SUNLINK HEALTH SYSTEMS INC (Form: 10-Q, Received: 02/17/2004 17:44:06)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2003

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-12607

SUNLINK HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Ohio

31-0621189

(State or other jurisdiction of incorporation

or organization)

(I.R.S. Employer

Identification No.)

900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339

(Address of principal executive offices)

(Zip Code)

(770) 933-7000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of Common Shares, without par value, outstanding as of February 13, 2004 was 6,516,984.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)


	December 31, 2003			June 30, 2003
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	4,779		$	1,773
Receivables—net		15,302			12,012
Medical supplies		2,728			2,005
Prepaid expenses and other		2,406			1,836

Total Current Assets		25,215			17,626

Property, Plant and Equipment, At Cost		57,816			42,870
Less accumulated depreciation and amortization		4,659			3,202

Property, Plant and Equipment—Net		53,157			39,668

Goodwill		4,115
Other Assets		510			2,159

Total Assets	$	82,997		$	59,453


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	9,897		$	6,417
Revolving advances		7,003			1,915
Third-party payor settlements		4,546			4,687
Current maturities of long-term debt		10,165			2,787
Accrued expenses		10,871			7,884
Net current liabilities of discontinued operations		150			150

Total Current Liabilities		42,632			23,840

Long-Term Liabilities:
Long-term debt		28,978			26,989
Noncurrent liability for professional liability risks		1,548			683
Noncurrent liabilities of discontinued operations		1,468			1,468

Total Long-term Liabilities		31,994			29,140

Commitments and Contingencies

Shareholders’ Equity:
Common shares, without par value:
Issued and outstanding, 6,331 shares at December 31, 2003 and 5,028 shares at June 30, 2003		3,165			2,514
Additional paid-in capital		5,940			3,662
Common share warrants		170			40
Retained earnings (deficit)		(488	)		720
Accumulated other comprehensive loss		(416	)		(463	)

Total Shareholders’ Equity		8,371			6,473

Total Liabilities and Shareholders’ Equity	$	82,997		$	59,453

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share amounts)

(unaudited)


	THREE MONTHS ENDED December 31,						SIX MONTHS ENDED December 31,
	2003			2002			2003			2002
Net Revenues	$	35,813		$	23,675		$	62,330		$	47,476
Cost of Patient Service Revenues:
Salaries, wages and benefits		16,577			11,270			29,276			22,143
Provision for bad debts		4,013			2,530			7,459			5,320
Supplies		4,192			2,740			7,351			5,461
Purchased services		2,472			1,841			4,590			3,737
Other operating expenses		5,613			3,087			9,455			6,420
Rent and lease expense		802			539			1,448			1,096
Depreciation and amortization		832			362			1,473			718
Asset impairment charge					1,562						1,562

Cost of patient service revenues		34,501			23,931			61,052			46,457

Operating Profit (Loss)		1,312			(256	)		1,278			1,019
Other Income (Expense):
Interest expense		(1,348	)		(592	)		(2,363	)		(1,341	)
Interest income		7			24			10			40
Merger expenses					(411	)					(411	)

Earnings (Loss) From Continuing Operations before Income Taxes		(29	)		(1,235	)		(1,075	)		(693	)
Income Tax Expense		97			67			126			159

Earnings (Loss) From Continuing Operations		(126	)		(1,302	)		(1,201	)		(852	)
Earnings (Loss) from Discontinued Operations		8			316			(7	)		301

Net Earnings (Loss)	$	(118	)	$	(986	)	$	(1,208	)	$	(551	)

Earnings (Loss) Per Share:
Continuing Operations:
Basic	$	(0.02	)	$	(0.26	)	$	(0.21	)	$	(0.17	)

Diluted	$	(0.02	)	$	(0.26	)	$	(0.21	)	$	(0.17	)

Net Earnings:
Basic	$	(0.02	)	$	(0.20	)	$	(0.21	)	$	(0.11	)

Diluted	$	(0.02	)	$	(0.20	)	$	(0.21	)	$	(0.11	)

Weighted-Average Common Shares Outstanding:
Basic		6,338			4,998			5,698			4,998

Diluted		6,338			4,998			5,698			4,998

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	SIX MONTHS ENDED December 31,
	2003			2002
Net Cash Provided By (Used In) Operating Activities	$	(711	)	$	1,017
Cash Flows From Investing Activities:
Expenditures for property, plant and equipment		(2,162	)		(5,806	)
Cash acquired in HealthMont acquisition		95

Net Cash Used in Investing Activities		(2,067	)		(5,806	)
Cash Flows From Financing Activities:
Proceeds from issuance of common shares		131
Proceeds from long-term debt		4,041
Revolving advances, net		2,281
Payments on long-term debt		(670	)		(462	)

Net Cash Provided by (Used in) Financing Activities		5,783			(462	)
Effect of Exchange Rate Changes on Cash		1			—

Net Increase (Decrease) in Cash and Cash Equivalents		3,006			(5,251	)
Cash and Cash Equivalents at Beginning of Period		1,773			5,719

Cash and Cash Equivalents at End of Period	$	4,779		$	468

Supplemental Disclosure of Cash Flow Information:
Cash Paid For:
Interest, net of amounts capitalized	$	864		$	48

Income taxes	$	336		$	80

Noncash Investing and Financing Activities:
Long-term debt issued as payment-in-kind for interest payable	$	1,113		$	807

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2003

(dollars in thousands, except share and per share amounts)

(unaudited)

Note 1.—Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements as of and for the three and six months ended December 31, 2003 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission and, as such, do not include all information required by accounting principles generally accepted in the United States of America. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements included in the SunLink Health Systems, Inc. (“SunLink” or the “Company”) Annual Report on Form 10-K for the fiscal year ended June 30, 2003, filed on September 26, 2003. In the opinion of management, the Condensed Consolidated Financial Statements, which are unaudited, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the periods indicated. The results of operations for the three and six months ended December 31, 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Note 2.—Business Operations and Corporate Strategy

SunLink is a provider of healthcare services through the operation of community hospitals in the United States. In February 2001, SunLink acquired its initial six hospitals and began healthcare operations. On October 3, 2003, SunLink acquired two additional hospitals from HealthMont, Inc. Through its subsidiaries, SunLink now operates a total of eight community hospitals in four states. Seven of the hospitals are owned and one is leased. SunLink also operates certain related businesses, consisting primarily of nursing homes located adjacent to, or in close proximity with, certain of its hospitals, and home health agencies servicing areas around its hospitals. The healthcare operations comprise a single business segment: community hospitals. SunLink currently does not have operations in other business segments. SunLink’s hospitals are acute care hospitals and have a total of 437 licensed beds.

SunLink’s business strategy is to focus its efforts on internal growth of its eight existing hospitals supplemented by growth from selected hospital acquisitions. During the six months ended December 31, 2003, SunLink concentrated its efforts on the acquisition of HealthMont, Inc., as discussed in Note 3 and the operation and improvement of its six original hospitals. SunLink continues to evaluate certain hospitals which are for sale and review selected hospitals which SunLink has determined might become available for purchase.

Note 3.—Acquisition of HealthMont, Inc.

On October 3, 2003, a wholly-owned subsidiary of SunLink completed the merger with HealthMont, Inc. (“HealthMont”), a privately held operator of community hospitals. Upon the consummation of the transaction, SunLink acquired two community hospitals: Memorial Hospital of Adel, a 60-bed acute-care facility in Adel, Georgia, which includes a 95-bed nursing home, and Callaway Community Hospital, a 49-bed acute-care hospital in Fulton, Missouri. The results of operations of HealthMont are included in the results of operations for the Company from October 3, 2003 through the end of the current fiscal quarter, December 31, 2003. The Company believes that the two HealthMont hospitals it acquired are compatible with its business strategy of operating rural and exurban community hospitals.

Under the terms of the merger agreement, SunLink, among other things, issued to the shareholders of HealthMont 1,135,782 common shares of SunLink in consideration for all issued and outstanding capital stock of GealthMont. SunLink also issued 95,000 shares of SunLink to settle certain contractual obligations of HealthMont to its officers and directors. Additionally SunLink is obligated to issue 19,005 common shares in connection with certain SunLink options issued in replacement of previously outstanding HealthMont options.

Based on the average market price of SunLink’s common shares of $2.26 per share calculated based on the price two days before, the day of and two days after the amended merger agreement was entered into, plus the amount of senior debt and capital lease obligations assumed, plus transaction costs, the price to SunLink of the transaction was $15,000. For financial reporting purposes, the average market value of SunLink’s common shares was set as of the date of the first amendment of the merger agreement, March 24, 2003. The preliminary balance of the purchase price in excess of the fair value of the assets acquired and liabilities assumed at the date of the acquisition was recorded as goodwill totaling $4,115. The purchase price was established at March 31, 2003 based upon, among other things, the expected future operating results of the two hospitals. The final allocation of the purchase price to the fair value of assets acquired and liabilities assumed must be completed within one year of the merger date.

In connection with the merger, SunLink assumed HealthMont’s debt, which was approximately $8,275 at closing. HealthMont obtained the consent of its senior lender to the merger and the modification of certain terms of HealthMont’s senior debt, including an extension of the maturity date of the debt to August 31, 2005. Certain HealthMont investors arranged letters of credit which support up to $1,650 of HealthMont’s revolving credit loans with HealthMont’s senior lender. SunLink has agreed, in the event the letters of credit are drawn and the proceeds are applied to the outstanding balance of the revolving credit loans, to issue to such letter of credit obligors 350,000 SunLink common shares in full satisfaction of HealthMont’s reimbursement obligations under the letters of credit. Beginning October 3, 2003, SunLink will pay to such letter of credit obligors a 5% commitment fee monthly through March 31, 2005 in consideration for their obligation to maintain the letters of credit in effect.

Prior to the merger transaction, on March 24, 2003, SunLink assumed management of HealthMont’s Adel, Georgia and Fulton, Missouri hospitals under a management agreement for a fee of $80 per month ($50 per month in cash and $ 30 per month deferred) and extended loans to HealthMont totaling $1,600 thru October 3, 2003. SunLink recorded the $50 cash management fee paid as a reduction of other operating expenses for the period prior to the merger. The loan was recorded as part of the purchase price upon consummation of the merger.

On October 3, 2003, SunLink’s new HealthMont subsidiary also entered into a three year secured term loan for $2,300 with a third party lender. The loan is guaranteed by SunLink. The proceeds of the loan were used for certain transaction costs and for working capital needs. The loan bears an interest rate of 15% per annum and requires SunLink to pay certain fees.

SunLink did not acquire HealthMont’s corporate staff and offices in connection with the merger and did not add any corporate staff or significantly increase its overhead as a result of the merger. Upon consummation of the merger, the board of directors of SunLink elected Gene E. Burleson, a former HealthMont director, to serve the remainder of the unexpired term of Ronald J. Vannuki, who stepped down from the Company’s board.

In the quarter ended December 31, 2002, SunLink expensed $411 of capitalized costs relating to the then proposed HealthMont merger because SunLink could not determine at that time that it was probable that the merger would be completed.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition. The Company is in the process of obtaining third-party valuations of certain intangible assets; accordingly the allocation of the purchase price is preliminary.


Current assets	$	2,857
Property, plant and equipment		13,634
Long-term assets		200
Goodwill		4,115

Total assets acquired		20,806

Current liabilities		10,392
Long-term liabilities		5,311

Total liabilities assumed		15,703

Net assets acquired	$	5,103

The following pro forma statements of earnings for the three and six months ending December 31, 2003, respectively give effect to SunLink’s acquisition of HealthMont as if it has occurred as of July 1, 2002:


	Pro forma						Pro forma
	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
Net revenues	$	35,965		$	30,920		$	69,688		$	62,049

Net loss	$	(127	)	$	(1,725	)	$	(3,080	)	$	(2,029	)

Net loss per share: basic and diluted	$	(0.02	)	$	(0.35	)	$	(0.54	)	$	(0.41	)

Note 4.—Stock-Based Compensation

SunLink measures compensation costs for stock options issued to employees and directors using the intrinsic value-based method of accounting. Pro forma net loss and net loss per share amounts that would have resulted had compensation costs been determined using the fair value-based method are as follows:


	Three Months Ended December 31,						Six Months Ended December 31,
	2003			2002			2003			2002
Net loss as reported:	$	(118	)	$	(986	)	$	(1,208	)	$	(551	)

Less: total stock-based compensation determined under the fair value based method for all awards, net of income tax		5			18			10			36

Pro forma net loss	$	(123	)	$	(1,004	)	$	(1,218	)	$	(587	)

Net loss per share attributable to common shareholders:
Basic:
As reported	$	(0.02	)	$	(0.20	)	$	(0.21	)	$	(0.11	)

Pro forma	$	(0.02	)	$	(0.20	)	$	(0.21	)	$	(0.12	)

Diluted:
As reported	$	(0.02	)	$	(0.20	)	$	(0.21	)	$	(0.11	)

Pro forma	$	(0.02	)	$	(0.20	)	$	(0.21	)	$	(0.12	)

Note 5.—Recent Accounting Pronouncements

In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. In particular, this Statement clarifies the circumstances under which a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company’s financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified on or after May 15, 2003 and is not expected to have a material impact on the Company’s financial condition or results of operations.

Note 6.—Receivables- net


	December 31, 2003			June 30, 2003
Patient accounts receivable (net of contractual allowances)	$	23,033		$	17,763
Less allowance for doubtful accounts		(7,759	)		(5,848	)

Patient accounts receivable, net		15,274			11,915

Other accounts receivable		28			97

Receivables—net	$	15,302		$	12,012

Net revenues included $142 and $456 for the three months ended December 31, 2003 and 2002, respectively, for the settlements and filings of prior year third-party payor issues. Net revenues included $280 and $515 for the six months ended December 31, 2003 and 2002, respectively, for the settlements and filings of prior year third-party payor issues. Net revenues for the three and six months ended December 31, 2003 included $709 from the Georgia Medicaid Indigent Care Fund program.

Note 7.—Discontinued Operations

Life Sciences and Engineering Segment—SunLink retained a defined benefit retirement plan which covered substantially all of the employees of this segment when it was sold in fiscal 1998. Pension expense of $19 and $15 for the three months ended December 31, 2003 and 2002, respectively, relating to this retirement plan is reported in discontinued operations for these periods. Pension expense of $34 and $30 for the six months ended December 31, 2003 and 2002, respectively, relating to this retirement plan is reported in discontinued operations for these periods Also included in discontinued operations for the three and six months ended December 31, 2003 is $30 of partial pension termination expense and a $57 income tax benefit related to the adjustment to the minimum pension liability account.

Industrial Segment—In fiscal 1989, SunLink discontinued the operations of its industrial segment and subsequently disposed of substantially all related net assets. However, obligations may remain relating to product liability claims for products sold prior to the disposal. Liabilities of discontinued operations at December 31, 2003 and June 30, 2003 of $435 and $495, respectively, relate to the industrial segment.

Housewares Segment—Non-current liabilities of discontinued operations at December 31, 2003 include $1,183 relating to the housewares segment which represents a reserve for a portion of a guarantee by a U.K. subsidiary of SunLink with respect to obligations of a former subsidiary under a lease covering a portion of the manufacturing location of the former subsidiary. The reserve for the subsidiary’s obligation under such lease is based upon management’s estimate, after consultation with its property consultants and legal counsel, of the cost, including lease payments, to satisfy the lease obligation. The guarantee runs through March 2019 and was made by the U.K. subsidiary of SunLink, which is currently inactive, for the former subsidiary’s lease obligation when the former subsidiary was owned by the SunLink U.K. subsidiary. The maximum potential obligation of SunLink’s subsidiary under the guarantee would be approximately $8,547. A currently inactive U.K. subsidiary of SunLink has an option to repurchase the capital stock of the disposed subsidiary for nominal consideration if any U.K. subsidiary of SunLink is called upon to perform under the lease guarantee and under certain other conditions. For the three and six months ended December 31, 2002, a gain from discontinued operations of $331 relating to a domestic capital loss tax carry-back was reported in discontinued operations.

Over the past fifteen years SunLink has discontinued operations carried on by its former industrial, U.K. leisure marine, life sciences and engineering, U.K. child safety and U.K. housewares segments. SunLink’s reserves related to discontinued operations of these segments represent management’s best estimate of the possible liability for property, product liability and other claims for which SunLink may incur liability. These estimates are based on management’s judgments using currently available information as well as, in certain instances, consultation with its insurance carriers and legal counsel. While estimates are based on the evaluation of available information, it is not possible to predict with certainty the ultimate outcome of many contingencies relating to discontinued operations. SunLink intends to adjust its estimates of the reserves as additional information is developed and evaluated. However, management believes that the final resolution of these contingencies will not have a material adverse impact on the financial position, cash flows or results of operations of SunLink.

Note 8.—Long-Term Debt


	December 31, 2003			June 30, 2003
Senior subordinated note, net of unamortized discount of $1,537 and $1,848	$	18,975		$	18,522
Senior subordinated zero coupon note, net of unamortized discount of $16 and $109		1,634			1,541
Term loan		4,179			4,668
Mountainside financing facility		6,000			4,259
HealthMont term notes I		700			700
HealthMont term notes II		2,300
HealthMont mortgage I		2,843
HealthMont mortgage II		1,528
Capital lease obligations		984			86

		39,143			29,776
Less current maturities		(10,165	)		(2,787	)

	$	28,978		$	26,989

Seller Financing—In connection with the acquisition of SunLink’s initial six hospitals, SunLink Healthcare Corp. (“SHC”), a wholly-owned subsidiary of the Company, issued an 8.5% senior subordinated note in the face amount of $17,000 and a senior subordinated zero coupon note in the face amount of $2,000, to the seller of the hospitals (collectively the “SHC Notes”).

The senior subordinated note is due on January 31, 2006 with interest payable semiannually either in cash or additional promissory notes through August 1, 2003 and in cash thereafter. Additional promissory notes for $3,862 for interest from February 1, 2001 through August 31, 2003 were issued. The accrued interest payable at December 31, 2003 of $727 was due and paid subsequent to quarter end on January 31, 2004. The stated interest rate of 8.5% on the senior subordinated note was considered a below-market interest rate at the date of issuance; therefore, the note was discounted to estimated market value at an effective interest rate of 12.3%. The discount recorded on the senior subordinated note was $2,873.

The senior subordinated zero coupon note matured and was paid subsequent to quarter end on January 31, 2004 in the amount of $1,650. The interest rate on the senior subordinated zero coupon note was considered less than the market rate at the date of issuance, therefore, the note was discounted to an estimated market interest rate of 11.3%. The original issue discount on the senior subordinated zero coupon note was $490.

The discounts on the SHC Notes were determined in consultation with SunLink’s financial advisor based on high-yield debt instruments of similar health care providers and are being amortized over the term of the related debt instrument using the effective interest method. For the three months ended December 31, 2003 and 2002, amortization expense was recognized on the discounts of $210 and $156, respectively, and for the six months ended December 31, 2003 and 2002, $405 and $328, respectively.

The loan agreement pursuant to which the SHC Notes were issued requires that SHC grant to the lender a security interest in, and mortgage on, collateral consisting of SHC and its subsidiaries’ real and personal property, unless SHC has outstanding senior indebtedness that meets certain conditions. The SHC Notes presently are not collateralized. Each of the individual hospital subsidiaries of SHC is a guarantor of the SHC Notes. Further, the SHC Notes are subordinate in payment and collateral to all defined senior indebtedness of SHC which in the aggregate may not exceed $15,000, other than debt incurred after the issuance of such notes in connection with certain permitted acquisitions. The loan agreement also prohibits the payment of dividends or other distributions in respect of capital stock of SHC or other payments to SunLink.

SunLink Credit Facility—On January 4, 2002, SunLink entered into a $14,000 credit facility comprised of a secured revolving credit facility for loans of up to $8,000 with interest at prime plus 1.25% (which revolving line of credit expires December 31, 2005) and a $6,000 secured term loan repayable in monthly installments through June 30, 2007 at an interest rate of 9.78%. The availability of borrowings under the SunLink revolving credit facility is based upon, among other things, a borrowing base keyed to the level of SHC receivables which, based upon the Company’s estimates, provided borrowing capacity of approximately $8,000 at December 31, 2003. Borrowings under the SunLink revolving credit facility were $4,564 at December 31, 2003. The revolving line of credit is secured by the patient accounts receivable of SHC. The SunLink revolving line of credit facility lender filed for bankruptcy on August 25, 2003. Subsequent to the bankruptcy filing and through December 31, 2003, the revolving credit facility lender has funded the line daily by the amount of SHC’s accounts receivable received by the lender to pay down the revolving line of credit plus additional advances of $1,050. The net proceeds from the secured term loan of $5,800 ($6,000 secured term loan less $200 costs and fees) were used for

working capital and to fund a portion of SunLink’s hospital capital projects which include the replacement hospital in Jasper, Georgia (which opened in May 2003), and a new emergency room at its hospital in Ellijay, Georgia. The term loan is secured by liens on SHC’s real and personal property, except for the Jasper, Georgia hospital and patient accounts receivables, as well as by the capital stock owned by SHC and its subsidiaries. Also, each of the SHC hospital subsidiaries is a guarantor of the loan.

Mountainside Financing Facility—On September 30, 2002, SunLink entered into a $6,000 secured bank financing facility (the “Mountainside Financing Facility”) to provide financing for the Mountainside Medical Center replacement hospital in Jasper, Georgia. As of December 31, 2003, SunLink had borrowed $6,000 under a construction loan with interest at prime plus 1% per annum. Under the Mountainside Financing Facility, the construction loan may be converted to a 20-year mortgage loan subject to certain conditions by July 1, 2004. The 20-year mortgage loan option would bear interest at prime plus 1% per annum or, at SunLink’s option, interest at the 5-year U.S. Treasury Constant Maturity Yield plus 3 ½%. The actual mortgage loan interest rate is adjustable every 5 years. The Mountainside Financing Facility requires SunLink to comply with certain conditions and covenants including hospital financial and operational covenants, information requirements and limitations on secured debt incurred by the hospital subsidiary.

SunLink funded the construction costs of the Mountainside Medical Center replacement hospital, which opened in May 2003, from the term loan, revolving SunLink credit facility, the Mountainside Financing Facility and internal funds.

HealthMont Secured Term Notes—In connection with the HealthMont merger, SunLink obtained a commitment for a $3,000, three-year secured term loan with an interest rate of 15%. On March 21, 2003, this commitment was modified and SunLink borrowed $700 prior to the closing of the merger to be used as partial funding for loans by SunLink to HealthMont. The $700 was borrowed through the sale of SunLink’s 15% notes due March 2006 (the “HealthMont Term Note I”). SunLink’s new HealthMont subsidiary borrowed the remaining $2,300 commitment at the closing of the HealthMont merger on October 3, 2003 through the sale of 15% notes due October 2006 (the “HealthMont Term Note II”).

HealthMont Mortgage I—In connection with the merger with HealthMont, SunLink assumed a mortgage loan of $2,926 on October 3, 2003. The loan bears interest at prime plus 2% and is payable in quarterly principal installments of $83 plus interest, with the remaining unpaid balance of $2,262 due on August 31, 2005. The mortgage is secured by the real and leased property of the HealthMont subsidiary’s Adel, Georgia facility. The agreement requires the HealthMont subsidiary to comply with certain conditions and covenants including financial and operational covenants. This mortgage is guaranteed by SunLink.

HealthMont Mortgage II—In connection with the merger with HealthMont, SunLink assumed a mortgage loan of $1,560 on October 3, 2003. The loan bears interest at prime plus 2% and is payable in quarterly principal installments of $32 plus interest, with the remaining unpaid balance of $1,304 due on August 31, 2005. The mortgage is secured by the real and leased property of the HealthMont subsidiary’s Fulton, Missouri facility. The agreement requires the HealthMont subsidiary to comply with certain conditions and covenants including financial and operational covenants. This mortgage is guaranteed by SunLink.

HealthMont Revolving Loan—In connection with the merger with HealthMont, SunLink assumed an $8,000 revolving loan agreement, which SunLink guaranteed, which had borrowings of $2,807 on October 3, 2003. The loans bears interest of prime plus 1.5% and the agreement expires August 31, 2005. All of the receipts of the HealthMont subsidiary are required to be deposited with the lender as payment on the revolving loan and borrowings are made weekly for

working capital needs. The amount available is based upon several factors, including liquidity, as defined, of the HealthMont subsidiary patient accounts receivable. As of December 31, 2003, the Company had $2,439 of borrowings outstanding and no unused availability under the HealthMont revolving loan agreement. The HealthMont revolving loan is secured by the personal property of the HealthMont subsidiary and letters of credit guaranteed by certain persons who were shareholders of HealthMont prior to the acquisition and who currently are shareholders of SunLink. The agreement requires SunLink’s HealthMont subsidiary to comply with certain conditions and covenants including financial and operational covenants. This revolving loan is guaranteed by SunLink.

The debt capacity of SunLink’s subsidiaries, SunLink Healthcare Corp. (“SHC”) and HealthMont Inc. is limited and is subject to certain financial and other covenants under their debt agreements. Under the most limiting of such covenants, SHC would, at December 31, 2003, have been able to incur up to approximately $257 of additional indebtedness. The HealthMont subsidiary has no additional borrowing capacity at December 31, 2003.

At December 31, 2003, SunLink was in violation of one financial covenant under each of the Mountainside Financing Facility and the HealthMont Term Note I. Waivers of compliance with these obligations at December 31, 2003 have been received from the two lenders. However, in accordance with Emerging Issues Task Force abstract No. 86-30, SunLink has classified the corresponding long-term debt of $6,400 under the two debt agreements as current liabilities as of December 31, 2003 because the lenders did not waive compliance with the financial covenants for more than one year. We anticipate that we will be able to comply with such covenants or obtain waivers in the event of non-compliance for not less than the remainder of the fiscal year. However, if we are unable to comply with such covenants or to obtain waivers in the event of noncompliance, such instances may violate cross default provisions in other debt agreements. In the event we were then unable to borrow against our revolving credit facilities or be required as a result of such non-compliance or cross defaults to repay significant amounts of indebtedness, we would be required to either refinance such indebtedness or secure new sources of financing to fund our operations and working capital needs. The failure to obtain such alternate sources of financing or a material delay in obtaining such alternative financing could have a material adverse effect on us and our operations.

