehouse receipts, Instruments,
and any other similar instruments constituting Collateral.



                    (vii) Each Issuer shall give the Collateral Agent at least 30 days’ prior written notice of
(i) any change in such Issuer’s name, identity or corporate structure and (ii) any reincorporation,
reorganization or other action that results in a change of the jurisdiction of organization of such
Issuer.



                    (viii) If any Event of Default shall have occurred and be continuing, the Collateral Agent may
exercise in respect of the Collateral, in addition to all other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a secured party upon default
under the UCC (whether or not the UCC applies to the affected Collateral), and also may (i) require
each Issuer to, and each Issuer hereby agrees that it will at its expense and upon request of the
Collateral Agent forthwith, assemble all or part of the



21









 







Collateral as directed by the Collateral Agent and make it available to the Collateral Agent
at a place to be designated by the Collateral Agent that is reasonably convenient to both parties,
(ii) enter onto the property where any Collateral is located and take possession thereof with or
without judicial process, (iii) prior to the disposition of the Collateral, store, process, repair
or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to
the extent the Collateral Agent deems appropriate, (iv) take possession of any Issuer’s premises or
place custodians in exclusive control thereof, remain on such premises and use the same and any of
such Issuer’s equipment for the purpose of completing any work in process, taking any actions
described in the preceding clause (iii), and collecting any Obligation, (v) without notice except
as specified below, sell the Collateral or any part thereof in one or more parcels at public or
private sale, at any of the Collateral Agent’s offices or elsewhere, for cash, on credit or for
future delivery, at such time or times and at such price or prices and upon such other terms as the
Collateral Agent may deem commercially reasonable, and (vi)  provide entitlement orders with
respect to Security Entitlements (as defined in Section 8-102 of the UCC) and other Investment
Property constituting a part of the Collateral and, without notice to any Issuer, transfer to or
register in the name of the Collateral Agent or any of its nominees any or all of the Securities
Collateral (defined below). The Collateral Agent or any Holder may be the purchaser of any or all
of the Collateral at any such sale and the Collateral Agent, as agent for and representative of the
Holders (but not any Holder in its individual capacity unless Holders of a majority of the
principal amount and interest of the Notes shall otherwise agree in writing), shall be entitled,
for the purpose of bidding and making settlement or payment of the purchase price for all or any
portion of the Collateral sold at any such public sale, to use and apply any of the Obligations as
a credit on account of the purchase price for any Collateral payable by the Collateral Agent at
such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any
claim or right on the part of any Issuer, and each Issuer hereby waives (to the extent permitted by
applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time
in the future have under any rule of law or statute now existing or hereafter enacted. Each Issuer
agrees that, to the extent notice of sale shall be required by law, at least ten days’ notice to
such Issuer of the time and place of any public sale or the time after which any private sale is to
be made shall constitute reasonable notification. The Collateral Agent shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given. The Collateral Agent
may adjourn any public or private sale from time to time by announcement at the time and place
fixed therefor, and such sale may, without further notice, be made at the time and place to which
it was so adjourned. Each Issuer hereby waives any claims against the Collateral Agent and the
Holders arising by reason of the fact that the price at which any Collateral may have been sold at
such a private sale was less than the price which might have been obtained at a public sale, even
if the Collateral Agent and the Holders accept the first offer received and do not offer such
Collateral to more than one offeree; provided that nothing contained herein shall be deemed to be a
waiver by any Issuer or any Subsidiary that such sale must be conducted in a commercially
reasonable manner and otherwise in accordance with applicable Law. If the proceeds of any sale or
other disposition of the Collateral are insufficient to pay all the Obligations, Issuers shall be
jointly and severally liable for the deficiency and the fees of any attorneys employed by the
Collateral Agent to collect such deficiency. Each Issuer further agrees that a breach of any of
the covenants contained in this Section 4(d)(viii) will cause irreparable injury to the Collateral
Agent and the Holders, that the Collateral Agent and the Holders have no adequate remedy at law in
respect of such breach and, as a consequence, that each and every covenant contained in this



22









 







Section shall be specifically enforceable against such Issuer, and each Issuer hereby waives
and agrees not to assert any defenses against an action for specific performance of such covenants
except for a defense that no default has occurred giving rise to the Obligations becoming due and
payable prior to their stated maturities.



               (e) Power of Attorney. The Collateral Agent is hereby irrevocably made, constituted
and appointed the true and lawful attorney for Issuer (without requiring the Collateral Agent to
act as such, but to be exercised after the occurrence and during the continuance of an Event of
Default) with full power of substitution to do the following: (i) endorse the name of any such
Person upon any and all checks, drafts, money orders, and other instruments for the payment of
money that are payable to such Person and constitute collections on its or their Accounts; (ii)
execute in the name of such Person any financing statements, schedules, assignments, instruments,
documents, and statements that it is or they are obligated to give the Collateral Agent under any
of the Notes Documents; and (iii) do such other and further acts and deeds in the name of such
Person that the Collateral Agent may deem necessary or desirable to enforce any Account or other
Collateral or to perfect the Collateral Agent’s security interest or Lien in any Collateral
(including any additional Collateral pursuant to Sections 6(d) and 6(l)). In addition, if any such
Person breaches its obligation hereunder to direct payments of Accounts or the proceeds of any
other Collateral to the appropriate Lockbox Account, the Collateral Agent, as the irrevocably made,
constituted and appointed true and lawful attorney for such Person pursuant to this paragraph, may,
by the signature or other act of any of the Collateral Agent’s officers or authorized signatories
(without requiring any of them to do so), direct any federal, state or private payor or fiscal
intermediary to pay proceeds of Accounts or any other Collateral to the appropriate Lockbox
Account.



               (f) Intercreditor Agreement. This Note and the other Notes Documents and all rights,
remedies and obligations under this Note and the other Notes Documents are subject to the Amended
and Restated Senior Subordination Agreement, dated as of April 30, 2009, by and among the Holders,
the Collateral Agent and CapitalSource Finance LLC in the form attached hereto as Exhibit
B, as it may be amended or modified from time to time in accordance with the terms thereof (the
“Intercreditor Agreement”) and the ComVest Subordination Agreement. The parties to this
Note and the other Notes Documents and all Persons claiming any right under or in respect of this
Note and the other Notes Documents are bound by and (to the extent provided in the Intercreditor
Agreement and the ComVest Subordination Agreement) entitled to the benefit of the Intercreditor
Agreement and the ComVest Subordination Agreement.



               (g) Acknowledgement of Joint and Several Liability; Additional Subsidiaries.



                    (i) Each Issuer acknowledges that it is jointly and severally liable for all of the
Obligations. Each Issuer expressly understands, agrees and acknowledges that (i) Issuers are all
Affiliated entities by common ownership, (ii) each Issuer desires to have the availability of one
common issuance of Notes instead of separate issuances, (iii) each Issuer has requested that the
Holder purchase the Note on the terms herein provided, (iv) Holders will be relying on a Lien upon,
all of Issuers’ assets even though the proceeds of any particular Note may not be advanced directly
to a particular Issuer, (v) each Issuer will nonetheless benefit by



23









 







the issuance of the Notes to the Holders, and (vi) all of the representations, warranties,
covenants, obligations, conditions, agreements and other terms contained in the Notes Documents
shall be applicable to and shall be binding upon each Issuer.



                    (ii) From time to time subsequent to the date hereof, additional Subsidiaries may guarantee
the Obligations and pledge additional Collateral by entering into a Subsidiary Guaranty and
Subsidiary Security Agreement in accordance with Section 6(l). Each Issuer expressly agrees that
its Obligations shall not be affected or diminished by the addition or release of any Issuer or
Subsidiary hereunder, nor by any election of the Holders (in their sole discretion) not to cause
any Subsidiary to comply with Section 6(l). The grant of security interest hereunder shall be
fully effective as to any Issuer that is or becomes a party hereto regardless of whether any other
Person becomes or fails to become or ceases to be an Issuer hereunder or party to a Subsidiary
Guaranty and Subsidiary Security Agreement.



               (h) Further Assurances. Each Issuer agrees that from time to time, at the expense of
the Issuers, such Issuer will promptly execute, obtain, deliver, file, register and/or record all
financing statements, continuation statements, stock powers, further instruments and other
documents, or cause the execution, filing, registration, recording or delivery of any of the
foregoing and take all further action, that may be necessary or desirable, or that the Collateral
Agent may request, to be executed, filed, registered, obtained, delivered or recorded, in order to
create, maintain, perfect, preserve, validate or otherwise protect any security interest granted or
purported to be granted hereby or to enable the Collateral Agent to exercise and enforce its rights
and remedies hereunder with respect to any Collateral, including any additional Collateral pursuant
to Sections 6(d) and 6(l). Without limiting the generality of the foregoing, each Issuer will:
(i) notify the Collateral Agent in writing of receipt by such Issuer of any interest in Chattel
Paper and, at the request of the Collateral Agent, mark conspicuously each item of Chattel Paper
and each of its records pertaining to the Collateral with a legend, in form and substance
satisfactory to the Collateral Agent, indicating that such Collateral is subject to the security
interest granted hereby, (ii) deliver to the Collateral Agent all promissory notes and other
Instruments and, at the request of the Collateral Agent, all original counterparts of Chattel
Paper, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in
form and substance satisfactory to the Collateral Agent, (iii) (A) execute (if necessary) and file
such financing or continuation statements, or amendments thereto, (B) deliver such documents,
instruments, notices, records and consents and take such other actions necessary to establish that
the Collateral Agent has control over electronic Chattel Paper and Letter-of-Credit Rights of such
Issuer and (C) deliver such other instruments or notices, in each case, as may be necessary or
desirable, or as the Collateral Agent may request, in order to perfect and preserve the security
interests granted or purported to be granted hereby, (iv) within two business days of learning
thereof, report to the Collateral Agent any reclamation, return or repossession of goods in excess
of $10,000 (individually or in the aggregate), (v) furnish to the Collateral Agent from time to
time statements and schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Collateral Agent may reasonably request, all in
reasonable detail, (vi) defend the Collateral and the Collateral Agent’s perfected Lien thereon
against any claims and demands of all Persons at any time claiming the same or any interest therein
adverse to the Collateral Agent, and pay all reasonable costs and expenses in connection with such
defense, which at the Collateral Agent’s discretion may be added to the Obligations; and (vii) use
commercially reasonable efforts to obtain any necessary consents of third parties to



24









 







the creation and perfection of a security interest in favor of the Collateral Agent with
respect to any Collateral. Each Issuer hereby authorizes the Collateral Agent to file one or more
financing or continuation statements, and amendments thereto, relative to all or any part of the
Collateral (including any financing statement indicating that it covers “all assets” or “all
personal property” of such Issuer) without the signature of any Issuer.



               (i) Acquired Mortgaged Property Etc. Each of the Issuers, directly or indirectly,
shall not and shall cause their Subsidiaries not to purchase, own, operate, hold, invest in or
otherwise acquire any facility, property or assets or allow the warehousing, location or storage of
any Collateral other than at the locations set forth on Schedule 4(i) unless the Company shall
provide to the Holders at least thirty (30) Business Days prior written notice. From and after the
Effective Date, in the event that (i) any Issuer or any Subsidiary acquires any fee interest in
real property or any Leasehold Property or (ii) at the time any Person becomes a Subsidiary and
following compliance with Section 6(l), such Person owns or holds any fee interest in real property
or any Leasehold Property, (any such interest in real property or Leasehold Property described in
the foregoing clause (i) or (ii) being a “Acquired Mortgaged Property”), if a mortgage is being
granted in favor of any Senior Indebtedness, the Company or such Subsidiary shall deliver to
Collateral Agent, as soon as practicable after such Person acquires such Acquired Mortgaged
Property or becomes a Subsidiary and following compliance with Section 6(l), as the case may be, a
fully executed and notarized Mortgage junior only to the mortgage securing the Senior Indebtedness,
in proper form for recording in all appropriate places in all applicable jurisdictions, encumbering
the interest of such Person in such Acquired Mortgaged Property; and such opinions, appraisal,
documents, title insurance, environmental reports that may be reasonably required by the Collateral
Agent.



               (j) Application of Proceeds of Collateral. Except as expressly provided elsewhere in
the Notes, all proceeds received by the Collateral Agent and the Holders in respect of any sale of,
collection from, or other realization upon all or any part of the Collateral shall be applied in
the following order of priority, subject to the Intercreditor Agreement and the ComVest
Subordination Agreement.



                    FIRST: To the payment of all costs and expenses of such sale, collection or other
realization, including reasonable compensation to the Collateral Agent, the Holders and their
agents and counsel, and all other expenses, liabilities and advances made or incurred by the
Collateral Agent and the Holders in connection therewith, and all amounts for which the Collateral
Agent and the Holders are entitled to indemnification hereunder and all advances made by the
Collateral Agent and the Holders hereunder for the account of Issuers, and to the payment of all
costs and expenses paid or incurred by the Collateral Agent and the Holders in connection with the
exercise of any right or remedy hereunder;



                    SECOND: To the payment of amounts due and unpaid on the Notes for principal and interest,
ratably, without preference or priority of any kind, according to the amounts due and payable on
the Notes for principal and interest, respectively;



                    THIRD: To the payment of other all other Obligations; and



25









 





                    FOURTH: To the payment to, or upon the order of, the Issuers, or to whosoever may be lawfully
entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus
then remaining from such proceeds.



          5. Redemption.




               (a) Optional Redemption.



                    (i) Intentionally Deleted.



                    (ii) At any time after the first anniversary of the Original Issue Date, and in accordance
with the procedures set forth in Section 5(e), the Issuers shall have the option to redeem the
Note. If the Issuers elect to redeem the Note pursuant to this Section 5(a)(ii), then the Issuers
shall at the option of the Holder (delivered by notice to the Issuers at least two (2) Business
Days prior to the redemption date) (a) pay to the Holder the outstanding principal amount of the
Note, plus accrued and unpaid interest thereon, through the redemption date (the “Par
Redemption Price”) and issue to the Holder a warrant to purchase the number of shares of Common
Stock equal to the number of Conversion Shares that the Holder would have been entitled to receive
had it converted the Note immediately prior to such redemption date (without taking into account
any limitations or restrictions on the convertibility of the Note), which shall have an exercise
price equal to the applicable Conversion Price and shall be exercisable until the Maturity Date,
substantially in the form attached as Exhibit C (the “Redemption Warrant”), or (b)
pay to the Holder an amount equal to 110% of the aggregate outstanding principal amount of the
Notes, plus accrued and unpaid interest thereon, if any, through the redemption date (the
“Premium Redemption Price”). The Issuers and Holders agree that the letter dated as of the
Original Issue Date among MHR, the Company, NH LLC and USPG regarding Procedures with Respect to
Redemption shall be terminated as of the Effective Date and shall be of no further force and
effect.