Note 9.—Income Taxes

Income tax expense of $97 (all state taxes) and $67 ($18 federal and $49 state taxes) was recorded for the three months ended December 31, 2003 and 2002, respectively. Income tax expense of $126 (all state taxes) and $159 ($68 federal and $91 state taxes) was recorded for the six months ended December 31, 2003 and 2002, respectively. SunLink had a federal net operating loss carryforward (which expires in 2020, 2021 and 2022) of approximately $9,800 at December 31, 2003. Use of this net operating loss carryforward is subject to the limitations of the provisions of Internal Revenue Code Section 382. As a result, not all of the net operating loss carryforward is useable to offset federal taxable income in the current year. SunLink has provided a valuation allowance for the entire amount of the deferred tax asset (the majority of which is the federal net operating loss carryforward) as it is management’s assessment based upon the criteria identified in SFAS No. 109, that it is currently more likely than not that none of the deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies.

Note 10.—Comprehensive Earnings

Comprehensive earnings for SunLink include foreign currency translation adjustments. Total comprehensive earnings for the following periods were as follows:


	Three Months Ended
	December 31, 2003			December 31, 2002
Net loss:	$	(118	)	$	(986	)
Other comprehensive income net of tax:
Change in equity due to:
Change in minimum pension liability adjustment		111
Foreign currency translation adjustments		(62	)		(25	)

Comprehensive loss	$	(69	)	$	(1,011	)


	Six Months Ended

	December 31, 2003			December 31, 2002
Net earnings (loss):	$	(1,208	)	$	(551	)
Other comprehensive income net of tax:
Change in equity due to:
Change in minimum pension liability adjustment		111
Foreign currency translation adjustments		(64	)		(47	)

Comprehensive loss	$	(1,161	)	$	(598	)

Note 11.—Asset Held for Sale and Impairment of Long-lived Asset

SunLink opened its new Mountainside Medical Center replacement hospital in Jasper, Georgia in May 2003. During the quarter ended December 31, 2002, SunLink determined that the carrying value of its old hospital and an adjacent medical office building exceeded their estimated fair value by $1,482 and $80, respectively. An impairment loss of $1,562 was recorded to write the hospital and medical office building down to fair value. Fair value was determined by SunLink based upon management’s determination of the best future use of the facilities and the estimated discounted cash flows generated by these uses. The medical office building is being retained and continues to be leased to medical practitioners. The old hospital facility is held for sale. The net book value of $503 for the old hospital facility is shown as an asset held for sale in other current assets on the consolidated balance sheet. SunLink has a pending sale contract for the old hospital and expects if the sale is completed, that such sale would result in no material gain or loss.

Note 12.—Commitments and Contingencies

As discussed in Note 7.—“Discontinued Operations”, among other things, a U.K. subsidiary of SunLink remains contingently liable as guarantor of obligations under a lease of a former

subsidiary covering a portion of the former subsidiary’s manufacturing location. The maximum potential obligation of SunLink’s subsidiary under the guarantee would be approximately $8,547.

As of December 31, 2003, SunLink had no material future commitments for capital expenditures. Subject to the availability of internally generated funds and other financing, SunLink expects to spend approximately $500 to $1,500 in capital expenditures during the remaining six months of the fiscal year ending June 30, 2004, primarily for new and replacement equipment.

SunLink is a party to claims and litigation incidental to its business, as to which it is not currently possible to determine the ultimate liability, if any. Based on an evaluation of information currently available and consultation with legal counsel, management believes that resolution of such claims and litigation is not likely to have a material effect on the financial position, cash flows or results of operations of SunLink.

With the acquisition of HealthMont, the Company assumed a lease guarantee of $500 for a hospital HealthMont formerly operated. The lease had been assumed by a third party in a transaction prior to the Company’s acquisition of HealthMont. The leased hospital has subsequent been closed and SunLink recorded a liability of $500 for the lease guarantee at the acquisition date.

Contractual obligations, commitments and contingencies related to long-term debt, non-cancelable operating leases and physician guarantees at December 31, 2003 were as follows:

Contractual Obligations, Commitments and Contingencies


Payments Due in:	Long-Term Debt		Operating Leases		Physician Guarantees
1 year	$	10,165	$	1,640	$	3,617
2 years		5,406		1,240		2,411
3 years		22,798		608		985
4 years		774		406
5 years		—		355
More than 5 years		—		6,026

	$	39,143	$	10,275	$	7,013

The Company also has $7,003 outstanding of revolving line of credit borrowings which are classified as current liabilities at December 31, 2003.

At December 31, 2003, SunLink had contracts with 22 physicians which contain guaranteed minimum gross receipts. SunLink expenses physician guarantees as they are determined to be due to the physician on an accrual basis. Each month the physician’s gross receipts are accumulated and the difference between the monthly guarantee and the physician’s actual gross receipts for the month is calculated. If the guarantee is greater than the receipts, the difference is accrued as a liability and an expense. The net guarantee amount is paid to the physician in the succeeding month. If the physician’s monthly receipts exceed the guarantee amount in subsequent months, then the overage is repaid to SunLink to the extent of any prior monthly guarantee payments and the liability and expense is reduced by the amount of the repayment. For the three months ended December 31, 2003 and 2002, SunLink expensed $933 and $402, respectively, and $1,683 and $957 for the six months ended December 31, 2003 and 2002, respectively, for physician guarantees. The table above shows the maximum obligations SunLink had at December 31, 2003 for the non-cancelable commitments under physician guarantee contracts.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(dollars in thousands, except per share and admissions data)

Recent Developments

Under the terms of the merger agreement, SunLink, among other things, issued to the shareholders of HealthMont 1,135,782 common shares of SunLink in consideration for all issued and outstanding capital stock of HealthMont. SunLink also issued 95,000 shares of SunLink to settle certain contractual obligations of HealthMont to its officers and directors. Additionally SunLink is obligated to issue 19,005 common shares in connection with certain SunLink options issued in replacement of previously outstanding HealthMont options.

fee paid as a reduction of other operating expenses for the period prior to the merger. The loan was recorded as part of the purchase price upon consummation of the merger.

Financial Summary


	THREE MONTHS ENDED								SIX MONTHS ENDED
	December 31,								December 31,
		2003			2002		% Change			2003			2002		% Change

Net revenues	$	35,813		$	23,675		51.3	%	$	62,330		$	47,476		31.3	%
Cost of patient service revenues		(34,501	)		(23,931	)	44.2	%		(61,052	)		(46,457	)	31.4	%

Operating profit (loss)		1,312			(256	)	N/A			1,278			1,019		25.4	%
Merger expenses					(411	)	N/A						(411	)	N/A
Interest expense		(1,348	)		(592	)	127.7	%		(2,363	)		(1,341	)	76.2	%
Interest income		7			24		(70.8	%)		10			40		(75.0	%)

Loss from Continuing
Operations Before Income Taxes	$	(29	)	$	(1,235	)	(97.7	%)	$	(1,075	)	$	(693	)	55.1	%

Admissions		3,058			1,906		60.4	%		5,196			3,698		40.5	%

Equivalent Admissions		6,732			4,433		51.9	%		11,925			9,095		31.1	%

Surgeries		1,347			1,068		26.1	%		2,478			2,088		18.7	%

Revenue per Equivalent Admissions	$	5,319		$	5,341		(0.4	%)	$	5,227		$	5,220		0.1	%

Equivalent admissions— Equivalent admissions is used by management and some investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues. The equivalent admissions computation seeks to equate outpatient revenues to the volume measure (admissions) used to measure inpatient volume to result in a general measure of combined inpatient and outpatient volume (equivalent admissions).

Results of Operations

All of our net revenues through December 31, 2003 are from our U.S. community hospital segment which is composed of the six SunLink facilities acquired February 1, 2001 and the two HealthMont facilities acquired October 3, 2003.

Net revenues for the quarter ended December 31, 2003 were $35,813 with a total of 6,732 equivalent admissions and revenues per equivalent admission of $5,319 compared to net revenues of $23,675, a total of 4,433 equivalent admissions and revenues per equivalent admission of $5,341 for the quarter ended December 31, 2002. The 51.2% increase in net revenues for the quarter ended December 31, 2003 was due to a 51.9% increase in equivalent admissions and the acquisition of the two HealthMont facilities on October 3, 2003. The increase in equivalent admissions also was a result of a 60.4% increase in admissions and higher outpatient net revenues. Excluding these two new HealthMont facilities, net revenues increased 22.4% resulting from an 18.2% increase in equivalent admissions and a 25.3% increase in admissions.

Net revenues for the six months ended December 31, 2003 were $62,330 with a total of 11,925 equivalent admissions and revenues per equivalent admission of $5,227 compared to net revenues of $47,476, a total of 9,095 equivalent admissions and revenues per equivalent admission of $5,220 for the six months ended December 31, 2002. The 31.3% increase in net revenues for the six months ended December 31, 2003 was due to a 31.1% increase in equivalent admissions and a 0.1% increase in revenue per equivalent admission. The increase in equivalent admissions was a result of increased inpatient volume as indicated by the 40.5% increase in admissions. Excluding these two new HealthMont facilities, net revenues increased 16.9% resulting from a 14.8% increase in equivalent admissions and a 22.4% increase in admissions. Net revenues for the three and six months ended December 31, 2003 included $709 from the Georgia Medicaid Indigent Care Fund program.

We believe upgraded services and facilities and the new doctors contributed to the increase in net revenues, admissions and equivalent admissions for the six months ended December 31, 2003 compared to the same period last year. We added 13 net new doctors during the year ended June 30, 2003 and 18 net new doctors during the six months ended December 31, 2003. During the six months ended December 31, 2003, SunLink spent $1,683 on physician guarantee and recruiting expenses.

We also have expended approximately $2,151 for capital expenditures to upgrade services and facilities since July 1, 2002. In addition, we opened the replacement Mountainside Medical Center in Jasper, Georgia in May 2003 and built a new emergency room at our facility in Ellijay, Georgia in January 2003.

We continue to seek increased patient volume by attracting additional physicians to our hospitals, further upgrading the services offered by the hospitals and improving the hospitals’ physical facilities.

The following table sets forth the percentage of net patient revenues from various payors in the Company’s hospitals for the periods indicated:


	Three Months Ended December 31,
	2003		2002
Source
Medicare	45.4	%	47.6	%
Medicaid	17.6	%	14.8	%
Self pay	7.5	%	7.5	%
Commercial Insurance & Other	29.5	%	30.1	%

	100.0	%	100.0	%


	Six Months Ended December 31,
	2003		2002
Source
Medicare	45.8	%	48.0	%
Medicaid	16.8	%	14.4	%
Self pay	7.7	%	7.7	%
Commercial Insurance & Other	29.7	%	29.9	%

	100.0	%	100.0	%

During the current fiscal year, SunLink has experienced an percentage increase in Medicaid revenues as a percent of net revenues and an offsetting percentage decrease in Medicare revenues, due primarily to the patient mix of the two acquired HealthMont hospitals. The dollar amount of net revenues in each payer category increased between 79.9% and 44.9% in the quarter ended December 31, 2003 versus the quarter ended December 31, 2002.

Cost of patient service revenues, including depreciation, was $34,501 and $23,931 for the quarters ended December 31, 2003 and 2002, respectively and $61,052 and $46,457 for the six months ended December 31, 2003, respectively.


	Cost of Patient Service Revenues As % of Net Revenues Three Months Ended December 31,
	2003		2002
Salaries, wages and benefits	46.3	%	47.6	%
Provision for bad debts	11.2	%	10.7	%
Supplies	11.7	%	11.6	%
Purchased services	6.9	%	7.8	%
Other operating expenses	15.7	%	13.0	%
Rent and lease expense	2.3	%	2.3	%


	Cost of Patient Service Revenues As % of Net Revenues Six Months Ended December 31,
	2003		2002
Salaries, wages and benefits	47.0	%	46.6	%
Provision for bad debts	12.0	%	11.2	%
Supplies	11.8	%	11.5	%
Purchased services	7.4	%	7.9	%
Other operating expenses	15.2	%	13.5	%
Rent and lease expense	2.3	%	2.3	%

Salaries, wages and benefits expense decreased as a percentage of net revenues for the current quarter due to the increased patient volume, but increased in the six month period due to staffing inefficiencies at the new Mountainside Medical Center which opened in May 2003 and higher employee health insurance claims. The provision for bad debts was 11.2% of net revenues in the quarter ended December 31, 2003, an increase of 0.5% of net revenues from the prior year. The increase was due to more difficult collections of deductibles and co-insurance payments due to the overall poorer economic conditions. Supplies expense increased as a percentage of net revenues in the current year due to increased supplies used at Mountainside Medical Center after opening in May 2003. The increase in other operating expenses as a percent of net revenue in the

first half of this year reflects increases in insurance and physician recruiting expenses. The cost of all insurance coverage has continued to increase over the past two years. Physician recruiting expense (included in other operating expenses) has increased by $532 (133%) and $726 (76.3%) during the three and six months ended December 31, 2003, respectively, as compared to the prior year period due to the recruitment of 24 net new doctors during the 15 preceding months.

Depreciation expense was $832 and $362 for the three months ended December 31, 2003 and 2002, respectively, and $1,473 and $718 for the six months ended December 31, 2003. The increase in the current year was due primarily to the opening of the new Mountainside Medical Center in May 2003 which had a capitalized cost of approximately $16,000 and the October 3, 2003 acquisition of HealthMont which added two new facilities.

Interest expense was $1,348 and $592 for the three months ended December 31, 2003 and 2002, respectively, and $2,363 and $1,341 for the six months ended December 31, 2003 and 2002, respectively. The increased interest expense is due to the increased debt owed in the current year primarily due to the $6,000 Mountainside Financing Facility, the $4,563 revolving advance borrowings undertaken by SHC and approximately $8,300 of debt assumed and undertaken in the HealthMont acquisition.

The loss from continuing operations of $126 ($0.02 per share) in the quarter ended December 31, 2003 compared to a loss from continuing operations of $1,302 ($0.26 per share) in the comparable quarter last year. Included in the prior year’s results was a $1,562 asset impairment charge for the write down of the carrying value of the old Mountainside Medical Center and medical office building in Jasper, Georgia to fair value and $411 of expenses related to the HealthMont merger.

For the three and six months ended December 31, 2002, a gain from discontinued operations of $331 relating to a domestic capital loss tax carry-back was reported in discontinued operations.

Liquidity and Capital Resources

We used $711 of cash in operating activities during the six months ended December 31, 2003 compared to a $1,017 cash generation for the comparable period last year. The cash use in the current year was composed of the following:


Net Loss	$	(1,208	)
Depreciation and other non-cash expenses		1,638
Increase in receivables, net		(1,330	)
Increase in other assets		(134	)
Increase in accounts payable and accrued expenses		323

	$	(711	)

We expended $2,162 for capital improvements at our hospitals during the six months ended December 31, 2003. This includes $844 included in accounts payable at June 30, 2003 for the replacement hospital in Jasper, Georgia and subsequently paid in the current fiscal year. In addition to routine capital expenditures of $873 during the six months ended December 31, 2003, primarily for new and replacement equipment, we expended $1,289 for the replacement hospital in Jasper, Georgia. We believe attractive, up to date physical facilities assist in recruiting quality staff and physicians, as well as attracting patients. Subject to the availability of internally generated funds and other financing, we expect to expend approximately $500 to $1,500 for capital expenditures during the remaining six months of the fiscal year ending June 30, 2004.

The availability of borrowing under our two revolving line of credit facilities is limited. Both are based upon, among other things, a borrowing base keyed to the level of the applicable hospitals’ receivables. Based upon our estimates, the SunLink revolving credit facility provided borrowing capacity of approximately $8,000 at December 31, 2003 . Borrowings under the SunLink revolving credit facility at December 31, 2003 were $4,564. Borrowings under the HealthMont revolving credit facility was $2,440 at December 31, 2003, the entire estimated borrowing capacity of that line of credit. If the applicable amount or quality of receivables is lower than expected, our borrowing capacity under the applicable revolving credit facilities will also be lower. On August 29, 2003, SunLink entered into a $3,000 standby bridge loan facility with a private investment fund, SunLink’s Chairman and CEO and one SunLink director. The facility had a 90 day commitment period which expired in November 2003 during which the funds could be borrowed. The facility also had a $20 standby commitment fee which was fully-earned and non-refundable. The $3,000 standby bridge loan facility was entered into due to the uncertainty of funding under the revolving line of credit facility after the lender of the SunLink revolving line of credit facility experienced financing problems in early August 2003 and subsequently filed for bankruptcy on August 25, 2003. Subsequent to the bankruptcy filing, the SunLink revolving credit facility lender has funded the line through December 31, 2003 with the collections received on SunLink’s accounts receivable plus additional advances of $1,050. If SunLink or its applicable subsidiaries experience a material adverse change in their business, assets, financial condition, management or operations, or if the value of the collateral securing the applicable credit facilities decreases, or if the lenders are unable to perform, we may be unable to draw on one or more of the credit facilities.

Our replacement hospital in Jasper, Georgia, Mountainside Medical Center, opened in May, 2003. On September 30, 2002, SunLink entered into a $6,000 secured bank financing facility (“the Mountainside Financing Facility”) to provide additional financing for the replacement hospital. Under the Mountainside Financing Facility, SunLink borrowed $6,000 under a construction loan with interest at prime plus 1% per annum. SunLink has funded the

construction costs for the Mountainside replacement hospital with the borrowings under the term loan, the revolving credit facility, the Mountainside Financing Facility and with funds from operations.

The Mountainside Financing Facility may be converted to a 20-year mortgage loan subject to certain conditions by July 1, 2004. The 20-year mortgage loan would bear interest at prime plus 1% per annum or, at SunLink’s option, interest at the 5-year U.S. Treasury Constant Maturity Yield plus 3½%. The actual mortgage loan interest rate is adjustable every 5 years. The Mountainside Financing Facility requires SunLink to comply with certain conditions and covenants including hospital financial and operational covenants, information requirements and limitations on secured debt incurred by the hospital subsidiary which owns and operates the Jasper, Georgia hospital.

At the closing of the HealthMont merger, we assumed HealthMont’s long-term debt of $5,287, which was composed of two mortgages totaling $4,371 and capital lease obligations totaling $916. The mortgages bear interest of prime plus 2%, have quarterly principal payments of $115 with the remaining unpaid balances of $3,566 due August 31, 2005. In connection with the merger with HealthMont, we obtained a commitment for a $3,000, three-year secured term loan with an interest rate of 15%. On March 21, 2003, this commitment was modified and we borrowed $700 prior to the closing of the merger to be used as partial funding for loans by SunLink to HealthMont. The $700 was borrowed through the sale of our 15% notes due March 2006. Our new HealthMont subsidiary borrowed the remaining $2,300 at the closing of the merger on October 3, 2003 through the sale of 15% notes due October 2006.

The debt capacity of our SunLink Healthcare Corp. (“SHC”) subsidiary, which owns the stock of our initial six hospital subsidiaries, is limited and is subject to certain leverage tests by its loan agreements. Under the most limiting of such tests, SHC would, at December 31, 2003, have been able to incur up to approximately $257 of additional indebtedness. This does not include any amount relating to the HealthMont merger which did not involve SHC. The HealthMont, Inc. subsidiary has no additional borrowing capacity at December 31, 2003.

Contractual obligations related to long-term debt, non-cancelable operating leases and physician guarantees at December 31, 2003 were as follows:

Contractual Obligations, Commitments and Contingencies


Payments Due in:	Long-Term Debt		Operating Leases		Physician Guarantees
1 year	$	10,165	$	1,640	$	3,617
2 years		5,406		1,240		2,411
3 years		22,798		608		985
4 years		774		406
5 years		—		355
More than 5 years		—		6,026

	$	39,143	$	10,272	$	7,013

The Company also has $7,003 outstanding of revolving line of credit borrowings which are classified as current liabilities at December 31, 2003.

Physician guarantees are used to help recruit new physicians to our hospitals by guaranteeing them a minimum level of gross receipts for a specific period while they establish their practices. At December 31, 2003, SunLink had contracts with 22 physicians which contain guaranteed minimum gross receipts. SunLink expenses physician guarantees as they are

determined to be due to the physician on an accrual basis. Each month, the physician’s gross receipts are accumulated and the difference between the monthly guarantee and the physician’s actual gross receipts for the month is calculated. If the guarantee is greater than the receipts, the difference is accrued as a liability and an expense. The net guarantee amount is paid to the physician in the succeeding month. If the physician’s monthly receipts exceed the guarantee amount in subsequent months, then the overage is repaid to SunLink to the extent of any prior monthly guarantee payments and the liability and expense is reduced by the amount of the repayment. During the three months ended December 31, 2003 and 2002, respectively, SunLink expensed $933 and $402, respectively, and $1,683 and $957 for the six months ended December 31, 2003 and 2002, respectively, for physician guarantees. The table above shows the maximum obligations SunLink had at December 31, 2003 for the non-cancelable commitments under physician guarantee contracts.

At December 31, 2003, we had outstanding long-term debt of $39,143 (including $6,400 of long-term debt classified as current), of which $20,609 was incurred in connection with our purchase on February 1, 2001 of our initial six community hospitals and related businesses, $7,371 was incurred or assumed in connection with the October 3, 2003 acquisition of HealthMont, $6,000 was outstanding under the Mountainside Financing Facility, $4,179 was outstanding under the term loan, and $984 was related to capital leases ($917 of which was assumed in the HealthMont acquisition). At such date, our debt included a seller financed balloon note of $18,975 and a seller financed zero coupon note of $1,634. The balloon note, due January 31, 2006, has a face amount of $16,650 and a stated interest rate of 8.5% which, because it was considered a below market interest rate at the date of issuance, has been discounted for financial reporting purposes to a market interest rate of 12.3%. As noted above, the balloon note has a payment-in-kind (PIK) feature for interest accrued through August 1, 2003. Interest due and payable through that date was paid in additional balloon notes due in 2006. Additional promissory notes issued for interest payable from February 1, 2001 to August 31, 2003 totaled $3,862. The zero coupon note with a face amount of $1,650 was discounted to a market interest rate of 11.3%. It came due and was paid on January 31, 2004.

At December 31, 2003, SunLink was in violation of one financial covenant under each of the Mountainside Financing Facility and the HealthMont Term Note I. Waivers of compliance with these financial covenants have been received from the two lenders. However, in accordance with Emerging Issues Task Force abstract No. 86-30, SunLink has classified the corresponding long-term debt of $6,400 as current liabilities as of December 31, 2003 because the lenders did not waive compliance with the financial covenants for more than one year. We anticipate that we will be able to comply with such covenants or obtain waivers in the event of non-compliance for not less than the remainder of the fiscal year. However, if we are unable to comply with such covenants or to obtain waivers in the event of noncompliance, such instances may violate cross default provisions in other debt agreements. In the event we were then unable to borrow against our revolving credit facilities or be required as a result of such non-compliance or cross defaults to repay significant amounts of indebtedness, we would be required to either refinance such indebtedness or secure new sources of financing to fund our operations and working capital needs. The failure to obtain such alternate sources of financing or a material delay in obtaining such alternative financing could have a material adverse on us and our operations.

Our contingent obligations, other than with respect to our existing operations, include potential product liability claims for products manufactured and sold before the disposal of our discontinued industrial segment in fiscal 1989 and for guarantees of certain obligations of former non-U.S. subsidiaries. We have provided an accrual at December 31, 2003 related to a portion of the guarantee by one of our U.K. subsidiaries of a lease covering a portion of a manufacturing facility utilized by our former U.K. housewares operations. We are currently in the process of liquidating two dormant subsidiaries in Germany and France. Based upon an evaluation of information currently available and consultation with legal counsel, management has not reserved any amounts for contingencies related to these liquidations.

We believe we have adequate financing and liquidity to support our current level of operations through the next twelve months. Our primary sources of liquidity have been cash generated from continuing operations and borrowings under our credit facilities. Historically, our primary sources of liquidity have included our existing sources as well as borrowings under a term loan entered into at the same time as our revolving credit facility. Our credit facilities

include the SHC $8,000 secured revolving line of credit facility which matures December 31, 2004, and the HealthMont $8,000 secured credit facility which matures August 31, 2005. The senior subordinated zero coupon note was paid on January 31, 2004 in the amount of $1,650 and interest payable for the senior subordinated note in the amount of $872 was paid on February 1, 2004. We financed these payments from cash on hand and cash generated from operations.

It is uncertain whether we will be able to borrow under the SunLink revolving credit facility because the lender is currently in reorganization under Chapter 11 of the Federal bankruptcy laws. Should such borrowing not be available, our liquidity could be adversely affected if we are required to make such payments as scheduled from operational funds.

Availability under the revolving credit facility is based upon the level of our receivables. The availability at December 31, 2003 of approximately $3,821 could be adversely affected by, among other things, decreases in hospitals’ receivables due to lower demand for our services by patients, change in patient mix, and changes in terms and levels of government and private reimbursement for services. Cash generated from operations could be adversely affected by, among other things, lower patient demand for our services, higher operating costs (including, but not limited to, salaries, wages and benefits, provisions for bad debts, general liability and other insurance costs, cost of pharmaceutical drugs and other operating expenses) or by changes in terms and levels of government and private reimbursement for services, and the regulatory environment of the community hospital segment.

Impact of Acquisition of HealthMont on Results of Operations and Liquidity and Capital Resources

We completed the acquisition of HealthMont, Inc. on October 3, 2003. The HealthMont hospitals are currently underperforming in comparison to estimates used in negotiating the purchase price and are projected to continue underperforming at least through the end of SunLink’s fiscal year, June 30, 2004. Since the acquisition, we have made significant personnel changes at both hospitals, and we are currently integrating HealthMont’s information and accounting systems into SunLink’s. As part of the purchase price allocation process, we are identifying and quantifying actual and contingent liabilities and conforming HealthMont’s accounting policies and procedures to our own accounting policies and procedures.

In the acquisition, we assumed $8,275 in HealthMont senior debt. HealthMont obtained the consent of its senior lender to the merger of HealthMont and the modification of certain terms of HealthMont’s senior credit facility, including an extension of the maturity date of the remaining debt to August 31, 2005 and a moratorium on financial covenants under the senior credit facility until June 30, 2004.

On October 3, 2003, our new HealthMont subsidiary also entered into a three year secured term loan for $2,300 with a third party lender. The loan is guaranteed by SunLink. The proceeds from the loan are being used to pay certain transaction costs of the merger and for working capital needs. The loan bears an interest rate of 15% per annum and we are required to pay certain fees in accordance with such loan.

Certain HealthMont investors have arranged letters of credit which support up to $1,650 of HealthMont’s revolving credit loans. We have agreed, in the event the letters of credit are drawn and the proceeds are used to reduce the outstanding balance of the revolving credit loans, we will issue to such letter of credit obligors up to 350,000 of SunLink common shares in full satisfaction of HealthMont’s reimbursement obligations under the letters of credit.

The debt capacity of our HealthMont, Inc. subsidiary, which owns the stock of our two recently acquired hospital subsidiaries, is limited and is subject to certain covenants under its debt agreements and has no remaining availability under its revolving credit facility.

In connection with the HealthMont merger, we borrowed $3,000 from a private investment fund for a three year term secured by the stock and a second lien on the assets of HealthMont. Such borrowings were partially funded in March 2003 in connection with the amended merger agreement through the purchase of $700 of our 15% notes due 2006 by such private lender. The $3,000 three year secured term borrowing was used for working capital and certain merger transaction costs and will bear interest at 15% per annum and requires SunLink to pay certain fees and issue warrants to the lender to purchase 75,000 SunLink common shares at $0.01 per share.

Certain Cautionary Statements

In addition to historical information, Items 1 and 2 of this report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on the current plans and expectations of the Company and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and the future financial condition and results of the Company. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not limited to:

General Business Conditions

–	general economic and business conditions in the U.S., both nationwide and in the states in which we operate hospitals;

–	the competitive nature of the U.S. community hospitals business;

–	demographic changes in areas where we operate hospitals;

–	the availability of cash or borrowing to fund working capital, renovations and capital improvements at existing hospital facilities and for acquisitions and replacement hospital facilities;

–	changes in accounting principles generally accepted in the U.S.; and,

–	fluctuations in the market value of equity securities including SunLink common shares;

Operational Factors

–	the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management and staff personnel for our hospital operations;

–	timeliness of reimbursement payments received under government programs;

–	restrictions imposed by debt agreements;

–	the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance;

–	the efforts of insurers, healthcare providers, and others to contain healthcare costs;

–	the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or via alternative healthcare services;

–	changes in medical and other technology; and,

–	increases in prices of materials and services utilized in our hospital operations;

Liabilities, Claims, Obligations and Other Matters

–	claims under leases, guarantees and other obligations relating to discontinued operations, including sold facilities, retained or acquired subsidiaries and former subsidiaries;

–	potential adverse consequences of known and unknown government investigations;

–	claims for product and environmental liabilities from continuing and discontinued operations;

–	professional, general and other claims which may be asserted against us, and,

–	the financial viability of our lenders and their ability to perform their obligations under our credit agreements with them:

Regulation and Governmental Activity

–	existing and proposed governmental budgetary constraints:

–	the regulatory environment for our businesses, including state certificate of need laws and regulations, rules and judicial cases relating thereto;

–	possible changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for SunLink’s healthcare services including the payment arrangements and terms of managed care agreements;

–	changes in or failure to comply with Federal, state or local laws and regulations affecting the healthcare industry; and,

–	the possible enactment of Federal healthcare reform laws or reform laws in states where we operate hospital facilities (including Medicaid waivers and other reforms);

Acquisition Related Matters

–	our ability to integrate acquired hospitals and implement our business strategy;

–	other risk factors specific to individual transactions, such as and including those described in the registration statement we filed with respect to the potential merger with HealthMont, and,

–	competition in the market for acquisitions of hospitals and healthcare facilities.

Except as required by law, we undertake no obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could be other additional factors besides those listed herein that also could affect SunLink in an adverse manner.

Critical Accounting Policies and Estimates

The unaudited Condensed Consolidated Financial Statements herein have been prepared in accordance with Rule 10-01 of Regulation S-X of the SEC and, as such, do not include all information required by accounting principles generally accepted in the United States of America. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, filed with the SEC on September 26, 2003. In the opinion of management, the Condensed Consolidated Financial Statements as of and for the three months ended December 31, 2003, which are unaudited, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the periods indicated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions.

In January 2002, the SEC issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The following is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

We have identified the following as accounting policies critical to us:

Management Estimates —The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates made by management involve reserves for adjustments to net patient service revenues, evaluation of the recoverability of assets, including accounts receivable, and the assessment of litigation and contingencies, including income taxes and related tax asset valuation allowances, all as discussed in more detail in the remainder of this subsection. Actual results could differ materially from these estimates.

Net Patient Service Revenues —We have agreements with third-party payors that provide for payments at amounts different from established charges. Payment arrangements vary and include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Our patient service revenues are reported as services are rendered at the estimated net realizable amounts from patients, third-party payors, and others. Estimated net realizable amounts are estimated based upon contracts with third-party payors, published reimbursement rates, and historical reimbursement percentages pertaining to each payor type. Estimated reductions in revenues to reflect agreements with third-party payors and estimated retroactive adjustments under such reimbursement agreements are accrued during the period the related services are rendered and are adjusted in future periods as interim and final settlements are determined. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to accrue such revenue deductions. At December 31, 2003, there were no material claims or disputes with third-party payors.

Allowance for Doubtful Accounts —Accounts receivable are reduced by an allowance for amounts estimated to become uncollectible in the future. Substantially all of the Company’s receivables result from providing healthcare services to hospital facility patients. The Company’s calculation of the allowance for doubtful accounts is based generally upon our historical collection experience for each type of payor. The allowance amount is computed by applying allowance percentages to amounts included in specific payor categories of patient accounts receivable. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to determine the allowance for doubtful accounts.

Risk Management —We are exposed to various risks of loss from medical malpractice and other claims and casualties; theft of, damage to, and destruction of assets; business interruption; errors and omissions; employee injuries and illnesses; natural disasters (including earthquakes); and employee health, dental and accident benefits. Commercial insurance coverage is purchased for a portion of claims arising from such matters. When, in our judgment, claims are sufficiently identified, we accrue a liability for estimated costs and losses under such claims, net of estimated insurance recoveries.

In connection with our acquisition of our initial six hospitals, we assumed responsibility for professional liability claims reported after the February 1, 2001 acquisition date and the previous owner retained responsibility for all known and filed claims prior to the acquisition date.

We purchased claims-made commercial insurance for acts prior to and after the acquisition date. The recorded liability for professional liability risks includes an estimate of the liability for claims incurred prior to February 1, 2001, but reported after February 1, 2001, and for claims incurred after February 1, 2001. These amounts are based on actuarially determined amounts.

In connection with our acquisition of HealthMont and its two hospitals, we assumed responsibility for all professional liability claims. HealthMont had purchased claims-made commercial insurance for claims made prior to our acquisition and we have purchased claims-made commercial insurance for claims made after the acquisition. The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition. These amounts were based on actuarially determined amounts.

We self-insure for workers’ compensation and employee health risks. The estimated liability for workers’ compensation and employee health risks includes estimates of the ultimate costs for both reported claims and claims incurred but not reported.

We accrue an estimate of losses resulting from workers’ compensation, employee health and professional liability claims to the extent they are not covered by insurance. These accruals are estimated quarterly based upon management’s review of claims reported and historical loss data.

We record a liability pertaining to pending litigation if it is probable a loss has been incurred and accrue the most likely amount of loss based on the information available. If no amount within the range of losses estimated from the information available is more likely than any other amount in the range of loss, the minimum amount in the range of loss is accrued. Because of uncertainties surrounding the nature of litigation and the ultimate liability to us, if any, we continually revise our estimated losses as additional facts become known.

Goodwill —Goodwill represents the cost of acquired businesses in excess of fair value of identifiable tangible and intangible net assets purchased. We account for goodwill from business combinations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “ Goodwill and Other Intangibles Assets” . SFAS No. 142 recognizes that goodwill has an indefinite life and is not subject to periodic amortization. However, goodwill is to be tested at least annually for impairment, using a fair value methodology, in lieu of amortization.

Income Taxes —We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and liability approach and the recognition of deferred tax assets and liabilities for expected future tax consequences. SFAS No. 109 generally requires consideration of all expected future events other than proposed enactments of changes in the income tax law or rates. We have provided a valuation allowance for all tax assets so that the net tax asset is zero based on our assessment, using factors identified in SFAS No. 109, that it is more likely than not that none of the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies. At December 31, 2003, the most significant tax asset is a U.S. net operating loss carryforward of approximately $9,800, utilization of which is subject to the limitations imposed by Section 382 of the Internal Revenue Code.

Stock-Based Compensation —The Company measures compensation cost for share options issued to employees using the intrinsic value-based method of accounting.

Recent Accounting Pronouncements

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. In particular, this Statement clarifies the circumstances under which a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company’s financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of these instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified on or after May 15, 2003 and is not expected to have a material impact on the Company’s financial condition or results of operations.

Related Party Transactions

A director and our director emeritus and company secretary, who was a director of SunLink until November 2003, are members of two different law firms, each of whom provide services to SunLink. We have paid an aggregate of $298 for legal services to these law firms in the six months ended December 31, 2003. Another director received $3 as fees for being a letter of credit obligor for up to $200 of SunLink’s revolving credit loans assumed in the HealthMont acquisition.

On August 29, 2003, SunLink entered into a $3,000 standby bridge loan facility with a private investor fund, SunLink’s Chairman and CEO and one SunLink director. The facility had a 90-day commitment period during which the funds could be borrowed. The facility also has a $20 standby commitment fee which is fully-earned and non-refundable. The $20 standby commitment fee was paid in September 2003. One-half of the standby commitment fee would be creditable against the closing commitment fee. The standby bridge loan facility was entered into by SunLink for short-term financing requirements due to the bankruptcy of its revolving line of credit facility lender. The 90-day commitment period passed without any borrowing made under the standby facility.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate changes, primarily as a result of borrowing under our revolving credit facilities, Mountainside Financing Facility and two mortgages assumed in the HealthMonth acquisition. Borrowings of $17,374 were outstanding under these agreements at December 31, 2003. A one percent change in the prime rate would result in a change in interest expense of $174 on an annual basis. No action has been taken to cover interest rate market risk and we are not a party to any interest rate market risk management activities.

ITEM 4.

CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures—Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in the Securities Exchange Act of 1934, Rules 13a-14 and 15-d-14) as of December 31, 2003 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to SunLink and its consolidated subsidiaries would be made known to them by others within those entities, subject to the matters discussed in (c) below.

(b)

Changes in internal controls – There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to December 31, 2003, except as discussed in (c) below.

(c)

We completed the acquisition of HealthMont, Inc. on October 3, 2003. Since the acquisition, we have made significant personnel changes at both of the HealthMont hospitals that we acquired and we are currently integrating HealthMont’s information and accounting systems into SunLink’s systems. As part of the initial purchase price allocation process, we are identifying and quantifying actual and contingent liabilities and conforming HealthMont’s accounting policies to SunLink’s accounting policies. As a result, because we are in the early stages of integrating HealthMont’s operations, personnel and systems, and in the initial stages of identifying and quantifying actual and contingent liabilities relating to the acquisition, there is currently an increased risk that existing disclosure controls and procedures related to the hospitals acquired from HealthMont would not be adequate.

PART II. OTHER INFORMATION

ITEM 2.

CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

On February 8, 2004, the Board of Directors of SunLink Health Systems, Inc. declared a dividend of one Series A Voting Preferred purchase right (a “Right”) for each outstanding common share of the Company to record owners of common shares at the close of business on February 10, 2004. The Board of Directors declared these rights to protect shareholders from coercive or otherwise unfair takeover tactics. The Rights should not interfere with any merger or other business combination approved by the Board of Directors.

Each Right will allow the holder to purchase from the Company one one-hundredth of a share of Series A Voting Preferred Stock (a “Preferred Share”) for $25, once the Rights become exercisable. This portion of a Preferred Share will give the shareholder approximately the same dividend and liquidation rights as would one share of common stock. Prior to exercise, the Right does not give its holder any dividend, liquidation or voting rights.

The Rights will not be exercisable until the earlier to occur of:

•

the close of business 10 business days following a public announcement that a person or group of affiliated or associated persons has acquired beneficial ownership of 20% or more of the outstanding SunLink common shares (an “Acquiring Person”),

•

the date that a person or group of affiliated or associated persons has acquired beneficial ownership of 35% or more of the outstanding SunLink common shares, or

•

the close of business 10 business days after the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person.

The Rights expire on February 8, 2014 unless the Company redeems them at an earlier date. The Company may redeem the Rights in whole, but not in part, at a price of $.001 per Right, at any time prior to a public announcement that a person has become an Acquiring Person.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 10, 2003, the Company held its Annual Meeting of Shareholders. At the meeting, four directors, Dr. Steven J. Baileys, Gene E. Burleson, Michael W. Hall and Robert M. Thornton, Jr. were elected to two year terms expiring at the Annual Meeting of Shareholders in 2005. 5,297,689 shares were voted in favor of electing Dr. Baileys and 33.307 shares were withheld. 5,300,289 shares were voted in favor of electing Mr. Burleson and 30,707 shares were withheld. 5,298,889 shares were voted in favor of electing Mr. Hall and 33,707 shares were withheld. 5,286,549 shares were voted in favor of electing Mr. Thornton and 44,447 shares were withheld.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:


3.1		Certificate of Amendment by Directors to Amended Articles of Incorporation of SunLink Health Systems, Inc. dated February 13, 2004


10.1		Amendment No. 2, dated October 2, 2003, to Loan Agreement, originally dated March 25, 2003, between SunLink Health Systems, Inc. and HealthMont, Inc.

10.2		HealthMont, Inc. Note Purchase Agreement, dated October 3, 2003, with Chatham Investment Fund I, LLC for $2,300,000

10.3		Revolving Loan and Security Agreement for $8,000,000 by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC, HealthMont of Oregon IV, LLC, and Heller Healthcare Finance, Inc., dated August 31, 2000

10.4		Amendment No. 1, dated as of December 31, 2000, to Loan and Security Agreement, originally dated as of August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC, HealthMont of Oregon IV, LLC, and Heller Healthcare Finance, Inc.

10.5		Amendment No. 2, dated as of February 28, 2002, to Loan and Security Agreement, originally dated as of August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC, HealthMont of Oregon IV, LLC, HealthMont of Missouri, Inc. and Heller Healthcare Finance, Inc.

10.6		Amendment No. 3, dated as of March 24, 2003, to Loan and Security Agreement, originally dated as of August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Missouri, Inc. and Heller Healthcare Finance, Inc.

10.7		Amendment No. 4, dated as of September 30, 2003, to Loan and Security Agreement, originally dated as of August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HM Acquisition Corp., SunLink Health Systems, Inc. and GE HFS Holdings, Inc. (f/k/a/ Heller Healthcare Finance, Inc.)

10.8		Mortgage Loan Agreement for $5,000,000, dated as of August 31, 2000, between Heller Healthcare Finance, Inc. and HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC, HealthMont of Oregon IV, LLC.

10.9		Amendment No. 1 to Mortgage Loan Agreement, originally dated August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC, HealthMont of Oregon IV, LLC, and Heller Healthcare Finance, Inc., amended as of December 31, 2000

10.10		Amendment No. 2 to Mortgage Loan Agreement, originally dated August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of





		Oregon V, LLC, HealthMont of Oregon IV, LLC, and Heller Healthcare Finance, Inc., amended as of June 30, 2001

10.11		Amendment No. 3 to Mortgage Loan Agreement, originally dated August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC, HealthMont of Oregon IV, LLC, and Heller Healthcare Finance, Inc., amended as of February 28, 2002

10.12		Amendment No. 4 to Mortgage Loan Agreement, originally dated August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon I, Inc., HealthMont of Oregon II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC, HealthMont of Oregon IV, LLC, and Heller Healthcare Finance, Inc., amended as of March 31, 2002

10.13		Amendment No. 5 to Mortgage Loan Agreement, originally dated August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Missouri, Inc., and Heller Healthcare Finance, Inc., amended as of December 31, 2002

10.14		Amendment No. 6 to Mortgage Loan Agreement, originally dated August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, and Heller Healthcare Finance, Inc., amended as of March 24, 2003

10.15		Amendment No. 7 to Mortgage Loan Agreement, originally dated August 31, 2000, by and among HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HM Acquisition Corp., SunLink Health Systems, Inc., GE HFS Holdings, Inc. (f/k/a Heller Healthcare Finance, Inc.), amended as of September 30, 2003

10.16		Mortgage Loan Agreement for $1,900,000 between Heller Healthcare Finance, Inc. and HealthMont of Missouri, Inc., dated December 31, 2000

10.17		Amendment No. 1 to Mortgage Loan Agreement, originally dated December 31, 2000, between Heller Healthcare Finance, Inc. and HealthMont of Missouri, Inc., amended as of June 30, 2001

10.18		Amendment No. 2 to Mortgage Loan Agreement, originally dated December 31, 2000, between GE HFS Holdings, Inc. (f/k/a Heller Healthcare Finance, Inc.),HealthMont of Missouri, Inc., HM Acquisition Corp., and SunLink Health Systems, Inc. amended as of September 30, 2003

31.1		Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

31.2		Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of securities Exchange Act of 1934

32.1		Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)

Reports on Form 8-K:


Date of Report		Subject of Report

October 1, 2003		Press release announcing financial results for fiscal year ended June 30, 2003.

October 1, 2003		Public disclosure in an investor conference call of potential negative impact of high costs at Mountainside Medical Center on results of operations.

October 17, 2003		Reporting of acquisition of HealthMont, Inc.

November 13, 2003		Press release announcing financial results for the first quarter of fiscal 2004.

December 17, 2003		Amendment to Form 8-K filed October 17, 2003 reporting the acquisition of HealthMont, Inc. to include financial statement information.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, SunLink Health Systems, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


SunLink Health Systems, Inc.

By:		/s/ Mark J. Stockslager

		Mark J. Stockslager
		Principal Accounting Officer

Dated: February 17, 2004

EXHIBIT 3.1

CERTIFICATE OF AMENDMENT TO

AMEND ARTICLE FOURTH OF THE

AMENDED ARTICLES OF INCORPORATION

- of -

SUNLINK HEALTH SYSTEMS, INC.

FOURTH: The maximum number of shares which the Corporation is authorized to have outstanding is 14,000,000 shares which shall be classified as follows:

2,000,000 Preferred Shares without par value (hereinafter called “Preferred Shares”); and

12,000,000 Common Shares without par value (hereinafter called “Common Shares”).

SECTION 1. The express terms and provisions of the Preferred Shares are as follows:

I. Preferred Shares may be issued in series from time to time. Within the limitations and restrictions set forth in this Article FOURTH, the Board of Directors is expressly authorized, at one time or from time to time, to adopt amendments to the Articles of Incorporation in respect of any authorized and unissued Preferred Shares to fix or alter the division of such shares into series, the designation and number of shares of each series, the dividend rates, the date of payment of dividends, the dates from which dividends shall be cumulative, redemption rights, redemption prices, liquidation prices, sinking fund requirements, conversion rights, and restrictions on issuance of shares of the same series or of any other class or series. The express terms and provisions of Preferred Shares of different series shall be identical except that there may be variations in respect of any or all of the particulars hereinbefore set forth in this subsection I. In case the stated dividends or the amounts payable on dissolution, liquidation, or sale of assets of the corporation are not paid in full, all Preferred Shares of all series shall participate ratably in the payment of dividends, including accumulations, if any, in proportion to the sums which would be payable thereon if all dividends thereon were paid in full, and, in any distribution of assets other than by way of dividends, in proportion to the sums which would be payable on such distribution if all sums payable thereon to holders of Preferred Shares were discharged in full.

II. The holders of Preferred Shares shall be entitled to receive when and as declared out of the surplus of the Corporation, subject to any limitations prescribed by statute, cash dividends at the respective rates and on the respective dates fixed by the Board of Directors for the shares of the several series of Preferred Shares, and no more.

Dividends on each Preferred Share shall be cumulative from the date fixed therefor by the Board of Directors.

Subject to the provisions of this Article FOURTH, the holders of all Common Shares shall be entitled to receive such dividends as may from time to time be declared thereon by the Board of Directors.

III. Upon dissolution, liquidation or sale of all or substantially all the assets of the Corporation, the holders of Preferred Shares shall be entitled to receive the following sums, before any payment shall be made to the holders of Common Shares with respect to payment upon dissolution, liquidation or sale of assets:

(a) in case of any involuntary dissolution or liquidation or forced sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the sum fixed for such contingency by the Board of Directors in respect of such series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment; or

(b) in case of any voluntary dissolution or liquidation or voluntary sale of all or substantially all the assets of the Corporation, each Preferred Share of each series shall be entitled to receive the amount fixed for such contingency by the Board of Directors in respect of such series prior to the initial issuance of the first shares or series, together with a sum, whether or not earned or declared, equivalent to all accumulated and unpaid dividends thereon to the date of such payment. After all sums payable on the Preferred Shares as herein provided upon a particular contingency shall have been paid in full, but not prior thereto, the Common Shares shall be entitled to payment of all other sums then distributable. For the purposes of this subsection III, a consolidation or merger of the Corporation with or into any other corporation, or a consolidation or merger of any other corporation, with or into the Corporation shall not be deemed a dissolution, liquidation, or sale of assets.

IV. The holders of Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively.

V. So long as any of the Preferred Shares shall remain outstanding, no dividend (other than dividends payable in Common Shares) shall be paid, nor shall any distribution (by purchase, redemption, payment to any sinking fund or market fund, or otherwise) be made, on any of the Common Shares unless:

(a) all dividends on all outstanding Preferred Shares shall have been paid, and full dividends thereon for the then current quarterly dividend period shall have been declared and a sum sufficient for the payment thereof set apart therefor; and

(b) the Corporation shall not be in arrears in respect of any sinking fund obligation in respect of any series of Preferred Shares.

VI. Preferred Shares acquired by the Corporation through the exercise by the holders thereof of any conversion privilege shall not be re-issued except as hereinafter provided. Such shares and any other Preferred Shares acquired by the Corporation otherwise than through the operation of any sinking fund and not used to reduce the amount of any sinking fund installment shall, upon compliance with such provisions of law relating to the retirement of shares as may be applicable, have the status of authorized and unissued Preferred Shares which are unclassified into any series. Preferred Shares acquired by the Corporation through the operation of any sinking fund or which have been used to reduce the amount of any sinking fund installment shall be canceled and not reissued, and the Corporation shall from time to time take appropriate corporate action to reduce the authorized number of Preferred Shares accordingly.

VII. Series A Voting Preferred Shares:

From the authorized number of Preferred Shares of Corporation, a series of Preferred Shares designated as “Series A Voting Preferred Shares” is hereby created and shall consist of 500,000 Preferred Shares of which the preferences, relative and other rights, and the qualifications, limitations or restrictions thereof shall be (in addition to those set forth elsewhere in these Articles) as follows:

1. Voting Rights . The holders of Series A Voting Preferred Shares shall be entitled to one vote for each Preferred Share held by them respectively.

2. Dividends . The Board shall declare a dividend or distribution on the Series A Voting Preferred Shares immediately after it declares any dividend or distribution on the Common Shares. Such dividends or distributions shall be in an amount per share equal to the amount per share of the dividend or distribution declared for each Common Share, multiplied by 100.

3. Reacquired Shares . Any Series A Voting Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after such acquisition. All such shares, upon their cancellation, shall become authorized but unissued Preferred Shares, without designation as to series, and may be reissued as part of any series of Preferred Shares created by the Board (including Series A Voting Preferred Shares) subject to the condition and restrictions on issuance set forth herein.

4. Liquidation, Dissolution or Winding Up . Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to:

(a) the holders of (x) Preferred Shares ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Voting Preferred Shares or (y) any holder of Common Shares, unless (prior thereto) the holders of Series A Voting Preferred Shares have received the greater of: (i) One Dollar ($1.00) per share ($0.01 per one one-hundredth of a share), plus an amount equal to accrued and unpaid dividends and distributions thereon (whether

or not declared) to the date of such payment, or (ii) an aggregate amount per share, subject to the provision for adjustment herein set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Shares; or

(b) the holders of Preferred Shares ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Voting Preferred Shares, except distributions made ratably on the Series A Voting Preferred Shares and all other such parity Preferred Shares in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up.

If the Corporation shall at any time declare or pay any dividend on Common Shares payable in Common Shares, or effect a subdivision or combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a greater or lesser number of Common Shares, then (and in each such event) the aggregate amount to which the holder of each share of Series A Voting Preferred Shares was entitled immediately prior to such event under paragraph (a) of this Section 4 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

5. Combination . If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock, securities, cash or any other property, then (in each such event) the Series A Voting Preferred Shares shall at the same time be similarly exchanged or changed in an amount per Share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. If, at any time on or after the Rights Declaration Date, the Corporation (i) declares any dividend on Common Shares payable outstanding Common Shares into a smaller number of Shares, (ii) subdivides the outstanding Common Shares; or (iii) combines the outstanding Common Shares into a smaller number of Shares, then (in each such case) the amount set forth in the preceding sentence with respect to the exchange or change of Series A Voting Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

6. No Redemption . The Series A Voting Preferred Shares shall not be redeemable; provided, however, that the Corporation may acquire Series A Voting Preferred Shares in any other manner permitted by law or these Articles.

7. Ranking . Unless otherwise provided in these Articles or any subsequent amendment of these Articles relating to a subsequent series of Preferred Shares of the Corporation, the Series A Voting Preferred Shares shall rank junior to all other series of the Corporation’s Preferred Shares as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and shall rank senior to the Common Shares.

8. Amendment . These Articles shall not, following the issuance of any shares of Series A Voting Preferred, be further amended in any manner which would materially and adversely alter or change the powers, preference or special rights of the Series A Voting Preferred Shares without the affirmative vote of the holders of at least a majority of the outstanding Series A Voting Preferred Shares, voting together as a single series.

9. Fractional Shares . Series A Voting Preferred Shares may be issued in fractions of a share (in one one-hundredths (1/100) of a Share and integral multiples thereof) that shall entitle the holder (in proportion to such holder’s fractional shares) to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Voting Preferred Shares.

SECTION 2. The express terms and provisions of the Common Shares are as follows:

I. The rights and preferences of the Common Shares shall be subject in all respects to the rights and preferences of the Preferred Shares in the manner and to the extent provided in this Article FOURTH.

II. The Common Shares shall rank junior to the Preferred Shares with respect to the payment of dividends. Out of the assets of the Corporation available for dividends remaining after there shall have been paid or declared and set apart for payment full dividends on the Preferred Shares, and subject to the restrictions or limitations contained in the express terms and provisions of any series of Preferred Shares with respect to the payment of dividends, dividends may be declared and paid upon the Common Shares, but only when and as determined by the Board of Directors.

III. The Common Shares shall rank junior to the Preferred Shares with respect to payment upon dissolution, liquidation or sale of assets of the Corporation. Upon the dissolution, liquidation or sale of all or substantially all the assets of the Corporation, after there shall have been paid to or set apart for holders of the Preferred Shares the full preferential amounts to which they are entitled, the holders of Common Shares shall be entitled to receive pro rata all of the remaining assets of the Corporation available for distribution to its shareholders.