               (b) Redemption upon Change of Control. Notwithstanding anything to the contrary
contained herein, prior to the occurrence of a Change of Control or in anticipation of a Change of
Control, the Issuers shall notify the Holders thereof. Upon the occurrence of or in anticipation
of a Change of Control (1) prior to the Bridge Loan Conversion contemplated by clauses (i), (ii),
(iii), (iv) or (v) in the applicable definition of Change of Control below, and (2) following the
date of the Bridge Loan Conversion, contemplated by clauses (i), (ii) (iii), (iv), (v) or (vi) in
the applicable definition of Change of Control below, the Issuers shall have the option to redeem
all, or any portion, of the outstanding Notes by paying to the Holder the Premium Redemption Price.
Upon the occurrence of or in anticipation of any Change of Control, in the event that the Issuers
had the option, but do not elect such option, or in the event that the Holder has the sole option,
the Holder shall have the option to cause the Issuers (or the surviving corporation) to (a) redeem
all, or any portion, of the outstanding Notes by paying to the Holder the Premium Redemption Price
and/or (b) have the surviving corporation (which shall be a corporation, partnership, trust or
limited liability company organized and existing under the Laws of the United States of America,
any state thereof or the District of the Columbia) in such Change of Control expressly assume, by
documents in form and substance satisfactory to the Holders, all the Obligations of the Company
under the Notes and the Notes Documents.



26









 





          Prior to the Bridge Loan Conversion, a “Change of Control” shall mean the occurrence of any of
the following events:




          (i) any person or group (as such terms are defined in Section 13(d) or Section 14(d) of the
Exchange Act or any successor provision to either of the foregoing) of persons, other than a person
who as of the Original Issue Date beneficially owns 25% or more of the combined voting power of all
Capital Stock of the Company, becomes the beneficial owner (as the term “beneficial owner” is
defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act)
directly or indirectly, of more than 50% of the combined voting power of all Capital Stock of the
Company or any successor thereto;




          (ii) the failure of RGGPLS Holding, Inc. or any successor thereto (“RGGPLS”) to (A)
beneficially own and control, directly or indirectly, at least fifty one percent (51%) of the
combined voting power of all Capital Stock of the Company or any successor thereto prior to
December 31, 2010 and (B) beneficially own and control, directly or indirectly, at least forty
(40%) of the combined voting power of all Capital Stock of the Company or any successor thereto on
or after December 31, 2010;




          (iii) the failure of the Company to own and control, directly or indirectly, one hundred
percent of the combined voting power of all Capital Stock and the economic interests of USPG, NH
LLC and Diabetes and 66-2/3% of National or any successor thereof or transferee of substantially
all the assets of any of the foregoing;




          (iv) during any calendar year, individuals who at the beginning of such period constituted the
Company’s board of directors (and any new members of such board of directors whose election by the
Company’s board of directors or whose nomination for election by the Company’s stockholders was
approved by a vote of a majority of the members of such board of directors then still in office who
either were directors at the beginning of such period or whose election or nomination for election
was previously so approved), cease for any reason to constitute a majority of the Company’s board
of directors;




          (v) a direct or indirect sale, transfer or other conveyance or disposition, in any single
transaction or series of transactions, including by way of merger, consolidation, amalgamation or
other business combination by any Issuer of all or substantially all of such Issuer’s assets on a
consolidated basis;




          (vi) any “change in/of control” or “sale” or “disposition” or similar event as defined in any
document governing indebtedness or Preferred Stock of Parent or any Issuer or other Subsidiary in
excess of $ 100,000 which gives the holder of such indebtedness or equity securities the right to
accelerate or otherwise require payment, repurchase or redemption of such indebtedness or Preferred
Stock prior to the maturity date or term thereof; or




          (viii) the liquidation, dissolution, or the winding up of the affairs of the Company.




          From and after the Bridge Loan Conversion, a “Change of Control” shall mean the occurrence of
any of the following events:




27









 








          (i) the failure of ComVest (which for purposes of this Section 5(b) shall include any
successor thereof) or any person or group (as such terms are defined in Section 13(d)(3) or Section
14(d)(2) of the Securities Exchange Act of 1934, the “Exchange Act”) of persons holding the
majority of the voting power of or otherwise controlling ComVest, at any time, to maintain sole (A)
beneficial ownership (as defined in Rule 13d-3 of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934), (B) control, directly or indirectly, in
either case, of, the aggregate voting power of all Capital Stock of Parent and the Company (which
for purposes of this Section 5(b) shall include any successor thereof) representing at least fifty
one percent of the combined voting power of all Capital Stock of each of Parent and the Company and
(C) the majority and controlling economic interests of Parent and the Company;




          (ii) any person or group (as such terms are defined in Section 13(d) or Section 14(d) of the
Exchange Act or any successor provision to either of the foregoing) of persons, other than a person
who as of immediately following the effective time of the Merger beneficially owns 25% or more of
the combined voting power of all Capital Stock of the Company, becomes the beneficial owner (as the
term “beneficial owner” is defined under Rule 13d-3 or any successor rule or regulation promulgated
under the Exchange Act) directly or indirectly, of more than 50% of the combined voting power of
all Capital Stock of the Company, Parent or ComVest (as applicable) or any successor thereto;




          (iii) the failure of Parent to own and control, directly or indirectly, at least fifty one
percent of the combined voting power of all Capital Stock of the Company or any successor thereto;




          (iv) the failure of the Company to own and control, directly or indirectly, one hundred
percent of the combined voting power of all Capital Stock and the economic interests of USPG, NH
LLC and Diabetes and 66-2/3% of National or any successor thereof or transferee of substantially
all the assets of any of the foregoing;




          (v) the failure of ComVest or Parent to maintain voting control, directly or indirectly, of
the election of a majority of the Board of Directors (or similar governing body) of each of Parent,
the Company and any other Issuer and any of their successors;




          (vi) a direct or indirect sale, transfer or other conveyance or disposition, in any single
transaction or series of transactions, including by way of merger, consolidation, amalgamation or
other business combination by any Issuer of all or substantially all of such Issuer’s assets on a
consolidated basis;




          (vii) any “change in/of control” or “sale” or “disposition” or similar event as defined in any
document governing indebtedness of Parent or any Issuer or other Subsidiary in excess of $ 100,000
which gives the holder of such indebtedness or equity securities the right to accelerate or
otherwise require payment, repurchase or redemption of such indebtedness prior to the maturity date
or term thereof; or




          (viii) the liquidation, dissolution, or the winding up of the affairs of the Company.




28









 








               (c) Partial Redemption.



                    (i) On February 28, 2010, and from time to time thereafter, the Issuers shall redeem that
portion of the Notes as is necessary to ensure that the Notes shall not be considered an
“applicable high yield discount obligation” within the meaning of Sections 163(e)(5) and 163(i) of
the Internal Revenue Code of 1986, as amended or any successor provisions thereof.



                    (ii) The Notes shall be redeemed on a pro-rata basis and in portions of the principal of Notes
that have denominations of $1,000 principal amount or multiples thereof. Notes in denominations
larger than $1,000 principal amount may be redeemed in part but only in whole multiples of $1,000.



                    (iii) Upon the partial redemption of the Note, the Issuers shall (i) pay to the Holder a
percentage of the Par Redemption Price equal to the Par Redemption Price multiplied by a fraction,
the numerator of which shall be the principal amount of the Note being redeemed and the denominator
of which shall be the principal amount of the Note immediately prior to the redemption date, and
(ii) issue a new Note in the form hereof representing the balance of the principal amount hereof
not redeemed and change the Conversion Price in accordance with Section 3(d)(iv) such that such new
Note will be convertible into the number of shares of Common Stock equal to the number of
Conversion Shares that the Holder would have been entitled to receive had it converted the Note
immediately prior to such redemption.