IV. The holders of Common Shares shall be entitled to one vote for each Common Share held by them respectively.

SECTION 3. No shareholder of the Corporation shall have the right to vote cumulatively in the election of directors of the Corporation.

Exhibit 10.1

AMENDMENT NO. 2 TO LOAN AGREEMENT

THIS AMENDMENT NO. 2 TO LOAN AGREEMENT (the “Second Amendment”) is made and entered into as of October 2, 2003 by and between SUNLINK HEALTH SYSTEMS, INC. (“SunLink”), an Ohio corporation, as lender (the “Initial Lender”), and any lenders party hereto from time to time (collectively the “Lenders”), and HEALTHMONT, INC. (“HealthMont”), a Tennessee corporation, as borrower (the “Borrower”).

W I T N E S S E T H:

WHEREAS, SunLink and Borrower have entered into that certain Loan Agreement dated as of March 24, 2003, which was amended by an Amendment No. 1 To Loan Agreement dated as of July 30, 2003 (such Loan Agreement, as so amended is herein called the “Loan Agreement”); and

WHEREAS, SunLink and Borrower now desire to further amend the Loan Agreement by extending the Scheduled Maturity Date (as defined in the Loan Agreement) from December 31, 2004, to September 30, 2005;

NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION (the receipt, sufficiency, and adequacy of which are hereby acknowledged), SunLink and Borrower agree as follows:

1. Amendment . The definition of the defined term “Scheduled Maturity Date” set forth in Section 1.01 on page 10 of the Loan Agreement is hereby amended and modified by replacing the date “December 31, 2004” with the date “September 30, 2005”.

2. No Other Amendments . No other amendments are being made to the Loan Agreement, except as those set forth above in Section 1 of this First Amendment. All of the other provisions of the Loan Agreement are hereby ratified and confirmed by the parties; and all of the provisions of the Loan Agreement, as amended by this Second Amendment are to continue and remain in full force and effect.

3. Governing Law . This Second Amendment is to be governed by, and construed and enforced in accordance with, the laws of the State of Georgia without regard to principles of conflicts of laws thereof.

[Signatures On Next Page]

IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered under seal, all as of the date first stated above.


	BORROWER:

	HEALTHMONT, INC.
(CORPORATE SEAL)

	By:	/s/ T IMOTHY S. H ILL

		Timothy S. Hill President and Chief Executive Officer


	LENDER:

	SUNLINK HEALTH SYSTEMS, INC.
(CORPORATE SEAL)

	By:	/s/ R OBERT M. T HORNTON , J R .

		Robert M. Thornton, Jr. Chief Executive Officer

Exhibit 10.2

HEALTHMONT, INC.

(f/k/a HM Acquisitions Corp.)

NOTE PURCHASE AGREEMENT

$2,300,000

15.0% PROMISSORY NOTE

Dated as of October 3, 2003

EXHIBITS & SCHEDULES



Exhibit A		Form of Promissory Note

Exhibit B		Form of Warrant

Exhibit C		Form of Security Agreement

Exhibit D		Form of Warrantholders Rights Agreement

Exhibit E		Form of Amended Collateral Assignment of Securities Deeds and Contracts

Exhibit F		Form of Parent Subordination Agreement

Exhibit G		Form of Intercompany Subordination Agreement

Exhibit H		Form of Parent Guaranty

Exhibit I		Form of Subsidiary Guaranty

Exhibit J		Form of Amended and Restated Pledge and Security Agreement

Schedule 8.5		Real Property

Schedule 9.2		Joint Ventures

Schedule 9.5		Facilities

Schedule 9.12		Transactions

Schedule 9.14		Capital Structure

Schedule 11		Permitted Liens

NOTE PURCHASE AGREEMENT

HEALTHMONT, INC.

(f/k/a HM Acquisitions Corp.)

$2,300,000

15.0% Promissory Note

Dated as of October 3, 2003

CHATHAM INVESTMENT FUND I, LLC

100 Galleria Parkway, Suite 270

Atlanta, Georgia 30305

Attn: Brian G. Reynolds

Ladies and Gentlemen:

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

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

The Company hereby agrees with Purchaser as follows:

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

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

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

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

4. WARRANT .

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

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

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

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

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

5.2 Purchaser shall have received:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

6.3 Binding Effect .

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

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

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

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

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

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

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

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

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

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

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

7.2 Voluntary Prepayments .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

8.10 Maintenance of Property; Insurance .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

9.3 [INTENTIONALLY OMITTED]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Quarter Ending		DSC Ratio
6/30/04		1.1 to 1.00
9/30/04		1.1 to 1.00
12/31/04		1.1 to 1.00
3/31/05		1.1 to 1.00
6/30/05 and thereafter		1.2 to 1.00

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

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


Quarter Ending		Cash Flow
9/30/04		$1,000,000
12/31/04		$1,100,000
3/31/05		$1,200,000
6/30/05 and thereafter		$1,200,000

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

10. DEFAULTS .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.3 Remedies .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“ Company ” is defined in the preamble.

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

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

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

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

“ Dollars ” means United States Dollars.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“ Insurer ” means a Person that insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or that has an agreement with the Company to compensate the Company for providing services to a Patient.

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

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

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

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

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

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

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

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

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

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

performed by the Company which are covered by a policy of insurance issued by an Insurer, and includes physician services, nurse and therapist services, dental services, hospital services, skilled nursing facility services, comprehensive outpatient rehabilitation services, home health care services, residential and out-patient behavioral healthcare services, and medicine or health care equipment provided by the Company to a Patient for a necessary or specifically requested valid and proper medical or health purpose.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

12. INDEMNIFICATION .

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

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

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

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

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

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

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

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

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

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

15. MISCELLANEOUS .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

15.13 Submission to Jurisdiction; Venue; Service of Process .

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

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

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

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

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

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

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

(Signature Page to Follow)

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

Very truly yours,


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

By:		/s/ R OBERT M. T HORNTON , J R .

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

Accepted: October 3, 2003


PURCHASER: CHATHAM INVESTMENT FUND I, LLC
By: Chatham Capital Management, LLC

By:


Name:

Title:		A member of the Board of Managers

Signature Page to Note Purchase Agreement

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

Very truly yours,


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

By:


Name:


Title:

Accepted: October 3, 2003


PURCHASER: CHATHAM INVESTMENT FUND I, LLC
By: Chatham Capital Management, LLC

By:		/s/ Nick Anacreonte

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

Signature Page to Note Purchase Agreement

Exhibit 10.3

$8,000,000.00

REVOLVING LOAN AND SECURITY AGREEMENT

by and between

HEALTHMONT, INC., a Tennessee corporation

HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

(dba Memorial Hospital of Adel, Memorial Convalescent Center

and Memorial Home Health)

HEALTHMONT OF TEXAS, INC., a Tennessee corporation

HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

(dba Dolly Vinsant Memorial Hospital)

HEALTHMONT OF OREGON I, INC., a Tennessee corporation

HEALTHMONT OF OREGON II, INC., a Tennessee corporation

HEALTHMONT OF OREGON III, INC., a Tennessee corporation

(dba Woodland Park Medical Plaza)

HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company

(dba Woodland Park Hospital)

HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company

dba Eastmoreland Hospital

(“Borrower”)

and

HELLER HEALTHCARE FINANCE, INC.

(“Lender”)

August 31, 2000

REVOLVING LOAN AND SECURITY AGREEMENT

THIS REVOLVING LOAN AND SECURITY AGREEMENT (the “Agreement”) is made as of August 31, 2000, by and between HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation dba Memorial Hospital of Adel, Memorial Convalescent Center and Memorial Home Health, HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company dba Dolly Vinsant Memorial Hospital HEALTHMONT OF OREGON I, INC., a Tennessee corporation, HEALTHMONT OF OREGON II, INC., a Tennessee corporation, HEALTHMONT OF OREGON III, INC., a Tennessee corporation dba Woodland Park Medical Plaza, HEALTHMONT OF OREGON V , LLC, a Tennessee limited liability company dba Woodland Park Hospital, HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company dba Eastmoreland Hospital (collectively the “Borrower”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“Lender”).

RECITALS

A. Borrower desires to establish certain financing arrangements with and borrow funds from Lender, and Lender is willing to establish such arrangements for and make loans and extensions of credit to Borrower, on the terms and conditions set forth below.

B. The parties desire to define the terms and conditions of their relationship and to reduce their agreements to writing.

NOW, THEREFORE, in consideration of the promises and covenants contained in this Agreement, and for other consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement, unless otherwise specified, all references to “Sections” shall be deemed to refer to Sections of this Agreement, and the following terms shall have the meanings set forth below:

Section 1.1. Account. “Account” means any right to payment for goods sold or leased or services rendered, whether or not evidenced by an instrument or chattel paper, and whether or not earned by performance, including, without limitation, the right to payment of management fees.

Section 1.2. Account Debtor. “Account Debtor” means any Person obligated on any Account of Borrower, including without limitation, any Insurer and any Medicaid/Medicare Account Debtor.

Section 1.3. Affiliate. “Affiliate” means, with respect to a specified Person, any Person directly or indirectly controlling, controlled by, or under common control with the specified Person, including without limitation their stockholders and any Affiliates thereof. A Person shall be deemed to control a corporation or other entity if the Person possesses, directly or indirectly, the power to direct or cause the direction of the management and business of the corporation or other entity, whether through the ownership of voting securities, by contract, or otherwise.

Section 1.4. A greement. “Agreement” means this Loan and Security Agreement, as it may be amended or supplemented from time to time.

Section 1.5. Base Rate. “Base Rate” means a rate of interest equal to one and one-half percent (1.5%) above the “Prime Rate of Interest.

Section 1.6. Borrowed Money. “Borrowed Money” means any obligation to repay money, any indebtedness evidenced by notes, bonds, debentures or similar obligations, any obligation under a conditional sale or other title retention agreement and the net aggregate rentals under any lease which under GAAP would be capitalized on the books of Borrower or which is the substantial equivalent of the financing of the property so leased.

Section 1.7. Borrower. “Borrower” has the meaning set forth in the Preamble.

Section 1.8. Borrowing Base. “Borrowing Base” has the meaning set forth in Section 2.1(d).

Section 1.9. Business Day. “Business Day” means any day on which financial institutions are open for business in the State of Maryland, excluding Saturdays and Sundays.

Section 1.9.a. Change of Control. “Change of Control” means (i) individuals who, as of the Closing Date, constituted the board of directors of Borrower (together with any new directors whose election by that board of directors or whose nomination for election by the stockholders of Borrower was approved by two-thirds of the directors of Borrower then still in office who were either directors at the beginning of the period or whose election or nomination for election was previously approved) cease for any reason to constitute a majority of the board of directors of Bcrrrower then in office, or (ii) a transfer of capital stock of Borrower occurs such that, immediately after giving effect to the transfer, Persons who held capital stock of Borrower immediately prior to the transfer do not continue to hold at least 67% of the capital stock of Borrower.

Section 1.10. Closing; Closing Date. “Closing” and “Closing Date” have the meanings set forth in Section 5.3.

Section 1.11. Collateral. “Collateral” has the meaning set forth in Section 3.1.

Section 1.12. Commitment Fee. “Commitment Fee” has the meaning set forth in Section 2.4(a).

Section 1.13. Concentration Account. “Concentration Account” has the meaning set forth in Section 2.3.

Section 1.14. Controlled Group. “Controlled Group” means all businesses that would be treated as a single employer under Section 400l(b) of ERISA.

Section 1.15. Cost Report Settlement Account . “Cost Report Settlement Account” means an “Account” owed to Borrower by a Medicaid/Medicare Account Debtor pursuant to any cost report, either interim, filed or audited, as the context may require.

Section 1.16. Default Rate. “Default Rate” means a rate per annum equal to five percent (5%) above the then applicable Base Rate.

Section 1.17. ERISA. “ERISA” has the meaning set forth in Section 4.12.

Section 1.18. Event of Default. “Event of Default” and “Events of Default” have the meanings set forth in Section 8.1.

Section 1.19. GAAP. “GAAP” means generally accepted accounting principles applied in a consistent manner.

Section 1.20. Governmental Authority. “Governmental Authority” means and includes any federal, state, District of Columbia, county, municipal, or other government and any department, commission, board, bureau, agency or instrumentality thereof, whether domestic or foreign.

Section 1.21. Hazardous Material. “Hazardous Material” means any substances defined or designated as hazardous or toxic waste, hazardous or toxic material, hazardous or toxic substance, or similar term, by any environmental statute, rule or regulation or any Governmental Authority applicable to Borrower or its business, operations or assets.

Section 1.22. Hi ghest Lawful Rate. “Highest Lawful Rate” means the maximum lawful rate of interest referred to in Section 2.7 that may accrue pursuant to this Agreement.

Section 1.23. Insurer. “Insurer” means a Person that insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or that has an agreement with Borrower to compensate Borrower for providing services to a Patient.

Section 1.24. Lender. “Lender” means Heller Healthcare Finance, Inc., a Delaware corporation.

Section 1.25. Loan. “Loan” has the meaning set forth in Section 2.1 (a).

Section 1.26. Loan Documents. “Loan Documents” means and includes this Agreement, the Note, the Mortgage Documents, the Warrant, the Certificate of Validity, and each and every other document now or hereafter delivered in connection with this Agreement, as any of them may be amended, modified, or supplemented from time to time.

Section 1.27. Loan Management Fee. “Loan Management Fee” has the meaning set forth in Section 2.4(c).

Section 1.28. Lockbox. “Lockbox” has the meaning set forth in Section 2.3.

Section 1.28 a. Lockbox Account. “Lockbox Account” means an account maintained by Borrower at the Lockbox Bank into which all collections of Accounts are paid directly.

Section 1.29. Lockbox Bank. “Lockbox Bank” has the meaning set forth in Section 2.3.

Section 1.30. Maximum Loan Amount. “Maximum Loan Amount” has the meaning set forth in Section 2.1 (a).

Section 1.31. Medicaid/Medicare Account Debtor. “Medicaid/Medicare Account Debtor” means any Account Debtor which is (i) the United States of America acting under the Medicaid/Medicare program established pursuant to the Social Security Act, (ii) any state or the District of Columbia acting pursuant to a health plan adopted pursuant to Title XIX of the Social Security Act or (iii) any agent, carrier, administrator or intermediary for any of the foregoing.

Section 1.32. Medical Services . “Medical Services” means Medical and health care services provided to a Patient, including, but not limited to, medical and health care services provided to a Patient and performed by Borrower which are covered by a policy of insurance issued by an Insurer, and includes physician services, nurse and therapist services, dental services, hospital services, skilled nursing facility services, comprehensive outpatient rehabilitation services, home health care services, residential and out-patient behavioral healthcare services, and medicine or health care equipment provided by Borrower to a Patient for a necessary or specifically requested valid and proper medical or health purpose.

Section 1.32a Mortgage Documents . “Mortgage Documents” means and includes all documents evidencing that certain first mortgage loan in the amount of $5,000,000 made as of the Closing Date from Lender to Borrower (the “ Mortgage Loan ”) including, without limitation, the mortgage note (the “ Secured Term Note ”), the mortgage loan agreement (the “ Mortgage Loan Agreement ”), those several Mortgage, Security Agreement and Assignment of Leases, and each and every other document now or hereafter delivered in connection with such mortgage documents, as any of them may be amended, modified, or supplemented from time to time.

Section 1.33. Note. “Note” has the meaning set forth in Section 2.1 (c).

Section 1.34. Obligations. “Obligations” has the meaning set forth in Section 3.1.

Section 1.35. Patient. “Patient” means any Person receiving Medical Services from Borrower and all Persons legally liable to pay Borrower for such Medical Services other than Insurers.

Section 1.36. Permitted Liens. “Permitted Liens” means: (i) deposits or pledges to secure obligations under workmen’s compensation, social security or similar laws, or under unemployment insurance; (ii) deposits or pledges to secure bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of business; (iii) mechanic’s, workmen’s, materialmen’s or other like liens arising in the ordinary course of business with respect to obligations which are not due, or which are being contested in good faith by appropriate proceedings which suspend the collection thereof and in respect of which adequate reserves have been made (provided that such proceedings do not, in Lender’s sole discretion, involve any substantial risk of the sale, loss or forfeiture of such property or assets or any interest therein); (iv) liens and encumbrances in favor of Lender; and (v) liens set forth on Schedule 1.36 .

Section 1.37. Person. “Person” means an individual, partnership, corporation, trust, joint venture, joint stock company, limited liability company, association, unincorporated organization, Governmental Authority, or any other entity.

Section 1.38. Plan. “Plan” has the meaning set forth in Section 4.12.

Section 1.39. Premises. “Premises” has the meaning set forth in Section 4.14.

Section 1.40. Prime Rate of Interest. “Prime Rate of Interest” means that rate of interest designated as such by Citibank, N.A., or any successor thereto, as the same may from time to time fluctuate.

Section 1.41. Prohibited Transaction. “Prohibited Transaction” means a “prohibited transaction” within the meaning of Section 406 of ERISA or Section 4975(c)(l) of the Internal Revenue Code that is not exempt under Section 407 or Section 408 of ERISA or Section

4975(c)(2) or (d) of the Internal Revenue Code or under a class exemption granted by the U.S. Department of Labor.

Section 1.42. Qualified Account. “Qualified Account” means an Account of Borrower generated in the ordinary course of Borrower’s business from the sale of goods or rendition of Medical Services which Lender, in its sole credit judgment, deems to be a Qualified Account. Without limiting the generality of the foregoing, no Account shall be a Qualified Account if: (a) the Account or any portion of the Account is payable by an individual beneficiary, recipient or subscriber individually and not directly to Borrower by a Medicaid/Medicare Account Debtor or commercial medical insurance carrier acceptable to Lender in its sole discretion; (b) the Account remains unpaid more than one hundred twenty (120) days past the claim or invoice date (but in no event more than one hundred thirty-five (135) days after the applicable Medical Services have been rendered); (c) the Account is subject to any defense, set-off, counterclaim, deduction, discount, credit, chargeback, freight claim, allowance, or adjustment of any kind; (d) any part of any goods the sale of which has given rise to the Account has been returned, rejected, lost, or damaged; (e) if the Account arises from the sale of goods by Borrower, the sale was not an absolute sale, or the sale was made on consignment or on approval or on a sale-or-return basis, or the sale was made subject to any other repurchase or return agreement, or the goods have not been shipped to the Account Debtor or its designee; (f) if the Account arises from the performance of Medical Services, the Medical Services have not been actually been performed or the Medical Services were undertaken in violation of any law; (g) the Account is subject to a lien other than a Permitted Lien; (h) Borrower knows of the bankruptcy, receivership, reorganization, or insolvency of the Account Debtor; (i) the Account is evidenced by chattel paper or an instrument of any kind, or has been reduced to judgment; (j) the Account is an Account of an Account Debtor having its principal place of business or executive office outside the United States; (k) the Account Debtor is an Affiliate or Subsidiary of Borrower; (l) more than ten percent (10%) of the aggregate balance of all Accounts owing from the Account Debtor obligated on the Account are outstanding more than one hundred fifty (150) days past their invoice date; (m) fifty percent (50%) or more of the aggregate unpaid Accounts from any single Account Debtor are not deemed Qualified Accounts under this Agreement; (n) the total unpaid Accounts of the Account Debtor, except for a Medicaid/Medicare Account Debtor, exceed twenty percent (20%) of the net amount of all Qualified Accounts (including Medicaid/Medicare Account Debtors); (o) any covenant, representation or warranty contained in the Loan Documents with respect to such Account has been breached; or (p) the Account fails to meet such other specifications and requirements which may from time to time be reasonably established by Lender using its customary underwriting guidelines.

Section 1.43. Reportable Event. “Reportable Event” means a “reportable event” as defined in Section 4043(c) of ERISA for which the notice requirements of Section 4043(a) of ERISA are not waived.

Section 1.44. Revolving Credit Loan. “Revolving Credit Loan” has the meaning set forth in Section 2.1 (b).

Section 1.45. Term. “Term” has the meaning set forth in Section 2.8.

Section 1.46 Termination Fee. “Termination Fee” shall mean a fee payable upon termination of the Agreement, as yield maintenance for the loss of bargain and not as a penalty, equal to either (i) Two Hundred Thousand Dollars ($200,000) if the date of notice of a termination is on or before the second anniversary of the Closing Date, or (ii) One Hundred Twenty Thousand Dollars ($ 120,000) if the date of a notice of termination is after the second anniversary of the Closing Date and on or before the third anniversary of the Closing Date.

Section 1.47 Warrant . “Warrant” means that certain Stock Purchase Warrant granted from Borrower to Lender contemporaneously herewith.

ARTICLE II

LOAN

Section 2.1. Terms .

(a) The maximum aggregate principal amount of credit extended by Lender to Borrower under this Agreement (the “Loan”) that will be outstanding at any time is Eight Million and No/100 Dollars ($8,000,000.00) (the “Maximum Loan Amount”).

(b) The Loan shall be in the nature of a revolving line of credit, and shall include sums advanced and other credit extended by Lender to or for the benefit of Borrower from time to time under this Article II (each a “Revolving Credit Loan”) up to the Maximum Loan Amount depending upon the availability in the Borrowing Base, the requests of Borrower pursuant to the terms and conditions of Section 2.2, and on such other basis as Lender may reasonably determine. The outstanding principal balance of the Loan may fluctuate from time to time, to be reduced by repayments made by Borrower (which may be made without penalty or premium), and to be increased by future Revolving Credit Loans, advances and other extensions of credit to or for the benefit of Borrower, and shall be due and payable in full upon the expiration of the Term. For purposes of this Agreement, any determination as to whether there is availability within the Borrowing Base for advances or extensions of credit shall be made by Lender in its sole discretion and is final and binding upon Borrower.

(c) At Closing, Borrower shall execute and deliver to Lender a promissory note evidencing Borrower’s unconditional obligation to repay Lender for Revolving Credit Loans, advances, and other extensions of credit made under the Loan, in the form of Exhibit A to this Agreement (as amended, modified, restated or replaced from time to time, the “Note”), dated the date of this Agreement, payable to the order of Lender in accordance with the terms thereof. The Note shall bear interest on the outstanding principal balance of the Note from the date of the Note until repaid, with interest payable monthly in arrears on the first Business Day of each month, at a rate per annum (on the basis of the actual number of days elapsed over a year of 360

days) equal to the Base Rate, provided that after the occurrence and during the continuance of an Event of Default such rate shall be equal to the Default Rate. Each Revolving Credit Loan, advance and other extension of credit shall be deemed evidenced by the Note, which is deemed incorporated into and made a part of this Agreement by this reference.

(d) Subject to the terms and conditions of this Agreement, advances under the Loan shall be made against a borrowing base equal to eighty-five percent (85%) of Qualified Accounts due and owing from any Medicaid/Medicare Account Debtor, Insurer or other Account Debtor (the “Borrowing Base”). Lender, in its sole credit judgment, may further adjust the Borrowing Base by applying percentages (known as “liquidity factors”) to Qualified Accounts by payor class based upon Borrower’s actual recent collection history for each such payor class (i.e., Medicare, Medicaid, commercial insurance, etc.) in a manner consistent with Lender’s underwriting practices and procedures. Such liquidity factors may be adjusted by Lender throughout the Term as warranted by collection histories. Lender shall give Borrower written notice of any such change in the liquidity factors.

(e) Due to potential Medicare program reimbursement liabilities against Borrower, $25,000 will be reserved against the initial Borrowing Base (the “ Borrowing Base Reserve ”). Thereafter, the Borrowing Base Reserve will be increased by an additional $50,000 on December 1, 2000, March 1, 2001, June 1, 2001 and September 1, 2001, and by $25,000 on December 1, 2001 (so that the total Borrowing Base Reserve as of December 1, 2001 is $250,000). Upon Borrower’s receipt of a notice or notices of Medicare program reimbursement liability, Borrower will immediately provide copies of such notice or notices to Lender and Lender shall have the right, in it sole discretion, to further increase the Borrowing Base Reserve to the extent of any such liabilities. Upon Borrower’s satisfaction of such liabilities, the Borrowing Base Reserve will be decreased to the extent of such satisfaction (but not below $250,000).

Section 2.2. Loan Administration. Borrowings under the Loan shall be as follows:

(a) A request for a Revolving Credit Loan shall be made, or shall be deemed to be made, in the following manner: (i) Borrower may give Lender notice of its intention to borrow, in which notice Borrower shall specify the amount of the proposed borrowing and the proposed borrowing date, not later than 2:00 p.m. Eastern time two (2) Business Days before the proposed borrowing date; provided , however , that no such request may be made at a time when there exists an Event of Default; and (ii) the becoming due of any amount required to be paid under this Agreement, whether as interest or for any other Obligation, shall be deemed irrevocably to be a request for a Revolving Credit Loan on the day following the due date in the

To demonstrate the methodology, the following is an illustration of the application of liquidity factors: If Borrower historically collects 75% of invoiced insurance claims within the eligibility period, the liquidity factor would be 75%, so that availability against such class of Accounts in the aggregate would be equal to Qualified Accounts multiplied by a 75% liquidity factor and then multiplied by the 85% advance rate.

amount required to pay such interest or other Obligation if such was not paid by Borrower on the due date.

(b) Borrower hereby irrevocably authorizes Lender to disburse the proceeds of each Revolving Credit Loan requested, or deemed to be requested, as follows: (i) the proceeds of each Revolving Credit Loan requested under subsection 2.2(a)(i) shall be disbursed by Lender by wire transfer to such bank account as may be agreed upon by Borrower and Lender from time to time or elsewhere if pursuant to written direction from Borrower; and (ii) the proceeds of each Revolving Credit Loan deemed to be requested under subsection 2.2(a)(ii) shall be disbursed by Lender by way of direct payment of the relevant interest or other Obligation.

(c) All Revolving Credit Loans, advances and other extensions of credit to or for the benefit of Borrower shall constitute one general Obligation of Borrower, and shall be secured by Lender’s lien upon all of the Collateral.

(d) Lender shall enter all Revolving Credit Loans as debits to a loan account in the name of Borrower and shall also record in said loan account all payments made by Borrower on any Obligations and all proceeds of Collateral which are indefeasibly paid to Lender, and may record therein, in accordance with customary accounting practice, other debits and credits, including interest and all charges and expenses properly chargeable to Borrower. All collections into the Concentration Account pursuant to Section 2.3 shall be applied first to fees, costs and expenses due and owing under the Loan Documents, then to interest due and owing under the Loan Documents, and then to principal outstanding with respect to Revolving Credit Loans.