               (d) Intentionally Deleted.



               (e) Redemption Procedures.



                    (i) Notice to Holders Upon Redemption. In the case of a redemption pursuant to
Sections 5(a), 5(b) or 5(c) at least 30 days prior to a redemption date of Notes, except in the
case of Section 5(c) for which at least 60 days prior to such redemption date of the Notes, the
Company shall mail a notice of redemption by first-class mail to each Holder of Notes at such
Holder’s registered address.




     The notice shall identify the amount Notes to be redeemed and shall state:




     (A) the redemption date;




     (B) the applicable subsection of Section 5 pursuant to which the redemption
will occur;




     (C) if applicable, the Redemption Price and the number of shares into which the
Redemption Warrant will be exercisable, on the redemption date;




     (D) if applicable, the Premium Redemption Price on the redemption date;



29









 






     (E) if redemption will occur pursuant to Section 5(c), the Notes or portions of
Notes to be redeemed, the Redemption Price and the new Conversion Price that will be
in effect for each of the remaining Notes.




     (F) that Notes called for redemption must be surrendered to the Company to
collect the consideration (or if to an agent of the Company, the name and address of
the agent where the Notes must be surrendered); and




     (G) that, unless the Company defaults in making such redemption payment
interest on the Notes (or portion thereof) called for redemption ceases to accrue on
and after the redemption date.



                    (ii) Such notice shall be accompanied by an Officer’s Certificate and a written opinion from
legal counsel from the Company to the effect that such redemption will comply with the conditions
herein.



                    (iii) Once notice of redemption is mailed, Notes called for redemption become due and payable
on the redemption date. Upon surrender to the Company, the consideration shall be delivered as
stated in the notice. Failure to give notice or any defect in the notice to any Holder shall not
affect the validity of the notice to any other Holder.



                    (iv) Holders shall be required to surrender the Notes being purchased by the Company, with an
appropriate form duly completed, to the Company at the address specified in the notice of
redemption. Holders whose Notes are purchased only in part shall be issued new Notes equal in
principal amount to the unpurchased portion of the Securities surrendered.



                    (v) If any Note surrendered for redemption in the manner provided herein shall not be so paid
on the redemption date due to the failure of the Company to deliver the required consideration,
interest shall continue to accrue from the redemption date until such consideration is delivered,
with such consideration being based on the unpaid principal and, to the extent lawful, on any
interest not paid on such unpaid principal, in each case at the date and in the manner provided in
the Notes which were to be redeemed.



                    (vi) Any redemption shall be conditioned upon and occur either concurrently with or
immediately prior to or after the consummation of the transaction, including without limitation a
Change of Control, related to such redemption.



                    (vii) Holders shall have the right to convert the Notes or any portion thereof in accordance
with Section 3 at any time prior to the actual redemption of the Notes or applicable portion of the
Notes, including without limitation, during the thirty (30) day (or, in the case of Section 5(c),
sixty (60) day) notice period under this Section 5(e).



               (f) Tax Put Right.



                    (i) For 30 days following a redemption in which the Holder receives Redemption Warrants, (A)
the Holder shall have a right (the “Tax Put Right”) by written notice to the Company (which
such notice shall include the number of shares of Common



30









 







Stock desired to be put to the Company and the value thereof as of the date of such notice) to
require the Issuers to purchase an amount of shares of Common Stock from the Holder, based on the
average Daily Market Price during the ten (10) Trading Days prior to such redemption, that is equal
to an amount of up to $5,000,000 in the aggregate for all such redemptions for all Holders of all
Notes and (B) if the amount received by the Holder after exercising its rights up to the maximum
aggregate amount pursuant to clause (A) is, when combined with the consideration received by the
Holder upon redemption of the Convertible Notes, still insufficient to pay the income taxes
relating to the redemption, the receipt of the Redemption Warrants and the exercise of the Tax Put
Right, then, upon receipt of written notice from the Holder (or any other Holder of Notes) of such
insufficiency, the Company shall use commercially reasonable efforts to file one registration
statement for all Holders of Notes (regardless of the number of redemptions) as soon as reasonably
practicable after such redemption but in any event within thirty (30) days after such redemption
and cause such registration statement to be declared effective as soon as practicable after such
filing but in any event within sixty (60) days after such filing, failing which the Holders of all
Notes shall have an additional Tax Put Right in the amount of up to $2,500,000 in the aggregate for
all such redemptions.



                    (ii) Upon the receipt of notice from a Holder that such Holder has elected to exercise its Tax
Put Right, the Company shall promptly, but in no event later than two (2) business days after the
receipt thereof, deliver a copy of such notice to the other Holders. For a period of five (5)
Business Days following its receipt of a Tax Put Right notice, each other Holder shall have the
right and option (but not the obligation) to also exercise a Tax Put Right by delivering written
notice thereof (which such notice shall include the number of shares of Common Stock desired to be
put to the Company and the value thereof as of the date of such notice). If the Holders electing
to exercise their Tax Put Right elect to put more than the aggregate amount of shares that the
Company is required to repurchase pursuant to Section 5(f)(i), then each Holder delivering a Tax
Put Right notice shall be entitled to require the Company to repurchase that number of shares of
Common Stock calculated by multiplying the aggregate number of shares of Common Stock that the
Company is required to repurchase pursuant to Section 5(f)(i) by a fraction the numerator of which
is equal to the number of shares of Common Stock elected to be repurchased from such Holder and the
denominator of which is equal to the total number of shares of Common Stock elected to be
repurchased by all Holders that elect to exercise their Tax Put Right.



          6. Covenants.




               (a) Reservation of Conversion Shares and Common Stock Underlying Waiver Warrants. The
Company agrees that it will at all times reserve and keep available out of its authorized shares of
Common Stock, free from preemptive rights, solely for the purpose of the issue upon conversion of
the Notes, issue upon the exercise of the Waiver Warrants and issuances of shares of Common Stock
in accordance with the terms hereof. The Company agrees that the Conversion Shares and shares of
Common Stock issued upon the exercise of the Waiver Warrants shall, when issued, be duly and
validly issued and fully paid and non-assessable.



               (b) Required Registration. The Company agrees that if any Conversion Shares or shares
issued upon the exercise of the Waiver Warrants require registration with or approval of any
governmental authority under any Federal or state Law, or any national



31









 







securities exchange, before such shares may be issued upon conversion, the Company will use
its best efforts to cause such shares to be duly registered or approved, as the case may be.



               (c) Limitation on Senior Indebtedness.



                    (i) The Issuers covenant and agree that so long as any Notes shall remain outstanding, at any
time prior to the Bridge Loan Conversion, the Issuers shall not, and shall not permit any of their
Subsidiaries, to directly or indirectly incur, create, assume, guarantee, become or remain liable,
contingently or otherwise, with respect to, or otherwise become responsible for the payment of,
including, without limitation, by way of assumption or acquisition in a business combination (each
event, an “incurrence”) any Indebtedness other than (x) the Notes, (y) Senior Indebtedness in an
aggregate principal amount outstanding not to exceed (1) $15 million of which at least $10 million
principal amount of such Indebtedness shall be in the form of a revolving loan facility secured by
the Issuers’ accounts receivables or other similar asset-based loan plus (2) $3 million principal
amount under the Bridge Loan; provided, however that the Issuers may incur additional Senior
Indebtedness up to $4 million the proceeds of which shall be used for the sole purpose of paying
off the Bridge Loan, and (z) Subordinated Indebtedness.