(e) Lender will account to Borrower monthly with a statement of Revolving Credit Loans, charges and payments made pursuant to this Agreement, and such accounting rendered by Lender shall be deemed final, binding and conclusive upon Borrower, absent manifest error, unless Lender is notified by Borrower in writing to the contrary within thirty (30) days of the date each accounting is mailed to Borrower. Such notice shall be deemed an objection to those items specifically objected to in the notice.

Section 2.3. Collections, Disbursements, Borrowing Availability, and Lockbox Account. Borrower shall maintain a lockbox account (the “Lockbox”) with Bank One Arizona, N.A. (the “Lockbox Bank”), subject to the provisions of this Agreement, and shall execute with the Lockbox Bank a Lockbox Agreement in the form attached as Exhibit B , and such other agreements related to the Lockbox Agreement as Lender may require. Borrower shall ensure that all collections of Accounts are paid directly from Account Debtors into the Lockbox, and that all funds paid into the Lockbox are immediately transferred into a depository account maintained by Lender at Bank One, N.A., or such other financial institution as determined by Lender in its sole discretion, by written notice to Borrowers and the Lockbox Bank (the “Concentration Account”). Lender shall apply, on a daily basis, all funds transferred into the Concentration Account pursuant to this Section 2.3 to reduce the outstanding indebtedness under the Loan (in accordance with Section 2.2(d)), and all future Revolving Credit Loans, advances

and other extensions of credit to be made by Lender under the conditions set forth in this Article II. To the extent that any collections of Accounts or proceeds of other Collateral are not sent directly to the Lockbox but are received by Borrower, such collections shall be held in trust for the benefit of Lender and immediately remitted, in the form received, to the Lockbox Bank for transfer to the Concentration Account immediately upon receipt by Borrower. Borrower acknowledges and agrees that its compliance with the terms of this Section 2.3 is essential, and that Lender will suffer immediate and irreparable injury and have no adequate remedy at law, if Borrower, through its acts or omissions, causes or permits Account Debtors to pay other than to the Lockbox Account, or if Borrower fails to immediately deposit collections of Accounts or proceeds of other Collateral in the Lockbox Account as herein required. Upon Borrower’s failure to comply with the terms of this Section 2.3, Lender will be entitled, in addition to exercising any other rights and remedies available to it, to assess a non-compliance fee which shall operate to increase the Base Rate by two percent (2%) per annum during any period of non-compliance, Lender shall be entitled to assess such fee whether or not an Event of Default is declared or otherwise occurs. All funds transferred from the Concentration Account for application to Borrower’s indebtedness to Lender shall be applied to reduce the Loan balance, but for purposes of calculating interest shall be subject to a five (5) Business Day clearance period. If as the result of collections of Accounts pursuant to the terms and conditions of this Section 2.3 a credit balance exists with respect to the Concentration Account, such credit balance shall not accrue interest in favor of Borrower, but shall be available to Borrower at any time or times for so long as no Event of Default, and no event or circumstance which, with notice or the passage of time (or both), would constitute an Event of Default, exists.

Section 2.4. Fees.

(a) By executing this Agreement. Borrower agrees unconditionally to pay to Lender a commitment fee equal to one and one-half percent (1.5%) ($120,000) of the Maximum Loan Amount (the “Commitment Fee”).

(b) For so long as the Loan is available to Borrower, Borrower unconditionally shall pay to Lender a monthly usage fee (the “Usage Fee”) equal to 0.0417% of the average amount by which the Maximum Loan Amount exceeds the average amount of the outstanding principal balance of the Revolving Credit Loans during the preceding month. The Usage Fee shall be payable monthly in arrears on the first Business Day of each successive calendar month.

(c) For so long as the Loan is available to Borrower, Borrower unconditionally shall pay to Lender a monthly loan management fee (the “Loan Management Fee”) equal to one-twelfth of one percent (0.0833%) of the average amount of the outstanding principal balance of the Revolving Credit Loans during the preceding month. The Loan Management Fee shall be payable monthly in arrears on the first day of each successive calendar month.

(d) Borrower shall pay to Lender all reasonable out-of-pocket audit and appraisal fees in connection with audits and appraisals of Borrower’s books and records and such other matters as Lender shall deem appropriate, which shall be due and payable on the first Business Day of the month following the date of issuance by Lender of a request for payment thereof to Borrower.

(e) Borrower shall pay to Lender, on demand, any and all reasonable fees, costs or expenses which Lender or any participant pays to a bank or other similar institution (including, without limitation, any fees paid by Lender to any participant) arising out of or in connection with (i) the forwarding to Borrower or any other Person on behalf of Borrower, by Lender, of proceeds of Revolving Credit Loans made by Lender to Borrower pursuant to this Agreement, and (ii) the depositing for collection, by Lender or any participant, of any check or item of payment received or delivered to Lender or any participant on account of Obligations.

Section 2.5. Payments. Principal payable on account of Revolving Credit Loans shall be payable by Borrower to Lender immediately upon the earliest of (i) the receipt by Borrower or Lender of any payments on or proceeds from any of the Collateral, to the extent of such proceeds, (ii) the occurrence of an Event of Default if the Loan and the maturity of the payment of the Obligations are accelerated, or (iii) the termination of this Agreement pursuant to Section 2.8 of this Agreement; provided , however that if any advance made by Lender in excess of the Borrowing Base shall exist at any time, Borrower shall, immediately upon demand, repay such overadvance. Interest accrued on the Revolving Credit Loans shall be due on the earliest of (i) the first Business Day of each month (for the immediately preceding month), computed on the last calendar day of the preceding month, (ii) the occurrence of an Event of Default if the Loan and the maturity of the payment of the Obligations are accelerated, or (iii) the termination of this Agreement pursuant to Section 2.8. Except to the extent otherwise set forth in this Agreement, all payments of principal and of interest on the Loan, all other charges and any other obligations of Borrower under this Agreement, shall be made to Lender to the Concentration Account, in immediately available funds.

Section 2.6. Use of Proceeds. The proceeds of Lender’s advances under the Loan shall be used solely for working capital and for other costs of Borrower arising in the ordinary course of Borrower’s business.

Section 2.7. Interest Rate Limitation. The parties intend to conform strictly to the applicable usury laws in effect from time to time during the term of the Loan. Accordingly, if any transaction contemplated by this Agreement would be usurious under such laws, then notwithstanding any other provision of this Agreement: (i) the aggregate of all interest that is contracted for, charged, or received under this Agreement or under any other Loan Document shall not exceed the maximum amount of interest allowed by applicable law (the “Highest Lawful Rate”), and any excess shall be promptly credited to Borrower by Lender (or, to the extent that such consideration shall have been paid, such excess shall be promptly refunded to Borrower by Lender); (ii) neither Borrower nor any other Person now or hereafter liable under this Agreement shall be obligated to pay the amount of such interest to the extent that it is in

excess of the Highest Lawful Rate; and (iii) the effective rate of interest shall be reduced to the Highest Lawful Rate. All sums paid, or agreed to be paid, to Lender for the use, forbearance, and detention of the debt of Borrower to Lender shall, to the extent permitted by applicable law, be allocated throughout the full term of the Note until payment is made in full so that the actual rate of interest does not exceed the Highest Lawful Rate in effect at any particular time during the full term thereof. If at any time the rate of interest under the Note exceeds the Highest Lawful Rate, the rate of interest to accrue pursuant to this Agreement shall be limited, notwithstanding anything to the contrary in this Agreement, to the Highest Lawful Rate, but any subsequent reductions in the Base Rate shall not reduce the interest to accrue pursuant to this Agreement below the Highest Lawful Rate until the total amount of interest accrued equals the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect. If the total amount of interest paid or accrued pursuant to this Agreement under the foregoing provisions is less than the total amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had been in effect, then Borrower agrees to pay to Lender an amount equal to the difference between (x) the lesser of (A) the amount of interest that would have accrued if the Highest Lawful Rate had at all times been in effect, or (B) the amount of interest that would have accrued if a varying rate per annum equal to the interest rate under the Note had at all times been in effect, and (y) the amount of interest accrued in accordance with the other provisions of this Agreement.

Section 2.8. Term .

(a) Subject to Lender’s right to cease making Revolving Credit Loans to Borrower upon or after any Event of Default, this Agreement shall be in effect for a period of three (3) years from the Closing Date, unless terminated as provided in this Section 2.8 (the “Term”), and this Agreement shall be renewed for one-year periods thereafter upon the mutual written agreement of the parties.

(b) Notwithstanding anything in this Agreement to the contrary, Lender may terminate this Agreement without notice upon or after the occurrence of an Event of Default.

(c) Upon at least thirty (30) days prior written notice to Lender (the “Termination Notice Period”), Borrower may terminate this Agreement after the Closing Date, provided however, at the effective date of any termination, Borrower shall pay to Lender (in addition to the then outstanding principal, accrued interest and other Obligations owing under the terms of this Agreement and any other Loan Documents) as yield maintenance for the loss of bargain and not as a penalty, an amount equal to the Termination Fee.

(d) All of the Obligations shall be immediately due and payable upon the termination date stated in any notice of termination of this Agreement (the “Termination Date”); provided that, notwithstanding anything in Section 2.8(c) to the contrary, the Termination Date shall be effective no earlier than the first Business Day of the month following the expiration of the Termination Notice Period. All undertakings, agreements, covenants, warranties, and

representations of Borrower contained in the Loan Documents shall survive any such termination and Lender shall retain its liens in the Collateral and all of its rights and remedies under the Loan Documents notwithstanding such termination until Borrower has paid the Obligations to Lender, in full, in immediately available funds.

(e) Notwithstanding any provision of this Agreement which makes reference to the continuance of an Event of Default, nothing in this Agreement shall be construed to permit Borrower to cure an Event of Default following the lapse of the applicable cure period, and Borrower shall have no such right in any instance unless specifically granted in writing by Lender.

Section 2.9. Joint and Several Liability; Binding Obligations. Each entity comprising Borrower and executing this Agreement on behalf of Borrower shall be jointly and severally liable for all of the Obligations. In addition, each entity comprising Borrower hereby acknowledges and agrees that all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in this Agreement shall be applicable to and shall be binding upon each entity comprising Borrower, and shall be binding upon all such entities when taken together.

ARTICLE III

COLLATERAL

Section 3.1. Generally. As security for the payment of all liabilities of Borrower to Lender, including without limitation: (i) indebtedness evidenced under the Note and Secured Term Note, repayment of Revolving Credit Loans, repayment of the Mortgage Loan, advances and other extensions of credit, sale and purchase obligations under the Warrant; all fees and charges owing by Borrower, (including without limitation the Termination Fee) and all other liabilities and obligations of every kind or nature whatsoever of Borrower to Lender, whether now existing or hereafter incurred, joint or several, matured or unmatured, direct or indirect, primary or secondary, related or unrelated, due or to become due, including but not limited to any extensions, modifications, substitutions, increases and renewals thereof, (ii) the payment of all amounts advanced by Lender to preserve, protect, defend, and enforce its rights under this Agreement and in the following property in accordance with the terms of this Agreement, and (iii) the payment of all expenses incurred by Lender in connection therewith (collectively, the “Obligations”), and as further security for the payment and performance of the obligations of Borrower under the Mortgage Documents and any and all other loan and security agreements, secured bridge or term notes or other loan documents evidencing indebtedness of Borrower or any of its Affiliates to Lender or any of its Affiliates, including without limitation the Mortgage Documents (as such documents are specifically listed on Exhibit E to this Agreement), as amended, modified or replaced, Borrower hereby assigns and grants to Lender a continuing first priority lien on and security interest in, upon, and to the following property (the “Collateral”):

(a) All of Borrower’s now-owned and hereafter acquired or arising Accounts, accounts receivable and rights to payment of every kind and description, and all of Borrower’s contract rights, chattel paper, documents and instruments with respect thereto, and all of Borrower’s rights, remedies, security and liens, in, ___ and in respect of the Accounts, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any Account Debtor, and credit and other insurance;

(b) All moneys, securities and other property and the proceeds thereof, now or hereafter held or received by, in transit to in possession of, or under the control of Lender or a bailee or Affiliate of Lender, from or for Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Borrower’s deposits (general or special), balances, sums and credits with Lender at any time existing;

(c) All of Borrower’s right, title and interest in, to and in respect of all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices or other documents or instruments with respect to, or otherwise representing or evidencing, any Account, and all returned, reclaimed or repossessed goods;

(d) All of Borrower’s now owned or hereafter acquired deposit accounts into which Accounts are deposited, including the Lockbox Account;

(e) All of Borrower’s now owned and hereafter acquired or arising general intangibles and other property of every kind and description with respect to, evidencing or relating to its Accounts, accounts receivable and other rights to payment, including, but not limited to, all existing and future customer lists, choses in action, claims, books, records, ledger cards, contracts, licenses, formulae, tax and other types of refunds, returned and unearned insurance premiums, rights and claims under insurance policies, and computer programs, information, software, records, and data, as the same relates to the Accounts;

(f) All of Borrower’s other general intangibles (including, without limitation, any proceeds from insurance policies after payment of prior interests), patents, unpatented inventions, trade secrets, copyrights, contract rights, goodwill, literary rights, rights to performance, rights under licenses, choses-in-action, claims, information contained in computer media (such as data bases, source and object codes, and information therein), things in action, trademarks and trademarks applied for (together with the goodwill associated therewith) and derivatives thereof, trade names, including the rights to make, use, and vend goods utilizing any of the foregoing, and permits, licenses, certifications, authorizations and approvals, and the rights of Borrower thereunder, issued by any governmental, regulatory, or private authority, agency, or entity whether now owned or hereafter acquired, together with all cash and non-cash proceeds and products thereof;

(g) All of Borrower’s now owned or hereafter acquired inventory of every description which is held by Borrower for sale or lease or is furnished by Borrower under any contract of service or is held by Borrower as raw materials, work in process or materials used or consumed in a business, wherever located, and as the same may now and hereafter from time to time be constituted, together with all cash and non-cash proceeds and products thereof;

(h) All of Borrower’s now owned or hereafter acquired machinery, equipment, computer equipment, tools, tooling, furniture, fixtures, goods, supplies, materials, work in process, whether now owned or hereafter acquired, together with all additions, parts, fittings, accessories, special tools, attachments, and accessions now and hereafter affixed thereto and/or used in connection therewith, all replacements thereof and substitutions therefor, and all cash and non-cash proceeds and products thereof;

(i) all of Borrower’s books, records, ledger cards, computer programs and other property at any time evidencing or relating to the Accounts;

(j) all of Borrower’s monies and other property of every kind and nature now or at any time or times hereafter in the possession of or under the control of Borrower or a bailee or Affiliate of Borrower; and

(k) The proceeds (including, without limitation, insurance proceeds) of all of the foregoing.

Section 3.2. Lien Documents. At Closing and thereafter as Lender deems necessary in its sole discretion, Borrower shall execute and deliver to Lender, or have executed and delivered (all in form and substance satisfactory to Lender in its sole discretion):

(a) UCC-1 Financing Statements pursuant to the Uniform Commercial Code in effect in the jurisdiction(s) in which Borrower operates, which Lender may file in any jurisdiction where any Collateral is or may be located and in any other jurisdiction that Lender deems appropriate; provided that a carbon, photographic, or other reproduction or other copy of this Agreement or of a financing statement is sufficient as and may be filed in lieu of a financing statement; and

(b) Any other agreements, documents, instruments, and writings deemed necessary by Lender or as Lender may otherwise request from time to time in its sole discretion to evidence, perfect, or protect Lender’s lien and security interest in the Collateral required under this Agreement.

Section 3.3. Collateral Administration.

(a) All Collateral (except deposit accounts) will at all times be kept by Borrower at the locations set forth on Schedule 3.3(a) and shall not be moved from such

locations without the prior written consent of Lender, which consent shall not be unreasonably withheld.

(b) Borrower shall keep accurate and complete records of its Accounts and all payments and collections thereon and shall submit to Lender on such periodic basis as Lender shall request a sales and collections report for the preceding period, in form satisfactory to Lender. In addition, if Accounts in an aggregate face amount in excess of $50,000.00 become ineligible because they fall within one of the specified categories of ineligibility set forth in the definition of Qualified Accounts or otherwise, Borrower shall notify Lender of such occurrence on the first Business Day following such occurrence and the Borrowing Base shall thereupon be adjusted to reflect such occurrence. If requested by Lender, Borrower shall execute and deliver to Lender formal written assignments of all of its Accounts weekly or daily, which shall include all Accounts that have been created since the date of the last assignment, together with copies of claims, invoices or other information related thereto.

(c) Whether or not an Event of Default has occurred, any of Lender’s officers, employees or agents shall have the right, at any time or times hereafter, in the name of Lender or any designee of Lender or Borrower, to verify the validity, amount or any other matter relating to any Accounts by mail, telephone, telegraph or otherwise. Borrower shall cooperate fully with Lender in an effort to facilitate and promptly conclude such verification process.

(d) To expedite collection, Borrower shall endeavor in the first instance to make collection of its Accounts for Lender. Lender retains the right at all times after the occurrence and during the continuance of an Event of Default, subject to applicable law regarding Medicaid/Medicare Account Debtors, to notify Account Debtors that Accounts have been assigned to Lender and to collect Accounts directly in its own name and to charge the collection costs and expenses, including attorneys’ fees, to Borrower.

Section 3.4. Other Actions. In addition to the foregoing, Borrower (i) shall provide prompt written notice to each private indemnity, managed care or other Insurer who either is currently an Account Debtor or becomes an Account Debtor at any time following the date of this Agreement that Lender has been granted a first priority lien and security interest in, upon and to all Accounts applicable to such Insurer and directs each Account Debtor to make payments into the Lockbox, and hereby authorizes Lender, upon Borrower’s failure to send such notices within fifteen (15) days after the date of this Agreement (or fifteen (15) days after the Insurer becomes an Account Debtor), to send any and all similar notices to such Insurers, and (ii) shall do anything further that may be lawfully required by Lender to secure Lender and effectuate the intentions and objects of this Agreement, including but not limited to the execution and delivery of lockbox agreements, continuation statements, amendments to financing statements, and any other documents required under this Agreement. At Lender’s request, Borrower shall also immediately deliver to Lender all items for which Lender must receive possession to obtain a perfected security interest. Borrower shall, on Lender’s demand, deliver to Lender all notes, certificates, and documents of title, chattel paper, warehouse receipts, instruments, and any other similar instruments constituting Collateral.

Section 3.5. Searches. Before Closing, and thereafter (as and when determined by Lender in its sole discretion), Lender will perform the searches described in clauses (a) and (b) below against Borrower (the results of which are to be consistent with Borrower’s representations and warranties under this Agreement), all at Borrower’s expense:

(a) Uniform Commercial Code searches with the Secretary of State and _ocal filing offices of each jurisdiction where Borrower maintains its executive offices, a place of business, or assets;

(b) Judgment, federal tax lien and corporate and partnership tax lien searches, in each jurisdiction searched under clause (a) above; and

In addition, prior to Closing, at Borrower’s expense, Borrower shall obtain and deliver to Lender good standing certificates showing Borrower to be in good standing in its state of formation and in each other state in which it is doing and currently intends to do business for which qualification is required.

Section 3.6. Power of Attorney. Each of the officers of Lender is hereby irrevocably made, constituted and appointed the true and lawful attorney for Borrower (without requiring any of them to act as such) with full power of substitution to do the following: (i) endorse the name of Borrower upon any and all checks, drafts, money orders, and other instruments for the payment of money that are payable to Borrower and constitute collections on Borrower’s Accounts; (ii) execute in the name of Borrower any financing statements, schedules, assignments, instruments, documents, and statements that Borrower is obligated to give Lender under this Agreement; and (iii) do such other and further acts and deeds in the name of Borrower that Lender may deem necessary to enforce any Account or other Collateral or perfect Lender’s security interest or lien in any Collateral. In addition, if Borrower breaches its obligation to direct payments of the proceeds of the Collateral to the Lockbox Account, Lender, as the irrevocably made, constituted and appointed true and lawful attorney for Borrower pursuant to this paragraph, may, by the signature or other act of any of Lender’s officers (without requiring any of them to do so), direct any federal, state or private payor or fiscal intermediary to pay proceeds of the Collateral to Borrower by directing payment to the Lockbox Account.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to Lender, and shall be deemed to represent and warrant on each day on which any Obligations shall be outstanding under this Agreement, that:

Section 4.1. Subsidiaries. Except as set forth in Schedule 4.1 , Borrower has no subsidiaries.

Section 4.2. Organization and Good Standing. Borrower is a corporation/limited liability company duly organized, validly existing, and in good standing under the laws of its state of formation, is in good standing as a foreign corporation/limited liability company in each jurisdiction in which the character of the properties owned or leased by it therein or the nature of its business makes such qualification necessary, has the corporate power and authority to own its assets and transact the business in which it is engaged, and has obtained all certificates, licenses and qualifications required under all laws, regulations, ordinances, or orders of public authorities necessary for the ownership and operation of all of its properties and transaction of all of its business except where the failure to qualify will not result in a materially adverse effect.

Section 4.3. Authority. Borrower has full corporate/limited liability company power and authority to enter into, execute, and deliver this Agreement and to perform its obligations under this Agreement, to borrow the Loan, to execute and deliver the Note, and to incur and perform the obligations provided for in the Loan Documents, all of which have been duly authorized by all necessary corporate action. No consent or approval of shareholders or members of, or lenders to, Borrower and no consent, approval, filing or registration with any Governmental Authority is required as a condition to the validity of the Loan Documents or the performance by Borrower of its obligations under the Loan Documents.

Section 4.4. Binding Agreement . This Agreement and all other Loan Documents constitute, and the Note, when issued and delivered pursuant to this Agreement for value received, will constitute, the valid and legally binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms.

Section 4.5. Litigation . Except as disclosed on Schedule 4.5 hereto, there are no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened, against or adversely affecting Borrower’s properties or assets or the validity or enforceability of the Loan Documents, or the ability of Borrower to perform any obligations under the Loan Documents. Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court, arbitration tribunal or governmental authority having jurisdiction over Borrower. Borrower is not the subject of any proceeding by any governmental agency, and no notice of any violation has been or will be issued by a governmental agency that would, directly or indirectly, or with the passage of time: (i) have a material adverse impact on Borrower’s ability to accept and/or retain patients or operate the Improvements for the licensed use or result in the imposition of a fine, a sanction, a lower rate certification or a lower reimbursement rate for services rendered to eligible patients; (ii) modify, limit or annul or result in the transfer, suspension, revocation or imposition of probationary use of any of the licenses; or (iii) if applicable, affect Borrower’s continued participation in the Medicaid or Medicare programs or any other of the third-party payors’ programs, or any successor programs thereto, at current rate certifications.

Section 4.6. No Conflicts . The execution and delivery by Borrower of this Agreement and the other Loan Documents do not, and the performance of its obligations under the Loan Documents will not, violate, conflict with, constitute a default under, or result in the creation of a

lien or encumbrance upon the property of Borrower (other than for the benefit of Lender) under: (i) any provision of Borrower’s articles of incorporation/organization or bylaws/operating agreement, (ii) any provision of any law, rule, or regulation applicable to Borrower, or (iii) any of the following: (A) any indenture or other agreement or instrument to which Borrower is a party or by which Borrower or its property is bound; or (B) any judgment, order or decree of any court, arbitration tribunal, or Governmental Authority having jurisdiction over Borrower which is applicable to Borrower.

Section 4.7. Financial Condition. The financial statements of Borrower as of and for the period ending July 31, 2000, certified by the chief financial officer of Borrower, which have been delivered to Lender, fairly present the financial condition of Borrower and the results of its operations and changes in financial condition as of the dates and for the periods referred to, and have been prepared in accordance with GAAP. There are no material unrealized or anticipated liabilities, direct or indirect, fixed or contingent, of Borrower as of the dates of such financial statements which are not reflected in such financial statements or in the notes to such financial statements. There has been no materially adverse change in the business, properties, condition (financial or otherwise) or operations (current or prospective) of Borrower since March 31. Borrower’s fiscal year ends on December 31. The federal tax identification number of each Borrower is set forth on Schedule 4.7 attached hereto.

Section 4.8. No Default. Borrower is not in default under or with respect to any obligation in any respect which could be materially adverse to its business, operations, property or financial condition, or which could materially adversely affect the ability of Borrower to perform its obligations under the Loan Documents. No Event of Default or event which, with the giving of notice or lapse of time, or both, could become an Event of Default, has occurred and is continuing.

Section 4.9. Title to Properties. Borrower has good and marketable title to its properties and assets, including the Collateral and the properties and assets reflected in the financial statements described in Section 4.7, subject to no lien, mortgage, pledge, encumbrance or charge of any kind, other than Permitted Liens. Borrower has not agreed or consented to cause any of its properties or assets whether owned now or hereafter acquired to be subject in the future (upon the happening of a contingency or otherwise) to any lien, mortgage, pledge, encumbrance or charge of any kind other than Permitted Liens.

Section 4.10. Taxes. Borrower has filed, or has obtained extensions for the filing of, all federal, state and other material tax returns which are required to be filed, and has paid all taxes shown as due on those returns and all assessments, fees and other amounts due as of the date hereof. All tax liabilities of Borrower are adequately provided for on Borrower’s books. Notwithstanding the foregoing, Borrower shall not be required to pay and discharge or cause to be paid and discharged any tax, assessment, charge, levy or claim (other than payroll taxes) so long as the validity or amount thereof shall be contested in good faith and by appropriate proceedings by Borrower, as determined in the reasonable judgment of Lender, and Borrower shall have set aside on its books adequate reserve therefor; and provided further , that such

deferment of payment is permissible only so long as Borrower’s title to, and its right to use, the Collateral is not adversely affected thereby and Lender’s lien and priority on the Collateral are not adversely affected, altered or impaired thereby. No tax liability has been asserted by the Internal Revenue Service or other taxing authority against Borrower for taxes in excess of those already paid.

Section 4.11. Securities and Banking Laws and Regulations.

(a) The use of the proceeds of the Loan and Borrower’s issuance of the Note will not directly or indirectly violate or result in a violation of the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including without limitation Regulations U, T or X of the Board of Governors of the Federal Reserve System. Borrower is not engaged in the business of extending credit for the purpose of the purchasing or carrying “margin stock” within the meaning of those regulations. No part of the proceeds of the Loan under this Agreement will be used to purchase or carry any margin stock or to extend credit to others for such purpose.

(b) Borrower is not an investment company within the meaning of the Investment Company Act of 1940, as amended, nor is it, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company within the meaning of that Act.