                    (ii) The Issuers covenant and agree that so long as any Notes shall remain outstanding, at any
time from and after the Bridge Loan Conversion, the Issuers shall not, and shall not permit any of
their Subsidiaries, to directly or indirectly incur, create, assume, guarantee, become or remain
liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment
of, including, without limitation, by way of assumption or acquisition in a business combination
(each event, an “incurrence”) any Indebtedness other than (x) the Notes, (y) Senior Indebtedness in
an aggregate principal amount outstanding not to exceed $18 million (which amount shall be
increased by an amount equal to the cash proceeds (net of any broker, finder’s or transaction fees
or commissions incurred in connection therewith, if any) of any cash equity contribution to the
Company by Parent, the aggregate amount of which equity contributions shall in no event exceed $7
million), at least $10 million principal amount of which Indebtedness shall be in the form of a
revolving loan facility secured by the Issuers’ accounts receivables or other similar asset-based
loan; provided however, that the incurrence of any Indebtedness pursuant hereto shall not cause the
Consolidated Senior Leverage Ratio to exceed 2.00 to 1.00 for the most recently ended four full
Fiscal Quarters for which internal financial statements are available immediately preceding the
date on which such Indebtedness is incurred determined on a pro forma basis (including pro a forma
application of the net proceeds therefrom), as if the additional Indebtedness had been incurred and
the application of proceeds therefrom had occurred at the beginning of such four Fiscal Quarter
period, and (z) Subordinated Indebtedness. Notwithstanding anything contained in the foregoing to
the contrary, the Issuers shall be permitted to incur a minimum of $15 million in Senior
Indebtedness, provided that at least $10 million principal amount of such Indebtedness shall be in
the form of a revolving loan facility secured by the Issuers’ accounts receivables or other similar
asset-based loan.



                    (iii) Notwithstanding any provision of this Section 6(c) to the contrary, as long as any
Obligations (as such term is defined in the Credit Agreement) (or any extensions, modifications,
refinancings, renewals and refundings thereof in accordance with the



32









 







Intercreditor Agreement) are outstanding under the Credit Agreement and the Credit Agreement
has not been terminated, the Issuers shall be permitted, and shall be allowed to permit any of
their Subsidiaries, to directly or indirectly incur, create, assume, guarantee, become or remain
liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment
of, Senior Indebtedness under the Credit Agreement (including any extensions, modifications,
refinancings, renewals and refundings thereof in accordance with the Intercreditor Agreement) in
the principal amount of $17,000,000 and the provisions of clauses (i) and (ii) above shall not be
applicable to any of such Senior Indebtedness unless and until ComVest, Parent or any of their
Affiliates becomes the holder of such Indebtedness under the Credit Agreement, whether as a result
of the purchase of such Senior Indebtedness pursuant to their exercise of the purchase option under
Section 22 of the ComVest Senior Subordination Agreement or otherwise. The limitation on the
principal amount of Senior Indebtedness set forth in this clause (iii) shall not limit or otherwise
affect the right of the holder of any such Senior Indebtedness to accrue and receive payment of
interest (including at the default rate and including postpetition interest), fees, expenses or
other charges. Upon the purchase of Senior Indebtedness under the Credit Agreement by ComVest,
Parent or any of their Affiliates, this clause (iii) shall be null and void and the limitation on
Senior Indebtedness shall be determined pursuant to clauses (i) and (ii) above.



                    (iv) If on any date the Issuers incur Senior Indebtedness in breach of this Section 6(c) as a
result of the aggregate principal amount of Senior Indebtedness exceeding the amount then permitted
under subclause 6(c)(i)(y) or 6(c)(ii)(y) hereof, such breach shall not constitute an Event of
Default if, and only if, the Issuers shall have concurrently with such incurrence prepaid to the
Holder in respect of the outstanding principal amount of the Note an amount equal to 110% of the
amount by which the Senior Indebtedness incurred, when aggregated with all such Senior Indebtedness
then outstanding, exceeds the maximum aggregate principal amount of Senior Indebtedness then
permitted under such subclause 6(c)(i)(y) or 6(c)(ii)(y). In connection with any payment to the
Holder under this Section 6(c)(iv), the Issuers shall comply with the procedures applicable to
redemption under Section 5(e) (including the giving of a notice to the Holder at least 30 days in
advance of any prepayment) to the same extent as if such prepayment was being made as a redemption
of the Notes pursuant to the provisions applicable to redemptions under Sections 5 (a) or (b)
above.



               (d) Limitation on Liens. The Issuers and their Subsidiaries shall not create, incur,
assume or suffer to exist any Lien upon, in or against, or pledge of, any of the Collateral or any
of their properties or assets or any of their authorized but unissued or treasury shares,
securities or other equity or ownership or partnership interests, whether now owned or hereafter
acquired, except for Permitted Liens; provided further, if the Issuers and their Subsidiaries shall
incur any Liens securing Senior Indebtedness, the Issuers and their Subsidiaries shall cause all
Obligations to also be secured by a Lien in favor of the Collateral Agent for the benefit of the
Holders, pursuant to a validly created and effective security interest, on a basis junior only to
such Senior Indebtedness being so secured, in such manner as is consistent with the Credit
Agreement and otherwise reasonably acceptable to the Holders of a majority of the principal amount
and interest of the Notes outstanding.



               (e) Right to Cure Default of First Priority Lien Indebtedness. The Issuers agree
that, upon any default, breach, violation, event, fact or circumstance under any First



33









 







Priority Lien Indebtedness (including a Default or Event of Default under the Credit
Agreement, as defined therein) which, with the giving of applicable notice or passage of time or
both, would permit the holder of such Indebtedness to declare a default or otherwise accelerate
amounts due thereunder, which the Issuers have not cured within the permitted time period and
RGGPLS or an RGGPLS Permitted Assignee (as defined below) have not elected, within five (5)
Business Days of any such event, to repay, refinance or replace such Indebtedness or otherwise cure
or provide funding to the Company for the purposes of curing such default (the “RGGPLS
Cure”), MHR Fund Management LLC, its Affiliates, and any Person, directly or indirectly,
managed or controlled by MHR Fund Management LLC or its Affiliates, including without limitation,
MHR Capital Partners Master Account LP, MHR Capital Partners (100) LP and OTQ LLC (collectively
“MHR”) shall have the right, but not the obligation, to fund the repayment of such
Indebtedness (including, without limitation, by way of purchasing interests in the loans under the
Credit Agreement) or otherwise cure such default within five (5) Business Days of the earlier of
(i) the expiration of the RGGPLS Cure period above and (ii) the receipt of notice from RGGPLS or
any RGGPLS Permitted Assignee that it has elected not to pursue an RGGPLS Cure. The Company shall
give MHR written notice of any such default promptly after the occurrence thereof, but in no event
later than two (2) Business Days after the occurrence of any such default. For purposes of the
foregoing, an “RGGPLS Permitted Assignee” shall mean the surviving entity in a
reorganization or recapitalization of RGGPLS, including without limitation, by way of merger or
consolidation with or into another person or entity, if the percentage interest of the members or
stockholders, as the case may be, in the equity interests of the surviving entity following
consummation of such transaction is substantially the same (on a relative basis) as each such
stockholder’s percentage interest in RGGPLS immediately prior to the consummation of such
transaction. From and after the date of the Bridge Loan Conversion, all references to RGGPLS in
this Section 6(e) shall be replaced by Parent, all references to RGGPLS Cure in this Section 6(e)
shall be replaced by “ComVest Cure” and references to RGGPLS Permitted Assignee in this Section
6(e) shall be replaced by “Parent Permitted Assignee”.



               (f) Financial Statements, Financial Reports and Other Information.



                    (i) Financial Reports. The Company shall furnish to the Holder (i) as soon as
available and in any event within ninety (90) calendar days after the end of each fiscal year of
the Company (or such earlier date required by the laws, regulations and rules of the Securities and
Exchange Commission), audited annual consolidated financial statements of the Company, including
the notes thereto, consisting of a consolidated balance sheet at the end of such completed fiscal
year and the related consolidated statements of income, retained earnings, cash flows and owners’
equity for such completed fiscal year, which financial statements shall be prepared and certified
without qualification by an independent certified public accounting firm satisfactory to the Holder
and accompanied by related management letters, if available, and (ii) as soon as available and in
any event within thirty (30) calendar days after the end of each calendar month, unaudited
consolidated financial statements of the Company consisting of a balance sheet and statements of
income, retained earnings, cash flows and owners’ equity as of the end of the immediately
preceding calendar month. All such financial statements shall be prepared in accordance with GAAP
consistently applied with prior periods. With each such financial statement, the Company shall
also deliver a certificate of its chief financial officer in substantially the form of Exhibit
D hereto (a “Compliance Certificate”) stating that (A) such person has reviewed the
relevant terms of the Notes Documents and the condition of the



34









 







Company, and (B) no Default or Event of Default has occurred or is continuing, or, if any of
the foregoing has occurred or is continuing, specifying the nature and status and period of
existence thereof and the steps taken or proposed to be taken with respect thereto.



                    (ii) Other Materials. The Issuers shall furnish to the Holder as soon as available,
and in any event within ten (10) calendar days after the preparation or issuance thereof or at such
other time as set forth below: (1) copies of such financial statements (other than those required
to be delivered pursuant to Section 6.1(f)(i) prepared by, for or on behalf of the Company and any
other notes, reports and other materials related thereto, including, without limitation, any pro
forma financial statements, (2) any reports, returns, information, notices and other materials that
the Company shall send to its stockholders, members, partners or other equity owners at any time,
(3) all Medicare and Medicaid cost reports and other documents and materials filed by the Company
and any other reports, materials or other information regarding or otherwise relating to Medicaid
or Medicare prepared by, for or on behalf of the Company, including, without limitation, (A) copies
of licenses and Permits required by any applicable Law or Governmental Authority for the operation
of its business, (B) Medicare and Medicaid provider numbers and agreements, (C) state surveys
pertaining to any healthcare facility operated, owned or leased by the Company and any of its
Affiliates or Subsidiaries, and (D) within ten (10) calendar days following the request of the
Holder, participating agreements relating to medical plans, (4) (A) within fifteen (15) calendar
days following the request of the Holder, a summary report of the status of all payments, denials
and appeals of all Medicare and/or Medicaid Accounts and accounts receivable and account payable
aging schedule and (B), within thirty (30) calendar days following the request of the Holder, a
sales and collection report, including a report of sales, credits issued and collections received,
all such reports showing a reconciliation to the amounts reported in the monthly financial
statements, (5) promptly upon receipt thereof, copies of any reports submitted to the Company by
its independent accountants in connection with any interim audit of the books of such Person or any
of its Affiliates and copies of each management control letter provided by such independent
accountants, (6) within fifteen (15) calendar days after the execution thereof, a copy of any
contracts with the federal government or with a Governmental Authority in the State of New York,
Vermont or Washington, and (7) such additional information, documents, statements, reports and
other materials as the Holder may reasonably request from a credit or security perspective or
otherwise from time to time.



                    (iii) Operating Budget. The Company shall furnish to the Holder on or prior to the
Effective Date and for each fiscal year of the Company thereafter not later than the earlier of (1)
thirty (30) calendar days after the end of each fiscal year or (2) thirty (30) calendar days after
the same is available, consolidated month by month projected operating budgets, annual projections,
profit and loss statements, balance sheets and cash flow reports of and for the Company for such
upcoming fiscal year (including an income statement for each month and a balance sheet as at the
end of the last month in each fiscal quarter), in each case prepared in accordance with GAAP
consistently applied with prior periods.



               (g) Books and Records; Inspection Rights.



                    (i) Each of the Issuers and the Subsidiaries shall (i) keep true, complete and accurate books
of record and account in accordance with commercially reasonable business practices in which true
and correct entries are made of all of its and their dealings and



35









 







transactions in all material respects; and (ii) set up and maintain on its books such reserves
as may be required by GAAP with respect to doubtful accounts and all taxes, assessments, charges,
levies and claims and with respect to its business, and include such reserves in its quarterly as
well as year end financial statements.



                    (ii) Each of the Issuers shall permit the representatives of the Holder, at the expense of the
Company, from time to time during normal business hours upon reasonable notice, to (i) visit and
inspect any of its offices or properties or any other place where Collateral is located to inspect
the Collateral and/or to examine or audit all of its books of account, records, reports and other
papers (but not more often than four (4) times per year so long as no Default or Event of Default
exists), (ii) make copies and extracts therefrom, and (iii) discuss its business, operations,
prospects, properties, assets, liabilities, condition and/or Accounts and Inventory with its
officers and independent public accountants (and by this provision such officers and accountants
are authorized to discuss the foregoing).



               (h) Active Diabetes Customers. As of the last day of each calendar month commencing as
of the last day of the calendar month in which the Effective Date occurs and continuing through the
Term Loan Maturity Date (as defined in the Credit Agreement), the Company shall have not less than
35,000 Active Diabetes Customers; provided that from and after the date of the Bridge Loan
Conversion, upon the acquisition (whether by purchase, assignment, participation or otherwise) of
ComVest or its Affiliates of any Senior Indebtedness, this Section 6(h) shall be replaced by the
covenant in Schedule 6(h) attached hereto.



               (i) Transfer of Assets. Notwithstanding any other provision of this Note or any other
Notes Documents, each of the Issuers shall not and shall cause their Subsidiaries not to sell,
lease, transfer, assign or otherwise dispose of any interest in any properties or assets (other
than obsolete equipment or excess equipment no longer needed in the conduct of the business in the
ordinary course of business and sales of Inventory in the ordinary course of business), or agree to
do any of the foregoing at any future time, unless permitted by the terms of the Credit Agreement;
provided that from and after the date of the Bridge Loan Conversion, upon the acquisition (whether
by purchase, assignment, participation or otherwise) of ComVest or its Affiliates of any Senior
Indebtedness, this Section 6(i) shall be replaced by the covenant in Schedule 6(i) attached hereto.