Section 4.12. ERISA. No employee benefit plan (a “Plan”) subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and regulations issued pursuant to ERISA that is maintained by Borrower or under which Borrower could have any material liability under ERISA (i) has failed to meet minimum funding standards established in Section 302 of ERISA, (ii) has failed to substantially comply with all applicable requirements of ERISA and of the Internal Revenue Code, including all applicable rulings and regulations thereunder, or (iii) has engaged in or been involved in a prohibited transaction (as defined in ERISA) under ERISA or under the Internal Revenue Code. Neither Borrower nor any member of a Controlled Group that includes Borrower has assumed, or received notice of a claim asserted against Borrower or another member of the Controlled Group for, withdrawal liability (as defined in the Multi-Employer Pension Plan Amendments Act of 1980, as amended) with respect to any multi-employer pension plan. Borrower has timely made when due all contributions with respect to any multi-employer pension plan in which it participates and no event has occurred triggering a material claim against Borrower for withdrawal liability with respect to any multi-employer pension plan in which Borrower participates.

Section 4.13. Compliance with Law. Except as described in Schedule 4.13 , Borrower is not in violation of any statute, rule or regulation of any Governmental Authority (including, without limitation, any statute, rule or regulation relating to employment practices or to environmental, occupational and health standards and controls). Borrower has obtained all licenses, permits, franchises, and other governmental authorizations necessary for the ownership of its properties and the conduct of its business. Borrower is current with all reports and documents required to be filed with any state or federal securities commission or similar

Governmental Authority and is in full compliance with all applicable rules and regulations of such commissions.

Section 4.14. Environmental Matters. No use, exposure, release, generation, manufacture, storage, treatment, transportation or disposal of Hazardous Material has occurred or is occurring on or from any real property on which the Collateral is located or which is owned, leased or otherwise occupied by Borrower (the “Premises”), or off the Premises as a result of any action of Borrower, except as described in Schedule 4.14 . All Hazardous Material used, treated, stored, transported to or from, generated or handled on the Premises, or off the Premises by Borrower, has been disposed of on or off the Premises by or on behalf of Borrower in a lawful manner. There are no underground storage tanks present on or under the Premises owned or leased by Borrower. No other environmental, public health or safety hazards exist with respect to the Premises.

Section 4.15. Places of Business. As of the Closing Date, the only places of business of Borrower, and the places where it keeps and intends to keep the Collateral and records concerning the Collateral, are at the addresses set forth in Schedule 4.15 . Schedule 4.15 also lists the owner of record of each such property.

Section 4.16. Intellectual Property. Borrower exclusively owns or possesses all the patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, franchises, licenses, and rights with respect to the foregoing necessary for the current and planned future conduct of its business, without any conflict with the rights of others. A list of all such intellectual property (indicating the nature of Borrower’s interest), as well as all outstanding franchises and licenses given by or held by Borrower, is attached as Schedule 4.16 . Borrower is not in default of any obligation or undertaking with respect to such intellectual property or rights. Borrower is not infringing on any patents, patent applications, trademark, trademark applications, service marks, trace names, copyrights, franchises, licenses, any rights with respect to the foregoing, or any other intellectual property rights of others and the Borrower is not aware of any infringement by others of any such rights owned by Borrower.

Section 4.17. Stock Ownership. The identity of the stockholders of record of all classes of the outstanding stock of Borrower, together with the respective ownership percentages held by such stockholders, are as set forth on Schedule 4.17 .

Section 4.18. Material Facts. Neither this Agreement nor any other Loan Document nor any other agreement, document, certificate, or statement furnished to Lender by or on behalf of Borrower in connection with the transactions contemplated by this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained in this Agreement or other Loan Document not misleading. There is no fact known to Borrower that adversely affects or in the future may adversely affect the business, operations, affairs or financial condition of Borrower, or any of its properties or assets.

Section 4.19. Investments, Guarantees, and Certain Contracts. Borrower does not own or hold any equity or long-term debt investments in, have any outstanding advances to, have any outstanding guarantees for the obligations of, or have any outstanding borrowings from, any Person, except as described on Schedule 4.19 . Borrower is not a party to any contract or agreement, or subject to any corporate/limited liability company restriction, which adversely affects its business.

Section 4.20. Business Interruptions. Within five years before the date of this Agreement, neither the business, property or assets, or operations of Borrower or, to the best of Borrower’s knowledge, Borrower’s predecessor New American Healthcare Corporation, has been adversely affected in any way by any casualty, strike, lockout, combination of workers or order of the United States of America or other Governmental Authority, directed against Borrower. There are no pending or threatened labor disputes, strikes, lockouts, or similar occurrences or grievances against Borrower or its business, except as set forth on Schedule 4.20

Section 4.21. Names. Within five years before the date of this Agreement, Borrower has not conducted business under or used any other name (whether corporate, partnership or assumed) other than as shown on Schedule 4.21 . Borrower is the sole owner of all names listed on that Schedule and any and all business done and invoices issued in such names are Borrower’s sales, business, and invoices. Each trade name of Borrower represents a division or trading style of Borrower and not a separate Person or independent Affiliate.

Section 4.22 Joint Ventures. Borrower is not engaged in any joint venture or partnership with any other Person, except as set forth on Schedule 4.22 .

Section 4.23 Accounts. Lender may rely, in determining which Accounts are Qualified Accounts, on all statements and representations made by Borrower with respect to any Account or Accounts. Unless otherwise indicated in writing to Lender, with respect to each Qualified Account, Borrower represents that:

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

(b) The Account arises out of a completed, bona fide sale and delivery of goods or rendition of Medical Services by Borrower in the ordinary course of its business and in accordance with the terms and conditions of all purchase orders, contracts, certification, participation, certificate of need, or other document s relating thereto and forming a part of the contract between Borrower and the Account Debtor

(c) The Account is for a liquidated amount maturing as stated in a duplicate claim or invoice covering such sale or rendition of Medical Services, a copy of which has been furnished or is available to Lender;

(d) To the best of Borrower’s knowledge, the Account, and Lender’s security interest in such Account, is not, and will not (by voluntary act or omission by Borrower), be in the future, subject to any offset, lien, deduction, defense, dispute, counterclaim or any other adverse condition, and each such Account is absolutely owing to Borrower and is not contingent in any respect or for any reason;

(e) To the best of Borrower’s knowledge, there are no facts, events or occurrences which in any way impair the validity or enforceability of any Accounts or tend to reduce the amount payable thereunder from the face amount of the claim or invoice and statements delivered to Lender with respect thereto;

(f) To the best of Borrower’s knowledge, (i) the Account Debtor under the Account had the capacity to contract at the time any contract or other document giving rise to the Account was executed and (ii) such Account Debtor is solvent;

(g) To the best of Borrower’s knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor under the Account which might result in any material adverse change in such Account Debtor’s financial condition or the collectibility of such Account;

(h) The Account has been billed and forwarded to the Account Debtor for payment in accordance with applicable laws and compliance and conformance with any and requisite procedures, requirements and regulations governing payment by such Account Debtor with respect to such Account, and such Account if due from a Medicaid/Medicare Account Debtor is properly payable directly to Borrower; and

(i) Borrower has obtained and currently (or is in the process of obtaining and will have obtained within 30 days following the Closing) has all certificates of need, Medicaid and Medicare provider numbers, licenses, permits and authorizations that are necessary in the generation of such Accounts.

Section 4.24. Solvency. Both before and after giving effect to the transactions contemplated by the terms and provisions of this Agreement, Borrower (taken as a whole) (i) owns property whose fair saleable value is greater than the amount required to pay all of Borrower’s Indebtedness (including contingent debts), (ii) was and is able to pay all of its Indebtedness as such Indebtedness matures, and (iii) had and has capital sufficient to carry on its business and transactions and all business and transactions in which it about to engage. For purposes of this Agreement, the term “Indebtedness” means, without duplication (x) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Borrower as of the date on which Indebtedness is to be determined, (y) all obligations of any other person or entity which such Borrower has guaranteed, and (z) the Obligations.

Section 4.26 Recoupments . There are no Medicare or Medicaid recoupments or recoupments of any third-party payor being sought, requested or claimed, or to the Borrower’s knowledge, threatened against the Borrower, or any of its Affiliates.

Section 4.27 Participation Agreements . Schedule 4.27 hereto, sets forth an accurate, complete and current list of all participation agreements with health maintenance organizations, insurance programs, third party payors and preferred provider organizations with respect to he Improvements. Borrower has delivered to Lender true, correct and complete copies of all such agreements listed on Schedule 4.27 .

Section 4.28 Reports . Borrower has timely filed or caused to be timely filed, all cost reports and other material reports of every kind whatsoever required by law or by written or oral contracts or otherwise to have been filed or made with respect to the Improvements. True and correct copies of all such reports for the three (3) most recent fiscal years of the providers have been furnished to Lender. Except as set forth on Schedule 4.28 , there are no claims, actions or appeals pending (and Borrower has not filed any claims or reports which should result in any such claims, actions or appeals) before any commission, board or agency including without limitation any intermediary or carrier, the Provider Reimbursement Review Board or the Administrator of the Health Care Financing Administration, with respect to any state or federal Medicare or Medicaid cost reports or claims filed by Borrower on or before the date hereof, or any disallowance by any commission, board or agency in connection with any audit of such cost reports.

ARTICLE V

CLOSING AND CONDITIONS OF LENDING

Section 5.1. Conditions Precedent to Agreement. The obligation of Lender to enter into and perform this Agreement and to make Revolving Credit Loans is subject to the following conditions precedent:

(a) Lender shall have received two (2) originals of this Agreement, the Certificate of Validity, the Warrant and all other Loan Documents required to be executed and delivered at or before Closing (other than the Note, as to which Lender shall receive only one original), executed by Borrower and any other required Persons, as applicable.

(b) Lender shall have received all searches and good standing certificates required by Section 3.5.

(c) Borrower shall have complied and shall then be in compliance with all the terms, covenants and conditions of the Loan Documents.

(d) There shall have occurred and be continuing no Event of Default and no event which, with the giving of notice or the lapse of time, or both, could constitute such an Event of Default.

(e) The representations and warranties contained in Article IV shall be true and correct.

(f) Lender shall have received copies of all board of directors resolutions of Borrower, and other action taken by Borrower to authorize the execution, delivery and performance of the Loan Documents and the borrowing of the Loan under the Loan Documents as well as the names and signatures of the officers of Borrower authorized to execute documents on its behalf in connection with the Loan, all as also certified as of the date of this Agreement by Borrower’s chief financial officer, or equivalent, and such other papers as Lender may require.

(g) Lender shall have received copies, certified as true, correct and complete by a corporate/limited liability company officer of each Borrower, of the certificate of incorporation/organization of each Borrower, with any amendments to any of the foregoing, and all other documents necessary for performance of the obligations of Borrower under this Agreement and the other Loan Documents.

(h) Lender shall have received a written opinion of counsel for Borrower dated the date of this Agreement, substantially in the form of Exhibit C .

(i) Lender shall have received such financial statements, reports, certifications, and other operational information required to be delivered under this Agreement, including without limitation an initial borrowing base certificate calculating the Borrowing Base.

(j) Lender shall have received the Commitment Fee.

(k) The Lockbox, Lockbox Account and the Concentration Account shall have been established.

(1) Lender shall have received an estoppel certificate substantially in the form of Exhibit D from Borrower’s landlord or sublandlord, as the case may be, with respect to each of the facilities identified on Schedule 4.1 5.

(m) Lender shall have received a certificate of Borrower’s chief financial officer, dated the Closing Date, certifying that all of the conditions specified in this Section nave been fulfilled.

(n) The Bankruptcy Court shall have issued a Final Order approving the sale of assets to Borrower from New American Healthcare Corporation and its subsidiaries (collectively “NAHC”) and Lender shall have received a copy of the signed Final Order.

(o) All conditions set forth in that certain Asset Purchase Agreement between Borrower and NAHC shall have been met.

(p) Lender shall have received such other documents and information as requested by Lender in its sole discretion.

Section 5.2. Conditions Precedent to Advances. Notwithstanding any other provision of this Agreement, no Loan proceeds, Revolving Credit Loans, advances or other extensions of credit under the Loan shall be disbursed under this Agreement unless the following conditions have been satisfied or waived immediately before such disbursement:

(a) The representations and warranties on the part of Borrower contained in Article IV of this Agreement shall be true and correct in all respects at and as of the date of disbursement or advance, as though made on and as of such date (except to the extent that such representations and warranties expressly relate solely to an earlier date and except that the references in Section 4.7 to financial statements shall be deemed to be a reference to the then most recent annual and interim financial statements of Borrower furnished to Lender pursuant to Section 6.1).

(b) No Event of Default or event which, with the giving of notice of the lapse of time, or both, could become an Event of Default shall have occurred and be continuing or would result from the making of the disbursement or advance.

(c) No adverse change in the condition (financial or otherwise), properties, business, or operations of Borrower shall have occurred and be continuing with respect to Borrower since the date of this Agreement.

Section 5.3. Closing. Subject to the conditions of this Article V, the Loan shall be made available on the date as is mutually agreed by the parties (the “Closing Date”) at such time as may be mutually agreeable to the parties upon the execution of this Agreement (the “Closing”) at such place as may be requested by Lender.

Section 5.4. Waiver of Rights. By completing the Closing under this Agreement, or by making advances under the Loan, Lender does not waive a breach of any representation or warranty of Borrower under this Agreement or under any other Loan Document, and all of Lender’s claims and rights resulting from any breach or misrepresentation by Borrower are specifically reserved by Lender.

ARTICLE VI

AFFIRMATIVE COVENANTS

Borrower covenants and agrees that for so long as Borrower may borrow under this Agreement and until payment in full of the Note and performance of all other obligations of Borrower under the Loan Documents:

Section 6.1. Financial Statements and Collateral Reports. Borrower will furnish to Lender (i) a sales and collections report and accounts receivable aging schedule on a form acceptable to Lender within twenty (20) days after the end of each calendar month, which shall include, but not be limited to, a report of sales, credits issued, and collections received; (ii) payables aging schedules within fifteen (15) days after the end of each calendar month; (iii) internally prepared monthly financial statements for Borrower, certified by the chief financial officer of Borrower, within forty-five (45) days of the end of each calendar month, accompanied by management analysis and actual vs. budget variance reports for each nursing home generating Accounts; (iv) to the extent prepared by Borrower, annual projections, profit and loss statements, balance sheets, and cash flow reports (prepared on a monthly basis) for the succeeding fiscal year within thirty (30) days before the end of each of Borrower’s fiscal years; (v) internally prepared annual financial statements for Borrower within ninety (90) days after the end of each of Borrower’s fiscal years; (vi) annual audited financial statements for Borrower prepared by KPMG, or another firm of independent public accountants satisfactory to Lender, within one hundred thirty-five (135) days after the end of each of Borrower’s fiscal years; (vii) promptly upon receipt thereof, copies of any reports submitted to Borrower by the independent accountants in connection with any interim audit of the books of Borrower and copies of each management control letter provided to Borrower by independent accountants; (viii) as soon as available, copies of all financial statements and notices provided by Borrower to all of its stockholders; and (ix) such additional information, reports or statements as Lender may from time to time request. Annual financial statements shall set forth in comparative form figures for the corresponding periods in the prior fiscal year. All financial statements shall include a balance sheet and statement of earnings and shall be prepared in accordance with GAAP.

Section 6.2. Payments Under this Agreement . Borrower will make all payments of principal, interest, fees, and all other payments required under this Agreement and under the Loan, and under any other agreements with Lender to which Borrower is a party, as and when due.

Section 6.3. Existence, Good Standing, and Compliance with Laws . Borrower will do or cause to be done all things necessary (i) to obtain and keep in full force and effect all corporate/limited liability company existence, rights, licenses, privileges, and franchises of Borrower necessary to the ownership of its property or the conduct of its business, and comply with all applicable current and future laws, ordinances, rules, regulations, orders and decrees of any Governmental Authority having or claiming jurisdiction over Borrower; and (ii) to maintain and protect the properties used or useful in the conduct of the operations of Borrower, in a

prudent manner, including without limitation the maintenance at all times of such insurance upon its insurable property and operations as required by law or by Section 6.7.

Section 6.4. Legality. The making of the Loan and each disbursement or advance under the Loan shall not be subject to any penalty or special tax, shall not be prohibited by any governmental order or regulation applicable to Borrower, and shall not violate any rule or regulation of any Governmental Authority, and necessary consents, approvals and authorizations of any Governmental Authority to or of any such disbursement or advance shall have been obtained.

Section 6.5. Lender’s Satisfaction. All instruments and legal documents and proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to Lender and is counsel, and Lender shall have received all documents, including records of corporate/limited liability company proceedings and opinions of counsel, which Lender may have requested in connection therewith.

Section 6.6. Taxes and Charges . Borrower will timely file all tax reports and pay and discharge all taxes, assessments and governmental charges or levies imposed upon Borrower, or its income or profits or upon its properties or any part thereof, before the same shall be in default and before the date on which penalties attach thereto, as well as all lawful claims for labor, material, supplies or otherwise which, if unpaid, might become a lien or charge upon the properties or any part thereof of Borrower; provided , however , that Borrower shall not be required to pay and discharge or cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith and by appropriate proceedings by Borrower, and Borrower shall have set aside on their books adequate reserve therefor; and provided further , that such deferment of payment is permissible only so long as Borrower’s title to, and its right to use, the Collateral is not adversely affected thereby and Lender’s lien and priority on the Collateral are not adversely affected, altered or impaired thereby.

Section 6.7. Insurance. Borrower will carry adequate public liability and professional liability insurance with responsible companies reasonably satisfactory to Lender in such amounts and against such risks as is customarily maintained by similar businesses and by owners of similar property in the same general area.

Section 6.8. General Information. Borrower will furnish to Lender such information as Lender may, from time to time, request with respect to the business or financial affairs of Borrower, and permit any officer, employee or agent of Lender to visit and inspect any of the properties, to examine the minute books, books of account and other records, including management letters prepared by Borrower’s auditors, of Borrower, and make copies thereof or extracts therefrom, and to discuss its and their business affairs, finances and accounts with, and be advised as to the same by, the accountants and officers of Borrower, all at such times and as often as Lender may reasonably require.

Section 6.9. Maintenance of Property. Borrower will maintain, keep and preserve all of its properties in good repair, working order and condition and from time to time make all necessary repairs, renewals, replacements, betterments and improvements thereto, so that the business carried on in connection therewith may be properly conducted at all times.

Section 6.10. Notification of Events of Default and Adverse Developments. Borrower promptly will notify Lender upon the occurrence of: (i) any Event of Default; (ii) any event which, with the giving of notice or lapse of time, or both, could constitute an Event of Default; (iii) any event, development or circumstance whereby the financial statements previously furnished to Lender fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of Borrower; (iv) any judicial, administrative or arbitration proceeding pending against Borrower, and any judicial or administrative proceeding known by Borrower to be threatened against it which, if adversely decided, could adversely affect its condition (financial or otherwise) or operations (current or prospective) or which may expose Borrower to uninsured liability of $50,000.00 or more; (v) any default claimed by any other creditor for Borrowed Money of Borrower other than Lender; and (vi) any other development in the business or affairs of Borrower which may be adverse; in each case describing the nature of the event or development. In the case of notification under clauses (i) and (ii)), Borrower should set forth the action Borrower proposes to take with respect to such event.

Section 6.11. Employee Benefit Plans. Borrower will (i) comply with the funding requirements of ERISA with respect to the Plans for its employees, or will promptly satisfy any accumulated funding deficiency that arises under Section 302 of ERISA; (ii) furnish Lender, promptly after filing the same, with copies of all reports or other statements filed with the United States Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal Revenue Service with respect to all Plans, or which Borrower, or any member of a Controlled Group, may receive from such Governmental Authority with respect to any such Plans, and (iii) promptly advise Lender of the occurrence of any Reportable Event or Prohibited Transaction with respect to any such Plan and the action which Borrower proposes to take with respect thereto. Borrower will make all contributions when due with respect to any multi-employer pension plan in which it participates and will promptly advise Lender: (x) upon its receipt of notice of the assertion against Borrower of a claim for withdrawal liability; (y) upon the occurrence of any event which could trigger the assertion of a claim for withdrawal liability against Borrower; and (z) upon the occurrence of any event which would place Borrower in a Controlled Group as a result of which any member (including Borrower) thereof may be subject to a claim for withdrawal liability, whether liquidated or contingent.

Section 6.12. Financing Statements. Borrower shall provide to Lender evidence satisfactory to Lender as to the due recording of termination statements, releases of collateral, and Forms UCC-3, and shall cause to be recorded financing statements on Form UCC-1, duly executed by Borrower and Lender, in all places necessary to release all existing security interests

and other liens in the Collateral (other than as permitted by this Agreement) and to perfect and protect Lender’s first priority lien and security interest in the Collateral, as Lender may request.

Section 6.13. Financial Records. Borrower shall keep current and accurate books of records and accounts in which full and correct entries will be made of all of its business transactions, and will reflect in its financial statements adequate accruals and appropriations is to reserves, all in accordance with GAAP.

Section 6.14. Collection of Accounts. Borrower shall continue to collect its Accounts in the ordinary course of business.

Section 6.15. Places of Business. Borrower shall give thirty (30) days’ prior written notice to Lender of any change in the location of any of its places of business, of the places where its records concerning its Accounts are kept, of the places where the Collateral is kept, or of the establishment of any new, or the discontinuance of any existing, places of business.

Section 6.16. Business Conducted. Borrower shall continue in the business currently conducted by it using its best efforts to maintain its customers and goodwill. Borrower shall not engage, directly or indirectly, in any line of business substantially different from the business conducted by it immediately before the Closing Date, or engage in business or lines of business which are not reasonably related thereto without tie prior written consent of Lender, such consent to be withheld or granted based on Lenders determination in its sole discretion whether such action would have a detrimental impact on (a) Borrower’s ability to repay the Loan and/or (b) the Lender’s rights in the Collateral.

Section 6.17. Litigation and Other Proceedings. Borrower shall give prompt notice to Lender of any litigation, arbitration, or other proceeding before any Governmental Authority against or affecting Borrower if the amount claimed is more than $50,000.00 for any single claim, or if the amounts at issue in all proceedings pending against Borrower at any point in time exceed $250,000 in the aggregate.

Section 6.18. Bank Accounts. Borrower shall assign to Lender all of its depository and disbursement accounts into which collections of Accounts are deposited.

Section 6.19. Submission of Collateral Documents. Borrower will, on demand of Lender, make available to Lender copies of shipping and delivery receipts evidencing the shipment of goods that gave rise to an Account, medical records, insurance verification forms, assignment of benefits, in-take forms or other proof of the satisfactory performance of services that gave rise to an Account, a copy of the claim o_ invoice for each Account and copies of any written contract or order from which the Account arose. Borrower shall promptly notify Lender if an Account becomes evidenced or secured by an instrument or chattel paper and upon request of Lender, will promptly deliver any such instrument or chattel paper to Lender.

Section 6.20. Licensure; Medicaid/Medicare Cost Reports. Borrower will maintain all certificates of need, provider numbers and licenses necessary to conduct its business as currently conducted, and take any steps required to comply with any such new or additional requirements that may be imposed on providers of medical products and Medical Services. If required, all Medicaid/Medicare cost reports will be properly filed.

Section 6.21. Officer’s Certificates. Together with the monthly financial statements delivered pursuant to clause (iii) of Section 6.1, and together with the audited annual financial statements delivered pursuant to clause (vi) of that Section, Borrower shall deliver to Lender a certificate of its chief financial officer, in form and substance satisfactory to Lender:

(a) Setting forth the information (including detailed calculations) required to establish whether Borrower is in compliance with the requirements of Articles VI and VII as of the end of the period covered by the financial statements then being furnished; and

(b) Stating that the signer has reviewed the relevant terms of this Agreement, and has made (or caused to be made under his supervision) a review of the transactions and conditions of Borrower from the beginning of the accounting period covered by the income statements being delivered to the date of the certificate, and that such review has not disclosed the existence during such period of any condition or event which constitutes an Event of Default or which is then, or with the passage of time or giving of notice or both, could become an Event of Default, and if any such condition or event existed during such period or now exists, specifying the nature and period of existence thereof and what action Borrower has taken or proposes to take with respect thereto.

Section 6.22. Visits and Inspections. Borrower agrees to permit representatives of Lender, from time to time, as often as may be reasonably requested, but only during normal business hours and following reasonable notice to Borrower, to visit and inspect the properties of Borrower, and to inspect, audit and make extracts from its books and records, and discuss with its officers, its employees and its independent accountants, Borrower’s business, assets, liabilities, financial condition, business prospects and results of operations, provided that said visits and inspections by Lender do not interfere with Borrower’s daily operations.

ARTICLE VII

NEGATIVE COVENANTS

Borrower covenants and agrees that so long as Borrower may borrow under this Agreement and until payment in full of the Note and performance of all other obligations of Borrower under the Loan Documents:

Section 7.1. Borrowing. Borrower will not create, incur, assume or suffer to exist any liability for Borrowed Money except: (i) indebtedness to Lender; (ii) indebtedness of Borrower

secured by mortgages, encumbrances or liens expressly permitted by Section 7.3; (iii) accounts payable to trade creditors and current operating expenses (other than for borrowed money) which are not aged more than one hundred twenty (120) days from the billing date or more than thirty (30) days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being contested in good faith and by appropriate and lawful proceedings, and Borrower shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower and its independent accountants; (iv) borrowings incurred in the ordinary course of its business and not exceeding $10,000.00 in the aggregate outstanding at any one time, (v) capital leases existing as of the date of this Agreement, and (vi) capital equipment leases entered into following the date of this Agreement provided that the aggregate amount obligated on all such capital equipment leases does not exceed $300,000 per Borrower facility without the prior written consent of Lender Borrower will not make prepayments on any existing or future indebtedness for Borrowed Money to any Person (other than Lender, to the extent permitted by this Agreement or any subsequent agreement between Borrower and Lender).

Section 7.2. Joint Ventures . Except as specifically described in Schedule 4.22 , Borrower will not invest directly or indirectly in any joint venture for any purpose without the prior written notice to, and the prior written consent of Lender, which consent shall not be unreasonably withheld.

Section 7.3. Liens and Encumbrances . Borrower will not create, incur, assume or suffer to exist any mortgage, pledge, lien or other encumbrance of any kind (including the charge upon property purchased under a conditional sale or other title retention agreement) upon, or any security interest in, any of its Collateral, whether now owned or hereafter acquired, except or Permitted Liens.