               (j) Transactions With Affiliates. Each of the Issuers shall not and shall cause their
Subsidiaries not to enter into or consummate any transaction of any kind with (i) any of its
Affiliates or (ii) any Subsidiary Guarantor or any of their respective Affiliates other than: (a)
salary, bonus, severance, employee stock option and other compensation and employment arrangements
with directors or officers in the ordinary course of business (including employment arrangements
with Mark Lama on customary terms consistent with the Company’s prior employment arrangements and
agreements in connection with his participation in the Bridge Loan and the conversion of his
participation in the Bridge Loan into Preferred Stock pursuant to the terms of the Bridge Loan),
(b) Distributions and dividends permitted pursuant to Section 6(m), (c) transactions with the
Holders or any Affiliate of the Holders, (d) payments permitted under and pursuant to written
agreements entered into by and between any Issuer or any Subsidiary and one or more of its
Affiliates that (A) reflect and constitute transactions on overall terms at least as favorable to
such Issuer or Subsidiary as would be the case in an arm’s-



36









 







length transaction between unrelated parties of equal bargaining power and (B) in the event
that the total consideration with respect to any such agreement together with any related
agreements exceeds $375,000, has been approved by an independent appraisal or valuation firm;
provided that, from and after the date of the Bridge Loan Conversion, any Subordinated Indebtedness
issued to an Affiliate in compliance with this subclause (d) shall not be subject to any maximum
cash interest rate; provided further, that notwithstanding the foregoing clauses (A) and (B) above
such Issuer or Subsidiary shall not enter into or consummate any transaction or agreement pursuant
to which it becomes a party to any mortgage, note, indenture or guarantee evidencing any
Indebtedness of any of its Affiliates or otherwise to become responsible or liable, as a guarantor,
surety or otherwise, pursuant to agreement for any Indebtedness of any such Affiliate, and (e) from
and after the date of the Bridge Loan Conversion, transactions with ComVest and its Affiliates in
connection with equity investments and contributions by ComVest or its Affiliates to an Issuer or a
Subsidiary. Notwithstanding anything to the contrary herein, it shall be a condition precedent to
any issuance of Subordinated Indebtedness permitted under subclause (d) above and any equity
investment or contribution permitted under subclause (e) above, that the Holders or any of their
Affiliates shall have been given the prior notice of and opportunity to participate ratably (based
on the relative ownership of Common Stock on a fully diluted and as-converted basis of ComVest and
all the Holders and their respective Affiliates) in providing such equity investments (including
equity equivalents and equity linked securities), contributions and Subordinated Indebtedness on no
less favorable terms and conditions as those applicable to ComVest and its Affiliates.



               (k) Investments; New Facilities or Collateral; Subsidiaries. Each of the Issuers,
directly or indirectly, shall not and shall cause their Subsidiaries not to (i) purchase, own,
hold, invest in or otherwise acquire obligations or Capital Stock or securities of, or any other
interest in, or all or substantially all of the assets of, any Person, or any joint venture, that
is not in the healthcare industry, including without limitation insurance related services to
Medicare and managed care end users, so long as the equity and assets so acquired shall constitute
Collateral under the Notes Documents, or (ii) make or permit to exist any loans, advances or
guarantees to or for the benefit of any Person or assume, guarantee, endorse, contingently agree to
purchase or otherwise become liable for or upon or incur any obligation of any other Person (other
than those created by the Notes Documents and Indebtedness permitted to be incurred under Section
6(c) and other than (A) trade credit extended in the ordinary course of business, (B) advances for
business travel and similar temporary advances made in the ordinary course of business to officers,
directors and employees, and (C) the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business). Each of the Issuers,
directly or indirectly, shall not and shall cause their Subsidiaries not to purchase, own, operate,
hold, invest in or otherwise acquire any facility, property or assets or allow the warehousing,
location or storage of any Collateral other than at the locations set forth on Schedule 6(k) unless
the Company shall provide to the Holder at least thirty (30) Business Days prior written notice.
Notwithstanding any provision of this Section 6(k) to the contrary, the Issuers may make
Acquisitions to the extent permitted by the Credit Agreement so long as the equity and assets so
acquired shall constitute Collateral under the Notes Documents; provided that from and after the
date of the Bridge Loan Conversion, upon the acquisition (whether by purchase, assignment,
participation or otherwise) of ComVest or its Affiliates of any Senior Indebtedness, this Section
6(k) shall be replaced by the covenant in Schedule 6(k) attached hereto.



37









 





               (l) Subsidiaries. Any Subsidiary of the Company that is not an Issuer as of the date
hereof and any newly acquired or created Subsidiary shall promptly execute a Subsidiary Guaranty
and a Subsidiary Security Agreement, and such other documents and such other documents and
instruments as the Holder may reasonably require.



               (m) Restricted Payments. Each of the Issuers shall not and shall cause their
Subsidiaries not to (i) declare, pay or make any dividend or Distribution on any shares of capital
stock or other securities or interests (other than dividends or Distributions payable in its stock,
or split-ups or reclassifications of its stock), (ii) apply any of its funds, property or assets to
the acquisition, redemption or other retirement of any capital stock or other securities or
interests or of any options to purchase or acquire any of the foregoing (provided, however, that
such Issuer or Subsidiary may redeem its capital stock from terminated employees pursuant to, but
only to the extent required under, the terms of the related employment agreements as long as no
Default or Event of Default has occurred and is continuing or would be caused by or result from the
payment thereof and as long as the aggregate amount of payments made to such terminating employees
in any fiscal year does not exceed $100,000), (iii) otherwise make any payments or Distributions to
any stockholder, member, partner or other equity owner in such Person’s capacity as such, or (iv)
make any payment of any management or service fee other than pursuant to arrangements that are
reasonably acceptable to the Holders and provided that such payments are subject to the execution
of a subordination agreement with the Holders in form and substance reasonably acceptable to the
Holders (“Management Fee Payments”).



               Except as permitted by the subordination agreement between such lender and the Holders
relating to such Subordinated Debt, the Issuers shall not (i) make any prepayment of any part or
all of any Subordinated Debt, (ii) repurchase, redeem or retire any instrument evidencing any such
Subordinated Debt prior to maturity, or (iii) enter into any agreement (oral or written) which
could in any way be construed to amend, modify, alter or terminate any one or more instruments or
agreements evidencing or relating to any Subordinated Debt in a manner adverse to Holder, as
determined by the Holders of a majority of the principal amount and interest of the Notes
outstanding.



               (n) Amendments of Documents Relating to Subordinated Indebtedness. Each of the
Issuers shall not, and shall not permit any of their Subsidiaries to, amend or otherwise change the
terms of any Subordinated Indebtedness, or make any payment consistent with an amendment thereof or
change thereto, if the effect of such amendment or change is to have such Subordinated Indebtedness
provide for (1) the payment, prepayment, redemption, repayment, repurchase or defeasance, directly
or indirectly, of any principal or premium, if any, thereon before ninety-one (91) days after the
Maturity Date or later or (2) total cash interest at a rate in excess of the prevailing market rate
for subordinated debt at the time of issuance, except to the extent permitted by the terms of any
written subordination agreement acceptable to the Holders.



               (o) Charter Documents; Fiscal Year; Dissolution; Use of Proceeds; Accounting Methods.
Each of the Issuers shall not, and shall not permit any of their Subsidiaries to, (i) amend,
modify, restate or change its certificate of incorporation (including the terms of the Preferred
Stock issued pursuant to the Bridge Loan Conversion) or certificate of formation or bylaws or
similar organizational documents in a manner that would be adverse to any Issuer or



38









 







any Subsidiary or the Holders or inconsistent with the rights granted to the Holders in
connection with the Notes Documents, provided, however, that any such amendment, modification,
restatement, or change shall be permitted in connection with any additional equity contributions to
Issuer or a Subsidiary, (ii) amend, alter or suspend or terminate or make provisional in any
material way, any material Permit without the prior written consent of the Holders of a majority of
the principal amount and interest of the Notes outstanding, which consent shall not be unreasonably
withheld, (iii) wind up, liquidate or dissolve (voluntarily or involuntarily) or commence or suffer
any proceedings seeking or that would result in any of the foregoing, or (iv) make any material
changes in financial or tax accounting methods, principles or practices (or change an annual
accounting period), except insofar as may be required by a change in GAAP, applicable Law or any
applicable Governmental Authority.