Section 7.4. Restriction on Fundamental Changes; No Change in Operation or Control. Without the prior written consent of Lender, such consent to be withheld or granted based on Lender’s determination in its sole discretion whether the requisite following actions would have a material adverse effect on (a) Borrower’s ability to repay the Loan and/or (b) the Lender’s rights in the Collateral, Borrower will not: (i) enter into any transaction of merger or consolidation; (ii) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution): (iii) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, any of its assets, or the capital stock of any subsidiary of Borrower, whether now owned or hereafter acquired; or (iv) acquire by purchase or otherwise all or any substantial part of the business or assets of, or stock or other evidence of beneficial ownership of, any Person. Borrower agrees that compliance with this Section 7.4 is a material inducement to Lender’s advancing credit under this Agreement and Borrower further agrees that any breach of the terms of this Section 7.4 shall constitute fraud. Borrower further agrees that in addition to all other remedies available to Lender, Lender shall be entitled to specific enforcement of the covenants in this Section 7.4, including injunctive relief. Consistent with the foregoing, until the Obligations are repaid in full, Borrower shall not transfer, assign, convey or grant to any other Person the

right to operate or control any of the facilities listed on Schedule 4.15 , whether by lease, sublease, management agreement, joint venture agreement or otherwise.

Section 7.5. Sale and Leaseback. Borrower will not, directly or indirectly, enter into any arrangement whereby Borrower sells or transfers all or any part of its assets and thereupon and within one year thereafter rents or leases the assets so sold or transferred without prior written notice to and the prior written consent of Lender, which consent shall not be unreasonably withheld.

Section 7.6. Dividends, Distributions and Management Fees. Upon notice from Lender to Borrower of the existence of an Event of Default under this Agreement, Borrower will not declare or pay any dividends or other distributions with respect to, purchase, redeem or otherwise acquire for value any of its outstanding stock now or hereafter outstanding, or return any capital of its stockholders, nor shall Borrower pay management fees or fees of a similar nature to any Person.

Section 7.7. Loans. Except for those certain loans to employees of Borrower in the aggregate amount of $265,000, as more fully described on Schedule 7.7 , Borrower will not make loans or advances to any Person, other than (i) trade credit extended in the ordinary course of its business, and (ii) advances for business travel and similar temporary advances made in the ordinary course of business to officers, stockholders, directors, and employees.

Section 7.8. Contingent Liabilities. Borrower will not assume, guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any Person, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business.

Section 7.9. Subsidiaries. Borrower will not form any subsidiary, or make any investment in or any loan in the nature of an investment to, any other Person.

Section 7.10. Compliance with ERISA. Borrower will not permit with respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or any Reportable Event.

Section 7.11. Certificates of Need . Borrower will not amend, alter or suspend or terminate or make provisional in any material way, any certificate of need or provider number without the prior written consent of Lender, which consent shall not be unreasonably withheld.

Section 7.12. Transactions with Affiliates. Borrower will not enter into any transaction, including without limitation the purchase, sale, or exchange of property, or the loaning or giving of funds to any Affiliate or subsidiary, except in the ordinary course of business and pursuant to the reasonable requirements of Borrower’s business and upon terms substantially the same and no less favorable to Borrower as it would obtain in a comparable arm’s length transaction with any Person not an Affiliate or subsidiary, and so long as the

transaction is not otherwise prohibited under this Agreement. For purposes of the foregoing, Lender consents to the transactions described on Schedule 7.12 .

Section 7.13. Use of Lender’s Name. Borrower will not use Lender’s name (or the name of any of Lender’s affiliates) in connection with any of its business operations. Borrower may disclose to third parties that Borrower has a borrowing relationship with Lender. Nothing contained in this Agreement is intended to permit or authorize Borrower to make any contract on behalf of Lender.

Section 7.14. Change in Control. There shall occur no change in the ownership of Borrower’s capital stock or in Borrower’s capital structure which would result in a Change in Control without the prior written consent of Lende_, such consent to be withheld or granted based on Lender’s determination in its sole discretion whether such Change in Control would have a detrimental impact on (a) Borrower’s ability to repay the Loan and/or (b) Lender’s rights in the Collateral. The capital structure of each Borrower is set forth in Schedule 4.17 .

Section 7.15. Contracts and Agreements. Borrower will not become or be a party to any contract or agreement which would breach this Agreement, or breach any other instrument, agreement, or document to which Borrower is a party or by which it is or may be bound.

Section 7.16. Margin Stock. Borrower will not carry or purchase any “margin security” within the meaning of Regulations U, T or X of the Board of Governors of the Federal Reserve System.

Section 7.17. Truth of Statements and Certificates. Borrower will not furnish to Lender any certificate or other document that contains any untrue statement of a material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished.

ARTICLE VIII

EVENTS OF DEFAULT

Section 8.1. Events of Default. Each of the following (individually, an “Event of Default” and collectively, the “Events of Default”) shall constitute an event of default under this Agreement:

(a) A default in the payment of any installment of principal of, or interest upon, the Note and the Secured Term Note when due and payable, whether at maturity or otherwise, or any breach of Section 2.3, which default or breach, as applicable, shall have continued unremedied for a period of five (5) Business Days after written notice of the default or breach from Lender to Borrower;

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

(c) A default in the due observance or performance by Borrower of any other term, covenant or agreement contained in any of the Loan Documents, which default shall have continued unremedied for a period of ten (10) Business Days after written notice of the default from Lender to Borrower;

(d) Any representation or warranty made by Borrower in this Agreement or in any of the other Loan Documents, any financial statement, or any statement or representation made in any other certificate, report or opinion delivered in connection with this Agreement or the other Loan Documents proves to have been incorrect or misleading in any material respect when made, which default shall have continued unremedied for a period of ten (10) Business Days after written notice of the default from Lender to Borrower;

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

(f) Borrower makes an assignment for the benefit of creditors, offers a composition or extension to creditors, or makes or sends notice of an intended bulk sale of any business or assets now or hereafter conducted by Borrower;

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

(h) One or more final judgments against Borrower or attachments against its property not fully and unconditionally covered by insurance shall be rendered by a court of record and shall remain unpaid, unstayed on appeal, undischarged, unbonded and undismissed for a period of twenty (20) days;

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

(j) There shall occur a Change of Control with respect to any Borrower and Borrower has not complied with the provisions set forth in Section 7.14 above;

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

(1) Borrower breaches or violates the terms of, or a default or an event which could, whether with notice or the passage of time, or both, constitute a default, occurs under any other existing or future agreement (related or unrelated) between Borrower and Lender;

(m) Upon the issuance of any execution or distraint process against Borrower or any of its property or assets;

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

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

(p) Borrower or any Affiliate of Borrower, shall challenge or contest, in any action, suit or proceeding, the validity or enforceability of this Agreement, or any of the other Loan Documents, the legality or the enforceability of any of the Obligations or the perfection or priority of any Lien granted to Lender;

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

(r) There shall occur a material adverse change in the financial condition or business prospects of Borrower which default shall have continued unremedied for a period of ten (10) Business Days after written notice from Lender.

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

(t) Borrower shall have prepaid in full or otherwise terminated the Secured Term Note.

Section 8.2. Acceleration . Upon the occurrence of any of the foregoing Events of Default, the Note shall become and be immediately due and payable upon declaration to that effect delivered by Lender to Borrower; provided that, upon the happening of any event specified in Section 8.1 (g), the Note shall be immediately due and payable without declaration or other notice to Borrower.

Section 8.3. Remedies.

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

(i) Terminate the Loan, whereupon all outstanding Obligations (including without limitation the Termination Fee which fee shall also be due and payable upon acceleration hereunder) shall be immediately due and payable;

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

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

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

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

(C) The right to require Borrower at Borrower’s expense to assemble all or any part of the Collateral and make it available to Lender at any place designated by Lender; and

(D) The right to reduce the Maximum Loan Amount or to use the Collateral and/or funds in the Concentration Account in amounts up to the Maximum Loan Amount for any reason.

(b) Borrower agrees that a notice received by it at least ten (10) days before the time of any intended public sale, or the time after which any private sale or other disposition of the Collateral is to be made, shall be deemed to be reasonable notice of such sale or other disposition. If permitted by applicable law, any perishable Collateral which threatens to speedily decline in value or which is sold on a recognized market may be sold immediately by Lender without prior notice to Borrower. At any sale or disposition of Collateral, Lender may (to the extent permitted by applicable law) purchase all or any part of the Collateral, free from any right of redemption by Borrower, which right is hereby waived and released. Borrower covenant; and agrees not to interfere with or impose any obstacle to Lender’s exercise of its rights and remedies with respect to the Collateral.

Section 8.4. Nature of Remedies . Lender shall have the right to proceed against all or any portion of the Collateral to satisfy in any order (i) the liabilities and Obligations of Borrower to Lender or any Affiliate of Lender under this Agreement, or any other loan documents evidencing financings provided to Borrower, or (ii) the liabilities and Obligations of Borrower to Lender or any Affiliate of Lender under the Mortgage Documents. All rights and remedies granted Lender under this Agreement and under any agreement referred to in this Agreement, or otherwise available at law or in equity, shall be deemed concurrent and cumulative, and not alternative remedies, and Lender may proceed with any number of remedies at the same time until the Loans, and all other existing and future liabilities and obligations of Borrower to Lender, are satisfied in full. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and Lender, upon the occurrence of an Event of Default, may proceed against Borrower, and/or the Collateral, at any time, under any agreement, with any available remedy and in any order.

ARTICLE IX

MISCELLANEOUS

Section 9.1. Expenses and Taxes.

(a) Borrower agrees to pay, whether or not the Closing occurs, a reasonable documentation preparation fee, together with actual audit and appraisal fees and all other reasonable out-of-pocket charges and expenses incurred by Lender in connection with the negotiation, preparation, legal review and execution of each of the Loan Documents, including but not limited to UCC and judgment lien searches and UCC filings and fees for post-Closing UCC and judgment lien searches. In addition, Borrower shall pay all such fees associated with any amendments to the Loan Documents following Closing.

(b) Borrower also agrees to pay all out-of-pocket charges and expenses incurred by Lender (including the fees and expenses of Lender’s counsel) in connection with the enforcement, protection or preservation of any right or claim of Lender, the termination of this Agreement, the termination of any liens of Lender on the Collateral, and the collection of any amounts due under the Loan Documents. If Lender uses in-house counsel for any of these purposes (i.e., for any task in connection with the enforcement, protection or preservation of any right or claim of Lender and the collection of any amounts due under its Loan Documents), Borrower further agrees that its Obligations under the Loan Documents include reasonable charges for such work commensurate with the fees that would otherwise be charged by outside legal counsel selected by Lender for the work performed.

(c) Borrower shall pay all taxes (other than taxes based upon or measured by Lender’s income or revenues or any personal property tax), if any, in connection with the issuance of the Note and the recording of the security documents therefor. The obligations of Borrower under this clause (c) shall survive the payment of Borrower’s indebtedness under this Agreement and the termination of this Agreement.

Section 9.2. Entire Agreement; Amendments. This Agreement and the other Loan Documents constitute the full and entire understanding and agreement among the parties with regard to their subject matter and supersede all prior written or oral agreements, understandings, representations and warranties made with respect thereto. No amendment, supplement or modification of this Agreement nor any waiver of any provision thereof shall be made except in writing executed by the party against whom enforcement is sought.

Section 9.3. No Waiver; Cumulative Rights. No waiver by any party to this Agreement of any one or more defaults by the other party in the performance of any of the provisions of this Agreement shall operate or be construed as a waiver of any future default or defaults, whether of a like or different nature. No failure or delay on the part of any party in exercising any right, power or remedy under this Agreement shall operate as a waiver of such right, power or remedy nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise of such right, power or remedy or the exercise of any other right, power or remedy. The remedies provided for in this Agreement are cumulative and are not exclusive of any remedies that may be available to any party to this Agreement at law, in equity or otherwise.

Section 9.4. Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy

sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement:

(a)

If to Lender, at:

Heller Healthcare Finance, inc.

2 Wisconsin Circle, 4th Floor

Chevy Chase, Maryland 20815

Attention: Steven M. Curwin, Deputy General Counsel

Telephone: (301) 961-1640

Telecopier: (301) 664-9866

(b)

If to Borrower, at:

c/o Healthmont, Inc.

Gateway Building, Suite 310

Brentwood, Tennessee 37027

Attn: President

Telephone: 615-309-6900

Telecopy: 615-309-6901

If mailed, notice shall be deemed to be given five (5) days after being sent, and if sent by personal delivery, telecopier or prepaid courier, notice shall be deemed to be given when delivered.

Section 9.5. Severability. If any term, covenant or condition or this Agreement, or the application of such term, covenant or condition to any party or circumstance shall be found by a court of competent jurisdiction to be, to any extent, invalid or unenforceable, the remainder of this Agreement and the application of such term, covenant, or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition shall be valid and enforced to the fullest extent permitted by law. Upon determination that any such term is invalid, illegal or unenforceable, Lender may, but is not obligated to, advance funds to Borrower under this Agreement until the parties to this Agreement amend this Agreement so as to effect the original intent of the parties as closely as possible in a valid and enforceable manner.

Section 9.6. Successors and Assigns. This Agreement, the Note, and the other Loan Documents shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns. Notwithstanding the foregoing, Borrower may not assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of Lender, which may be withheld in its sole discretion. Lender may sell, assign,

transfer, or participate any or all of its rights or obligations under this Agreement without notice to or consent of Borrower.

Section 9.7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute but one instrument.

Section 9.8. Interpretation. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any party because that party or its legal representative drafted that provision. The titles of the paragraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. Any pronoun used in this Agreement shall be deemed to include singular and plural and masculine, feminine and neuter gender as the case may be. The words “herein,” “hereof,’” and “hereunder” shall be deemed to refer to this entire Agreement, except as the context otherwise requires.

Section 9.9. Survival of Terms. All covenants, agreements, representations and warranties made in this Agreement, any other Loan Document, and in any certificates and other instruments delivered in connection with this Agreement shall be considered to have been relied upon by Lender and shall survive the making by Lender of the Loans contemplated by this Agreement and the execution and delivery to Lender of the Note, and shall continue in full force and effect until all liabilities and obligations of Borrower to Lender are satisfied in full.

Section 9.10. Release of Lender. For and in consideration of the Loan, Borrower, voluntarily, knowingly, unconditionally, and irrevocably, with specific and express intent, for and on behalf of itself and its agents, attorneys, heirs, successors, and assigns (collectively the “Releasing Parties”) does hereby fully and completely release, acquit and forever discharge Lender, and its successors, assigns, heirs, affiliates, subsidiaries, parent companies, principals, directors, officers, employees, shareholders and agents (hereinafter called the “Lender Parties”); and any other person, firm, business, corporation, insurer, or association which may be responsible or liable for the acts or omissions of the Lender Parties, or who may be liable for the injury or damage resulting therefrom (collectively the “Released Parties”), of and from any and all actions, causes of action, suits, debts, disputes, damages, claims, obligations, liabilities, costs, expenses and demands of any kind whatsoever, at law or in equity, whether matured or unmatured, liquidated or unliquidated, vested or contingent, choate or inchoate, known or unknown that the Releasing Parties (or any of them) have, whether now or in the future, (whether directly or indirectly) against the Released Parties or any of them. The Borrower acknowledges that the foregoing release is a material inducement __ Lender’s decision to extend to Borrower the financial accommodations hereunder and has been relied upon by Lender in agreeing to make the Loan.

Section 9.11. Time. Whenever Borrower is required to make any payment or perform any act on a Saturday, Sunday, or a legal holiday under the laws of the State of Maryland (__ other jurisdiction where Borrower is required to make the payment or perform the act), the

payment may be made or the act performed on the next Business Day. Time is of the essence in Borrower’s performance under this Agreement and all other Loan Documents.

Section 9.12. Commissions. The transaction contemplated by this Agreement was brought about by Lender and Borrower acting as principals and without any brokers, agents, or finders being the effective procuring cause. Borrower represents that it has not committed Lender to the payment of any brokerage fee, commission, or charge in connection with this transaction. If any such claim is made on Lender by any broker, finder, or agent or other person. Borrower will indemnify, defend, and hold Lender harmless from and against the claim and will defend any action to recover on that claim, at Borrower’s cost and expense, including Lender’s counsel fees. Borrower further agrees that until any such claim or demand is adjudicated in Lender’s favor, the amount demanded will be deemed a liability of Borrower under this Agreement, secured by the Collateral.

Section 9.13. Third Parties. No lights are intended to be created under this Agreement or under any other Loan Document for the benefit of any third party donee, creditor, or incidental beneficiary of Borrower. Nothing contained in this Agreement shall be construed as a delegation to Lender of Borrower’s duty of performance, including without limitation Borrower’s duties under any account or contract in which Lender has a security interest.

Section 9.14. Discharge of Borrower’s Obligations. Lender, in its sole discretion, shall have the right at any time, and from time to time, without prior notice to Borrower if Borrower fails to do so, to: (i) obtain insurance covering any of the Collateral as required under this Agreement; (ii) pay for the performance of any of Borrower’s obligations under this Agreement; (iii) discharge taxes, liens, security interests, or other encumbrances at any time levied or placed on any of the Collateral in violation of this Agreement unless Borrower is in good faith with due diligence by appropriate proceedings contesting those items; and (iv) pay for the maintenance and preservation of any of the Collateral. Expenses and advances shall be added to the Loan, until reimbursed to Lender and shall be secured by the Collateral. Any such payments and advances by Lender shall not be construed as a waiver by Lender of an Event of Default.

Section 9.15. Information to Participants. Lender may divulge to any participant it may obtain in the Loan, or any portion of the Loan, all information, and furnish to such participant copies of reports, financial statements, certificates, and documents obtained under any provision of this Agreement or any other Loan Document.

Section 9.16. Indemnity. Borrower hereby agrees to indemnify and hold harmless Lender, its partners, officers, agents and employees (collectively, “Indemnitee”) from and against any liability, loss, cost, expense, claim, damage, suit, action or proceeding ever suffered or incurred by Lender (including reasonable attorneys’ fees and expenses) arising from Borrower’s failure to observe, perform or discharge any of its covenants, obligations, agreements or duties under this Agreement, or from the breach of any of the representations or warranties contained in Article IV of this Agreement. In addition, Borrower shall defend Indemnitee against

and save it harmless from all claims of any Person with respect to the Collateral. Notwithstanding any contrary provision in this Agreement, the obligation of Borrower under this Section 9.16 shall survive the payment in full of the Obligations and the termination of this Agreement.

Section 9.17. Lender Approvals. Unless expressly provided herein to the contrary, any approval, consent, waiver or satisfaction of Lender with respect to any matter that is the subject of this Agreement, the other Loan Documents may be granted or withheld by Lender in its sole and absolute discretion.

Section 9.17. Choice of Law; Consent to Jurisdiction. THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE NOTE IS COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF MARYLAND OR IN THE U.S. DISTRICT COURT FOR THE DISTRICT OF MARYLAND, BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS DESCRIBED IN SECTION 9.4. OR IF SERVED BY ANY OTHER MEANS PERMITTED BY APPLICABLE LAW.

Section 9.18. Cooperation in Discovery and Litigation. In any litigation, trial, arbitration or other dispute resolution proceeding relating to this Agreement or any of the other Loan Documents, all directors, officers, employees and agents of Borrower or of its Affiliates shall be deemed to be employees or managing agents of Borrower for purposes of all applicable law or court rules regarding the production of witnesses by notice for testimony (whether in a deposition, at trial or otherwise). Borrower will use all commercially reasonable efforts to produce in any such dispute resolution proceeding, at the time and in the manner requested by Lender, all Persons, documents (whether in tangible, electronic or other form) or other things under its control and relating to the dispute in any jurisdiction that recognizes that (or any similar) distinction.

Section 9.19. Waiver of Trial by Jury. BORROWER HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS

AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO THIS AGREEMENT, SO AS TO SERVE AS CONCLUSIVE EVIDENCE OF BORROWER’S WAIVER OF THE RIGHT TO JURY TRIAL, FURTHER, BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER’S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.

Section 9.20. Confession of Judgment . BORROWER AUTHORIZES ANY ATTORNEY ADMITTED TO PRACTICE BEFORE ANY COURT OF RECORD IN THE UNITED STATES OR THE CLERK OF SUCH COURT TO APPEAR ON BEHALF OF BORROWER IN ANY COURT IN ONE OR MORE PROCEEDINGS, OR BEFORE ANY CLERK THEREOF OF PROTHONOTARY OR OTHER COURT OFFICIAL, AND TO CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON THIS AGREEMENT (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES, FEES AND COSTS) PLUS ATTORNEYS’ FEES EQUAL TO FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR HEARING. BORROWER AGREES AND CONSENTS THAT VENUE AND JURISDICTION SHALL BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND. BORROWER WAIVES THE BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.

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


LENDER:

HELLER HEALTHCARE FINANCE, INC.
a Delaware corporation

By:

Name:
Title:


BORROWER:

HEALTHMONT, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	CEO


HEALTHMONT OF GEORGIA, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS I, LLC
a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON I, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON II, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON III, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON IV, LLC
a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON V, LLC
a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager

Exhibit 10.4

$8,000,000.00

AMENDMENT NO. 1

LOAN AND SECURITY AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC., a Tennessee corporation

HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

(dba Memorial Hospital of Adel, Memorial Convalescent Center

and Memorial Home Health)

HEALTHMONT OF TEXAS, INC., a Tennessee corporation

HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

(dba Dolly Vinsant Memorial Hospital)

HEALTHMONT OF OREGON I, INC., a Tennessee corporation

HEALTHMONT OF OREGON II, INC., a Tennessee corporation

HEALTHMONT OF OREGON III, INC., a Tennessee corporation

(dba Woodland Park Medical Plaza)

HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company

(dba Woodland Park Hospital)

HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company

dba Eastmoreland Hospital

(“Borrower”)

and

HELLER HEALTHCARE FINANCE, INC.

(“Lender”)

Amended as of December 31, 2000

AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT (the “Amendment”) is made as of January 1, 2000, by end between HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation dba Memorial Hospital of Adel, Memorial Convalescent Center and Memorial Home Health, HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company dba Dolly Vinsant Memorial Hospital HEALTHMONT OF OREGON I, INC., a Tennessee corporation, HEALTHMONT OF OREGON II, INC., a Tennessee corporation, HEALTHMONT OF OREGON III, INC., a Tennessee corporation dba Woodland Park Medical Plaza, HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company dba Woodland Park Hospital, HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company dba Eastmoreland Hospital (collectively, “ Original Borrower ”), HEALTHMONT OF MISSOURI, INC., a Tennessee corporation dba Callaway County Community Hospital (the “ New Borrower ”) and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“Lender”).

RECITALS

A. Pursuant to that certain Loan and Security Agreement dated August 31, 2000 by and between Original Borrower and Lender (the “ L oan Agreement ”), the parties have established certain financing arrangements that allow Original Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. Original Borrower now wishes to add New Borrower as a Borrower under the Loan Agreement.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. Lender and Borrower have agreed to the following amendments to the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

1. A ddition of New Borrower. Original Borrower and Lender agree that the New Borrower shall from and hereafter be a Borrower for all purposes of the Loan Agreement and other documents. Accordingly, the New Borrower hereby agrees to be bound, by all of the conditions, covenants, representations, warranties, and other agreements set forth in the Loan Agreement, and hereby agrees to promptly execute all further documentation required by Lender to be executed by the New Borrower, consistent with the terms of the Loan Agreement.

2. A mendment to Loan Agreement .

A. Section 1.32a of the Loan Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof:

“Section 1.32a Mortgage Documents . “Mortgage Documents” means and includes all documents evidencing (i) that certain first mortgage loan in the amount of $5,000,000 made as of the Closing Date from Lender to Original Borrower (the “ Mortgage Loan ”) including, without limitation, the mortgage note (the “ Secured Term Note ”), the mortgage loan agreement (the “ Mortgage Loan Agreement ”), those several Mortgage, Security Agreement and Assignment of Leases, and each and every other document now or hereafter delivered in connection with such mortgage documents, as any of them may be amended, modified, or supplemented from time to time, and (ii) that certain first mortgage loan in the amount of $1,900,000 made as of December 31, 2000 from Lender to New Borrower (the “ NB Mortgage Loan ”) including, without limitation, the New Borrower mortgage note (the “ NB Mortgage Not e ”), the New Borrower mortgage loan agreement (the “ NB Mortgage Loan Agreement ”), the Deed of Trust, Assignment of Leases and Rents, Security Agreement and Financing Statement, and each and every other document now or hereafter delivered in connection with such mortgage documents, as any of them may be amended, modified, or supplemented from time to time.”

B. Section 3.1(i) of the Loan Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof:

“ Section 3.1. Generally . As security for the payment of all liabilities of Borrower to Lender, including without limitation: (i) indebtedness evidenced under the Note, Secured Term Note and NB Mortgage Note, repayment of Revolving Credit Loans, repayment of the Mortgage Loan, repayment of the NB Mortgage Loan advances and other extensions of credit, sale and purchase obligations under the Warrant; all fees and charges owing by Borrower, (including without limitation the Termination Fee) and all other liabilities and obligations of every kind or nature whatsoever of Borrower to Lender, whether now existing or hereafter incurred, joint or several, matured or unmatured, direct or indirect, primary or secondary, related or unrelated, due or to become due, including but not limited to any extensions, modifications, substitutions, increases and renewals thereof,”

C. The following new Section 6.23 is hereby added to Article VI of the Loan Agreement:

“ 6.23. Callaway County Community Hospital Property Condition Report . On or before January 31 2001, New Borrower shall provide Lender with a completed Property Condition or Engineering Report (the “Report”) for the Callaway County Community Hospital property. In the event that such report indicates repairs estimated at greater than $5,000 in

the aggregate, then the Borrowing Base will be reduced by an amount equal to the aggregate estimated cost of repairs. As such repairs are completed by New Borrower, the amounts allocated to such repair(s) in the Report will be added back to the Borrowing Base.”

D. The following new Section 8.1(u) is hereby added to Article VIII of the Loan Agreement:

“(u) New Borrower shall have failed to provide Lender with a Property Condition or Engineering Report for the Callaway County Community Hospital property by January 31, 2001.”

3. Confirmation of Representations and Warranties. To the extent applicable to New Borrower, New Borrower hereby confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to the New Borrower, and specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity.

4. Grant by New Borrower of Security Interes t. Consistent with the intent of the parties, the undersigned New Borrower hereby grants to Lender a continuing first priority lien on and security interest in, upon, and to the Collateral, pursuant to and in accordance with the terms of Article III of the Loan Agreement.

5. Enforceability. This Amendment constitutes the legal, valid and binding obligation of New Borrower, and is enforceable against such New Borrower in accordance with its terms.

6. Costs . Borrower shall be responsible for the payment of all costs of Lender incurred in connection with the preparation of this Amendment, including all reasonable fees of Lender’s in-house counsel.