          7. Transfer of Note. Upon due presentment for registration of transfer of this Note,
the Company will execute, register and deliver in exchange a new Note equal in aggregate principal
amount to the then unpaid principal amount of this Note, dated the date to which interest has been
paid and registered in the name of the transferee.




          8. Governing Law. This Note shall be governed by and construed in accordance with the
domestic substantive Laws of the State of New York, without giving effect to any choice or conflict
of law provision or rule that would cause the application of the laws of any other jurisdiction.




          9. Jurisdiction. The Issuers irrevocably consent to the exclusive jurisdiction of the
United States federal courts and the state courts located in the County of New York, State of New
York in any suit or proceeding based on or arising under this Note and irrevocably agrees that all
claims in respect of such suit or proceeding may be determined in such courts. The Issuers
irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or
proceeding. The Issuers further agree that service of process upon the Issuers mailed by first
class mail shall be deemed in every respect effective service of process upon the Issuers in any
such suit or proceeding. The Issuers agree that a final non-appealable judgment in any such suit
or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such
judgment or in any other lawful manner. Nothing herein shall affect the right of the Holder to
institute suit and conduct an action in any other appropriate manner, jurisdiction or court or to
serve process in any other manner permitted by Law.




          10. Notices. All notices and other communications given to any party hereto pursuant
to this Note shall be in writing and shall be delivered, or mailed first class postage prepaid,
registered or certified mail, addressed as follows:




               (a) If to the Issuers, to:


NationsHealth, Inc.

13650 N.W. 8th Street

Suite 109

Sunrise, FL 33325

Fax number: (954) 903-5005

Attention: Chief Executive Officer




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with a copy to:



McDermott Will & Emery LLP

201 South Biscayne Blvd.

Miami, Florida 33131

Fax number: (305) 347-6500

Attention: Ira J. Coleman, Esq.



Fred Levenson, Esq.

Michael Boykins, Esq.



with a copy to:



Foley & Lardner LLP

100 N. Tampa St., Suite 2700

Tampa, Florida 33602

Fax number: (813) 221-4210

Attention: Steven Vazquez, Esq.




               (b) If to the Holder, to:


MHR Fund Management LLC

40 West 57th Street, 24th Floor,

New York, NY 10019

Fax number: (212) 262-9356

Attention: Hal Goldstein and



Emily Fine



with a copy to:



O’Melveny & Myers LLP

7 Times Square

Times Square Tower

New York, NY 10036

Fax number: (212) 408-2419

Attention: Patricia M. Perez, Esq.



Each such notice or other communication shall for all purposes be treated as being effective or
having been given when delivered, if delivered personally, by e-mail or facsimile with confirmation
of receipt or by overnight courier or, if sent by mail, at the earlier of its actual receipt or
three (3) days after the same has been deposited in a regularly maintained receptacle for the
deposit of United States mail, addressed and postage prepaid as aforesaid. The Company shall use
commercially reasonable efforts to provide Holder with notices that the Company provides under the
Credit Agreement concurrently with the giving of such notices under the Credit Agreement and shall
provide Holder with copies of such notices upon written request of such Holder no later than five
business days following receipt of such written request.




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          11. Company’s Waivers. The Issuers, to the extent permitted by Law, waive and agree
not to assert or take advantage of any of the following: (a) any defense based upon an election of
remedies by the Holder which may destroy or otherwise impair any subrogation or other rights of the
Issuers or any guarantor or endorser of this Note; (b) any duty on the part of the Holder to
disclose any facts or other data the Holder may now or hereafter know; (c) acceptance or notice of
acceptance of this Note by the Issuers; (d) presentment and/or demand for payment of this Note or
any other Obligations; and (e) protest and notice of dishonor with respect to this Note or other
Obligations or performance of obligations arising under the Notes Documents.




          12. Amendment; Waiver. All amendments or waivers of any of the terms hereof
(including, without limitation, any waiver of acceleration of the Maturity Date) and any payment of
this Note with any consideration other than cash, shall be made or effected only with the written
consent of the Holders of a majority of the principal amount and interest of the Notes outstanding.
No failure or delay on the part of any Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise thereof or of any other right, power
or privilege.




          13. Replacement of Note. Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this Note by the Holder, the Company
shall issue a replacement instrument, at the Company’s expense, representing such Note in lieu of
such lost, stolen, destroyed, or mutilated instrument, provided that the Holder agrees to
indemnify the Company for any losses incurred by the Company with respect to such lost instrument
(other than the cost of issuing the new instrument).




          14. Headings. The headings of the sections of this Note are inserted for convenience
only and do not constitute a part of this Note.




          15. Ranking. The Notes shall rank senior in right of payment to any Indebtedness and
future Indebtedness of the Issuers and their Subsidiaries other than the Senior Indebtedness
permitted by Section 6(c) and in the Intercreditor Agreement and the ComVest Subordination
Agreement.




          16. Assignability. This Note shall be binding upon the Issuers and their successors
and assigns and shall inure to the benefit of the Holder and its successors and assigns.
Notwithstanding anything to the contrary contained herein or in the Notes Documents, this Note may
be pledged and all rights of the Holder under this Note may be assigned to any Affiliate or to any
other person or entity without the consent of the Issuers, subject to the Securities Act of 1933.




          17. Cost of Collection. If default is made in the payment of this Note, the Issuers
shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.




          18. Remedies Cumulative. The remedies provided in this Note shall be cumulative and
in addition to all other remedies available under this Note, at Law or in equity (including a
decree of specific performance and/or other injunctive relief), and nothing herein



41









 






shall limit a Holder’s right to pursue actual damages for any failure by the Issuers to comply
with the terms of this Note. The Issuers acknowledge that a breach by them of their obligations
hereunder will cause irreparable harm to the Holder of the Note and that the remedy at Law for any
such breach may be inadequate. The Issuers therefore agree, in the event of any such breach or
threatened breach, that the Holder of the Note shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.





42









 








          IN WITNESS WHEREOF, the Company has caused this Note to be signed and to be dated the day and
year first above written.




	 	 	 	 	 
	 	NATIONSHEALTH, INC.

 	 
	 	By:  	     /s/ Glenn Parker
 	 
	 	 	Name:  	Glenn Parker 	 
	 	 	Title:  	CEO 	 
	 
	 	NATIONSHEALTH HOLDINGS, L.L.C.

 	 
	 	By:  	     /s/ Glenn Parker
 	 
	 	 	Name:  	Glenn Parker 	 
	 	 	Title:  	CEO 	 
	 
	 	UNITED STATES PHARMACEUTICAL GROUP, L.L.C.

 	 
	 	By:  	     /s/ Glenn Parker
 	 
	 	 	Name:  	Glenn Parker 	 
	 	 	Title:  	CEO 	 
	 
	 	DIABETES CARE & EDUCATION, INC.

 	 
	 	By:  	      /s/ Glenn Parker
 	 
	 	 	Name:  	Glenn Parker 	 
	 	 	Title:  	CEO 	 
	 
	 	NATIONAL PHARMACEUTICALS AND MEDICAL PRODUCTS (USA), LLC

 
	 
	 	By:  	     /s/ Glenn Parker
 	 
	 	 	Name:  	Glenn Parker 	 
	 	 	Title:  	CEO