7. Reference to the Effect on the Loan Agreement .

(a) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of similar import shall mean and be a reference to the Loan Agreement as amended by this Amendment.

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

(c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in this Amendment, operate as a waiver of any right, power or remedy of Lender, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments and agreements executed or delivered in connection with the Loan Agreement.

8. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

9. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

10. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

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


LENDER:

HELLER HEALTHCARE FINANCE, INC. a Delaware corporation

By:

Name:
Title:


BORROWER:

HEALTHMONT, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	CEO


HEALTHMONT OF GEORGIA, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS, INC.
a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS I, LLC a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON I, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON II, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON III, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON IV, LLC a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON V, LLC a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President

Exhibit 10.5

$8,000,000.00 REVOLVING CREDIT LOAN

AMENDMENT NO. 2

LOAN AND SECURITY AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF TEXAS, INC.,

HEALTHMONT OF TEXAS I, LLC (dba Dolly Vinsant Memorial Hospital),

HEALTHMONT OF OREGON I, INC.,

HEALTHMONT OF OREGON II, INC.,

HEALTHMONT OF OREGON III, INC. (dba Woodland Park Medical Plaza),

HEALTHMONT OF OREGON V, LLC (dba Woodland Park Hospital),

HEALTHMONT OF OREGON IV, LLC (dba Eastmoreland Hospital), and

HEALTHMONT OF MISSOURI, INC. (dba Callaway County Community Hospital)

(collectively, “Borrower”)

and

HELLER HEALTHCARE FINANCE, INC.

(“Lender”)

Amended as of February 28, 2002

AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT (this “Amendment”) is made as of February 28, 2002, by and among HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company (dba Dolly Vinsant Memorial Hospital), HEALTHMONT OF MISSOURI, INC., a Tennessee corporation (dba Callaway County Community Hospital) (collectively, the “Continuing Borrower”), HEALTHMONT OF OREGON I, INC., a Tennessee corporation, HEALTHMONT OF OREGON II, INC., a Tennessee corporation, HEALTHMONT OF OREGON III, INC., a Tennessee corporation (dba Woodland Park Medical Plaza), HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company (dba Woodland Park Hospital), and HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company (dba Eastmoreland Hospital) (collectively, the “Withdrawing Borrower”; the Continuing Borrower and the Withdrawing Borrower are sometimes collectively referred to herein as the “Borrower”), and HELLER HEALTHCARE FINANCE, INC ., a Delaware corporation (“Lender”).

RECITALS

A. Pursuant to that certain Loan and Security Agreement dated August 31, 2000 by and among Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “Loan Agreement”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. Borrower now wishes to effect the withdrawal of Withdrawing Borrower as a Borrower under the Loan Agreement, and to make such further amendments as are necessary to effect such transaction.

C. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement.

1. Withdrawal of Withdrawing Borrower. Lender, Continuing Borrower and Withdrawing Borrower agree that Withdrawing Borrower shall no longer be party to the Loan Agreement or the other Loan Documents and will not be bound by any of the conditions, covenants, representations, warranties and other agreements set forth in the Loan Agreement.

2. Other Amendments to Loan Agreement. Section 9.4 shall be deleted in its entirety and substituted with the following language:

“Section 9.4. Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement:


If to Borrower:		c/o Healthmont, Inc. 113 Seaboard Lane Suite C-200 Franklin, Tennessee 37067 Attn: President Telephone: (615) 250-7800 Telecopy: (615) 250-7802

If to Lender:		Heller Healthcare Finance, Inc. 2 Wisconsin Circle, Suite 400 Chevy Chase Maryland 20815 Attn: Chief Counsel Telephone: (301) 664-9857 Telecopy: (331) 664-9866”

3. Confirmation of Representations and Warranties. Each of the Continuing Borrowers hereby confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to the Continuing Borrowers, and specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity.

4. Updated Schedules . As a condition precedent to Lender’s agreement to enter into this Amendment, and in order for this Amendment to be effective, Continuing Borrower shall revise, update and deliver to Lender all Schedules to the Loan Agreement to (a) reflect updated and accurate information with respect to Continuing Borrower, and (b) to update all other information as necessary to make the Schedules previously delivered correct. Continuing Borrower hereby represents and warrants that the information set forth on the attached Schedules is true and correct as of the date of this Agreement. The attached Schedules are hereby incorporated into the Loan Agreement as if originally set forth therein.

5. Costs . In connection with the execution and delivery of this Amendment and the related amendment documents executed and delivered as of the date hereof, Borrower shall unconditionally pay to the Lender a modification fee of $10,000. In addition, Borrower shall be responsible for the payment of all costs of Lender incurred in connection with the preparation of this Amendment, including all reasonable fees of Lender’s in-house counsel. Borrower hereby authorizes Lender to deduct all of such fees set forth in this Section 5 from the proceeds of the next Revolving Credit Loan.

6. Reference to the Effect on the Loan Agreement.

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

7. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

8. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

9. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGE]

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


LENDER:

HELLER HEALTHCARE FINANCE, INC., a Delaware corporation

By:	/s/ J OSEPH P RANDONI	(SEAL)

Name:	JOSEPH PRANDONI
Title:	VICE PRESIDENT

CONTINUING BORROWER:

HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

HEALTHMONT OF TEXAS, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

HEALTHMONT OF MISSOURI, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	Chief Manager


WITHDRAWING BORROWER:

HEALTHMONT OF OREGON I , INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF OREGON II, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF OREGON III, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	Chief Manager


HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	Chief Manager

Exhibit 10.6

$8,000,000.00 REVOLVING CREDIT LOAN

AMENDMENT NO. 3

LOAN AND SECURITY AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF TEXAS, INC.,

HEALTHMONT OF TEXAS I, LLC

(dba Dolly Vinsant Memorial Hospital), and

HEALTHMONT OF MISSOURI, INC.

(dba Callaway County Community Hospital)

and

HELLER HEALTHCARE FINANCE, INC.

Amended as of March 24, 2003

AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT (this “ Amendment ”) is made as of March 24, 2003, by and among HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), HEALTHMONT OF MISSOURI, INC., a Tennessee corporation (dba Callaway County Community Hospital) (collectively, the “ Continuing Borrower ”), HEALTHMONT OF TEXAS, INC., a Tennessee corporation, and HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company (dba Dolly Vinsant Memorial Hospital) (collectively, the “ Withdrawing Borrower ”; the Continuing Borrower and the Withdrawing Borrower are sometimes collectively referred to herein as the “ Borrower ”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Loan and Security Agreement dated August 31, 2000 by and among Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B . Borrower now wishes to effect the withdrawal of Withdrawing Borrower as a Borrower under the Loan Agreement, and to make such further amendments as are necessary to effect such transaction.

C. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement.

1. Withdrawal of Withdrawing Borrower. Lender, Continuing Borrower and Withdrawing Borrower agree that Withdrawing Borrower shall no longer be party to the Loan Agreement or the other Loan Documents and will not be bound by any of the conditions, covenants, representations, warranties and other agreements set forth in the Loan Agreement and other Loan Documents.

2. Other Amendments to Loan Agreement. Section 8.1 shall be amended by adding the following as additional Events of Default:

(u) an Event of Default shall have occurred under any of the loan documents entered into between Healthmont, Inc. and Sunlink Health Systems, Inc. dated on or about the date hereof (the “ Sunlink Loan Documents ”); or

(v) a material default or the Termination Date shall have occurred under that certain Agreement and Plan of Merger dated as of October 15, 2002 among Sunlink Health Systems, Inc., Healthmont, Inc. and HM Acquisition Corp. (as amended, the “ Merger Agreement ”), or the Scheduled Maturity Date shall have occurred under the Sunlink Loan Documents.”

3. Confirmation of Representations and Warranties. Each of the Continuing Borrowers hereby confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to the Continuing Borrowers, and specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity, except for Permitted Liens and the subordinated liens and security interest held by SunLink Health Systems, Inc.

4. Updated Schedules . As a condition precedent to Lender’s agreement to enter into this Amendment, and in order for this Amendment to be effective, Continuing Borrower shall revise, update and deliver to Lender all Schedules to the Loan Agreement to (a) reflect updated and accurate information with respect to Continuing Borrower, and (b) to update all other information as necessary to make the Schedules previously delivered correct. Continuing Borrower hereby represents and warrants that the information set forth on the attached Schedules is true and correct as of the date of this Agreement. The attached Schedules are hereby incorporated into the Loan Agreement as if originally set forth therein.

5. Release . Borrower hereby fully, finally, and absolutely and forever releases and discharges Lender and its present and former directors, shareholders, officers, employees, agents, representatives, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns, from any and all actions, causes of action, claims, debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity of Borrower, whether now known or unknown to Borrower, and whether contingent or matured (collectively, “ Claims ”): (a) in respect of the Loan Agreement, the Loan Documents, or the actions or omissions of Lender in respect of the Loan Agreement and the Loan Documents; and (b) arising from events occurring prior to the date of this Amendment. The foregoing release and discharge shall, automatically and without further action of the Borrower, be deemed renewed as of the date of each advance of Loan proceeds with respect to all Claims in respect of the Loan Agreement, the Loan Documents, or the actions or omissions of Lender in respect of the Loan Agreement and the Loan Documents and arising from events occurring prior to the date of such advance.

6. Costs . In addition, Continuing Borrower shall be responsible for the payment of all costs of Lender incurred in connection with the preparation of this Amendment, including all reasonable fees of Lender’s in-house counsel. Continuing Borrower hereby authorizes Lender to deduct all of such fees set forth in this Section 6 from the proceeds of the next Revolving Credit Loan.

7. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

8. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

9. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

10. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGE]

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

WITNESS/ATTEST:


		LENDER:

		HELLER HEALTHCARE FINANCE, INC., a Delaware corporation

By:	/s/ L ISA L ENDERMAN	By:	/s/ D AVID G. M OORE	(SEAL)

Name:	Lisa Lenderman	Name:	DAVID G. MOORE
Title:	Senior Counsel & VP	Title:	AUTHORIZED SIGNATORY


		CONTINUING BORROWER:

		HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
		Title:	Chief Executive Officer and President



		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
		Title:	President



		HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
		Title:	President



		WITHDRAWING BORROWER:

		HEALTHMONT OF TEXAS, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
		Title:	President



		HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
		Title:	Chief Manager

Exhibit 10.7

$8,000,000.00 REVOLVING CREDIT LOAN

AMENDMENT NO. 4

LOAN AND SECURITY AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF MISSOURI, INC.

(dba Callaway County Community Hospital), and

HM ACQUISITION CORP.,

and guaranteed

SUNLINK HEALTH SYSTEMS, INC.

and

GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.)

Amended as of September 30, 2003

AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT (this “ Amendment ”) is made as of September 30, 2003, by and among HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), HEALTHMONT OF MISSOURI, INC., a Tennessee corporation (dba Callaway County Community Hospital), (collectively, the “ Original Borrower ”), and HM ACQUISITION CORP., a Delaware corporation (the “ New Borrower ”; the Original Borrower and the New Borrower are sometimes collectively referred to herein as “ Borrower ”), and GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Loan and Security Agreement dated August 31, 2000 by and among Original Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Original Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

B. Original Borrower now wishes to add HM Acquisition Corp. as a Borrower under the Loan Agreement, to extend the Term of the Loan, and to make such further amendments as are necessary to effect such transaction, all as set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement:

1. Amendments to Loan Agreement . The Loan Agreement is hereby amended as follows:

1.1. Addition of New Borrower; Merger of Entities . New Borrower, Original Borrower, and Lender agree that the New Borrower and Original Borrower shall from and hereafter be Borrower for all purposes of the Loan Agreement and other Loan Documents. Accordingly, the New Borrower hereby agrees to be bound by all of the conditions, covenants, representations, warranties, and other agreements set forth in the Loan Agreement, and hereby agrees to promptly execute all further documentation required by Lender to be executed by the New Borrower, consistent with the terms of the Loan Agreement. Without limiting the generality of the foregoing, each of the parties hereby understand, acknowledge and agree that, as of the date hereof, Healthmont, Inc. and HM Acquisition Corp. will effectuate the Merger described in that certain Agreement and Plan

of Merger dated as of October 15, 2002, and as such, Healthmont, Inc. will cease to exist as a separate legal entity, and HM Acquisition Corp, a Delaware corporation, will be the surviving corporation, and shall file an amendment to its articles of incorporation changing its name to Healthmont, Inc.

1.2. Section 1.46 – Termination Fee . Section 1.46 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“Section 1.46. Termination Fee. “Termination Fee” shall mean a fee payable upon termination of the Agreement, as yield maintenance for the loss of bargain and not as a penalty, equal to either (i) Two Hundred Thousand Dollars ($200,000) if the date of notice of a termination is on or before August 31, 2004, or (ii) One Hundred Twenty Thousand Dollars ($120,000) if the date of a notice of termination is after August 31, 2004 and prior to August 31, 2005. ”

1.3. Section 2.8(a) – Term . Section 2.8(a) of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ (a) Subject to Lender’s right to cease making Revolving Credit Loans to Borrower upon or after any Event of Default, this Agreement shall be in effect through August 31, 2005, unless terminated as provided in this Section 2.8 (the “ Term ”), and this Agreement shall be renewed for one-year periods thereafter upon the mutual written agreement of the parties. ”

1.4. Section 7.6 – Dividends and Distributions . Section 7.6 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“Section 7.6. Dividends, Distributions and Management Fees. Borrower will not declare or pay any dividends or other distributions with respect to, purchase, redeem or otherwise acquire for value any of its outstanding stock now or hereafter outstanding, or return any capital of its stockholders, nor shall Borrower pay management fees or fees of a similar nature to any Person. Notwithstanding the foregoing, so long as no Event of Default has occurred under any of the Loan Documents or the Mortgage Loan Documents, Borrower shall be entitled to make (a) distributions to its parent, SunLink Health Systems, Inc. (“ SHS ”), (b) payments of principal on the intercompany indebtedness owed by Borrower to SHS, and (c) amounts in respect of payments made by Borrower to SHS for Borrower’s allocable share of costs for goods or services that SHS obtains from third persons in the ordinary course of business for the benefit of Borrower and that Borrower would otherwise have to obtain itself from a third person in the ordinary course of business, but in each case in (a), (b) or (c), such Distribution may only be made to the extent that such distribution or other payments will not cause or result in an Event of Default (including, without limitation, a violation of any financial covenants in the Loan Documents or the

Mortgage Loan Documents). In furtherance of the foregoing, the parties acknowledge and agree that, prior to any distribution made by Borrower to SHS, Borrower must first provide evidence reasonably satisfactory to Lender that Borrower is currently in compliance with each of its financial covenants set forth in the Mortgage Loan Documents, and that any such payment intended to be made to SHS will not result in a violation of any such financial covenants. ”

1.5. Section 8.1(e) – Events of Default . Section 8.1(e) of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ (e) Any obligation of Borrower (other than its Obligations under this Agreement or the Mortgage Documents) for the payment of Borrowed Money is not paid when due or within any applicable grace period, or such obligation becomes or is declared to be due and payable before the expressed maturity of the obligation, or there shall have occurred an event which, with the giving of notice or lapse of time, or both, would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable (including, without limitation, all of the subordinated Indebtedness owed by one or more entities comprising Borrower to Chatham Investment Fund I, LLC); ”

1.6. Section 8.1(v) – Events of Default . Section 8.1(v) of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ (v) Any material default or Event of Default shall have occurred under any of the loan documents entered into between any entity comprising Borrower and Chatham Investment Fund I, LLC dated on or about September 30, 2003. ”

1.7. Notices . Section 9.4 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“Section 9.4. Notices . Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement:

(a)

If to Lender, at:

GE HFS Holdings, Inc.

c/o GE Healthcare Financial Services

2 Bethesda Metro Center, Suite 600

Bethesda, Maryland 208_4

Attention: General Counsel

Telephone: (301) 961-1640

Telecopier: (301) 664-9866

(b)

If to Borrower, at:

c/o SunLink Health Systems, Inc.

900 Circle 75 Parkway

Suite 1300

Atlanta, Georgia 30339

Telephone: (770) 933-7000

Telecopier: (770) 933-7010

Attention: Robert M. Thornton, Jr., Chairman and CEO ”

2. Grant by New Borrower of Security Interest. Consistent with the intent of the parties, New Borrower hereby grants to Lender a continuing first priority lien or and security interest in, upon, and to the Collateral, pursuant to and in accordance with the terms of Article III of the Loan Agreement.

3. Enforceability. This Amendment constitutes the legal, valid and binding obligation of New Borrower, and is enforceable against New Borrower in accordance with its terms.

4. Confirmation of Representations and Warranties. New Borrower hereby (a) confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to New Borrower, (b) covenants to perform its obligations under the Loan Agreement, and (c) specifically represents and warrants to Lender that it has good title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity. Each Original Borrower hereby (x) confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to such Borrower as of the date hereof, (y) covenants to perform its obligations under the Loan Agreement, and (z) specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity.

5. Updated Schedules . As a condition precedent to Lender’s agreement to enter into this Amendment, and in order for this Amendment to be effective, Borrower shall revise, update and deliver to Lender all Schedules to the Loan Agreement to: (a) reflect updated and accurate information with respect to New Borrower, and (b) update all other information as necessary to make the Schedules previously delivered correct. Borrower hereby represents and warrants that the information set forth on the attached Schedules is

true and correct as of the date of this Agreement. The attached Schedules are hereby incorporated into the Loan Agreement as if originally set forth therein.

6. Conditions to Effectiveness of this Amendment . This Amendment shall be effective upon execution and delivery to Lender of the following documents and satisfaction of the following conditions (as applicable), all of which must be in a form reasonably acceptable to Lender, and all of which shall constitute conditions precedent to the effectiveness of this Amendment:

(a) at least one (1) original of each of this Amendment, the Fourth Amended and Restated Revolving Credit Note, the Letter Agreement re: extension of the overline facility, the Certificate of Validity, the Unconditional Guaranty of Payment and Performance by SunLink Health Systems, Inc., the Tax Form 8821 for New Borrower, the Amended and Restated Subordination Agreement among Borrower, Lender and SunLink Health Systems, Inc., and the Subordination Agreement among Borrower, Lender, SunLink Health System, Inc. and Chatham Investment Fund I, LLC;

(b) an opinion of Borrower’s and Guarantor’s counsel dated as of the date hereof, in form and substance reasonably acceptable to Lender relating to this Amendment and the transactions contemplated herein;

(c) a Secretary’s Certificate of each entity comprising Borrower containing a unanimous consent of all members of the board of managers or managing member of Borrower authorizing the amendments set forth herein and the transactions contemplated hereby, together with such entity’s governing documents and good standing certificates as requested by Lender;

(d) copies of each of the executed loan documents relating to the $2,300,000 loan facility made by Chatham Investment Fund I, LLC to New Borrower;

(e) evidence reasonably satisfactory to Lender that the loan term for the indebtedness from SunLink Health Systems, Inc to Borrower has been extended to no sooner than September 30, 2005; and

(f) evidence reasonably satisfactory to Lender that the indebtedness owed by Healthmont, Inc. to Healthmont of Texas, Inc. has been satisfied in full.

7. Post Closing Obligations . Borrower shall cause to be delivered to Lender in a form satisfactory to Lender, all of the items set forth on Schedule 1 attached hereto within the time periods set forth on Schedule 1 , and failure to deliver such items shall constitute an Event of Default hereunder.

8. Costs and Fees . In consideration of Lender’s agreement to enter into this Amendment and to extend the Terms of the Loan and to the Mortgage Loans, Borrower shall pay to Lender a modification fee equal to Twenty Thousand and No/100 Dollars ($20,000.00). Furthermore, Borrower shall be responsible for the payment of all reasonable fees of Lender’s in-house counsel incurred in connection with the preparation of this Amendment and any related documents. Borrower hereby authorizes Lender to deduct all

of such fees set forth in this Section 8 from the proceeds of the Revolving Credit Loans made under the Loan Agreement.

9. Release . Borrower hereby fully, finally, and absolutely and forever releases and discharges Lender and its present and former directors, shareholders, officers, employees, agents, representatives, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns, from any and all actions, causes of action, claims, debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity of Borrower, whether now known or unknown to Borrower, and whether contingent or matured (collectively, “ Claims ”): (a) in respect of the Loan Agreement, the Loan Documents, or the actions or omissions of Lender in respect of the Loan Agreement and the Loan Documents; and (b) arising from events occurring prior to the date of this Amendment.

10. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

11. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

12. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

13. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGES]

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

WITNESS/ATTEST:


	LENDER: GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:	By:	/s/ M ICHAEL G. G ARDULLO	(SEAL)

Name:	Name:	MICHAEL G. GARDULLO
Title:	Title:	AUTHORIZED SIGNATORY

	ORIGINAL BORROWER: HEALTHMONT, INC., a Tennessee corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

	HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

	HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

	NEW BORROWER: HM ACQUISITION CORP., a Delaware corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

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

WITNESS/ATTEST:


		LENDER: GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		ORIGINAL BORROWER: HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Assistant Secretary	Title:	Chief Executive Officer and President

		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Secretary	Title:	President

		HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Secretary	Title:	President

		NEW BORROWER: HM ACQUISITION CORP., a Delaware corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

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

WITNESS/ATTEST:


		LENDER: GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		ORIGINAL BORROWER: HEALTHMONT, INC., a Tennessee corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		NEW BORROWER: HM ACQUISITION CORP., a Delaware corporation

By:	/s/ M ARIA M ADISON	By:	/s/ J. T. M ORRIS	(SEAL)

Name:	MARIA MADISON	Name:	J. T. Morris
Title:	Vice President	Title:	President

Exhibit 10.8

MORTGAGE LOAN AGREEMENT

between

HELLER HEALTHCARE FINANCE, INC.,

a Delaware corporation,

as Lender,

AND

HEALTHMONT, INC., a Tennessee corporation

HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

(dba Memorial Hospital of Adel, Memorial Convalescent Center

and Memorial Home Health)

HEALTHMONT OF TEXAS, INC., a Tennessee corporation

HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

(dba Dolly Vinsant Memorial Hospital)

HEALTHMONT OF OREGON I, INC., a Tennessee corporation

HEALTHMONT OF OREGON II, INC., a Tennessee corporation

HEALTHMONT OF OREGON III, INC., a Tennessee corporation

(dba Woodland Park Medical Plaza)

HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company

(dba Woodland Park Hospital)

HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company

dba Eastmoreland Hospital

$5,000,000 Loan

Memorial Hospital of Adel, 706 North Parish Avenue, Adel Georgia

Woodland Park Hospital, , Portland, Oregon

Eastmoreland Hospital, , Portland, Oregon

Dolly Vinsant Memorial Hospital, 400 East Highway 77, San Benito, Texas

TABLE OF CONTENTS



ARTICLE I	The Loan	2

ARTICLE II	Security	3

ARTICLE III	Conditions Precedent	3

ARTICLE IV	Representations and Warranties	5

ARTICLE V	Affirmative Covenants	12

ARTICLE VI	Negative Covenants	19

ARTICLE VII	Events of Default; Acceleration of Indebtedness; Remedies	21

ARTICLE VIII	Miscellaneous	22

Loan No. __________

MORTGAGE LOAN AGREEMENT

THIS MORTGAGE LOAN AGREEMENT (this “ Agreement ”) is made as of August 31, 2000 between HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation dba Memorial Hospital of Adel, Memorial Convalescent Center and Memorial Home Health, HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company dba Dolly Vinsant Memorial Hospital HEALTHMONT OF OREGON I, INC., a Tennessee corporation, HEALTHMONT OF OREGON II, INC., a Tennessee corporation, HEALTHMONT OF OREGON III, INC., a Tennessee corporation dba Woodland Park Medical Plaza, HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company dba Woodland Park Hospital, HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company dba Eastmoreland Hospital (collectively the “Borrower”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“Lender”).

RECITALS

A. Lender has agreed to make (i) a mortgage loan (the “ Loan ”) of Five Million Dollars ($5,000,000) to Borrower subject to the terms and conditions contained herein, and (ii) a revolving credit loan (the “ Revolving Loan ”) of Eight Million Dollars ($8,000,000), subject to the terms and conditions contained in that certain Revolving Loan Agreement (the “ Revolving Loan Agreement ”) dated as of even date herewith. The Loan is evidenced by that certain Secured Term Note of even date herewith in the original principal amount of FIVE MILLION DOLLARS ($5,000,000) ( the “ Note ”) and the Revolving Loan is evidenced by that certain Revolving Credit Note of even date herewith in the original principal amount of EIGHT MILLION DOLLARS ($8,000,000) (the “Revolving Credit Note”). The terms and provisions of the Note are hereby incorporated herein by reference in this Agreement.

B. Borrower is or on the Closing Date will be the owner of Memorial Hospital of Adel in Adel, Georgia, Eastmoreland Hospital in Portland, Oregon, and Dolly Vinsant Memorial Hospital in San Benito, Texas (collectively, the “ Mortgage Properties ”), the Woodland Park Hospital in Portland, Oregon, (“Woodland”) and certain of the improvements located thereon (collectively called the “ Improvements ”). (The Mortgage Properties and Woodland may hereinafter be collectively referred to as the “Properties”). The Properties are more particularly described on Exhibit A attached hereto.

C. Borrower will use the proceeds of the Loan for the purpose of acquiring the Properties, funding certain capital improvements and working capital, establishing an interest reserve and paying the commitment fee and certain other legal and closing costs.

D. Borrower’s obligations under the Loan will be secured by, among other things, (a) a first priority Mortgage, Assignment of Rents and Security Agreement of even date herewith encumbering each of the Mortgage Properties (the “Mortgages”), and (b) an Assignment of Leases and Rents of even date herewith encumbering Woodland (the “Woodland Assignment”).

This Agreement, the Note, the Mortgages, the Woodland Assignment, the Environmental Indemnity, the Revolving Loan Agreement and any other documents evidencing or securing the Loan or the Revolving Loan or executed in connection therewith including without limitation the instruments and agreements identified in Section 3.1 hereof, and any modifications, renewals and extensions thereof, are referred to herein collectively as the “ Loan Documents .”

E. An index of defined terms appears on the attached Schedule I. All initially capitalized terms used but not defined herein or in Schedule I shall have the meanings ascribed to them in the Note.

NOW, THEREFORE, in consideration of the foregoing and the mutual conditions and agreements contained herein, the parties agree as follows:

ARTICLE I

The Loan

1.1 Disbursements .

1.1.1 Initial Funding . The Initial Funding Amount shall be $5,000,000.00. The Closing Date shall be as set forth in the Note.

1.2 Loan Term . Unless otherwise terminated in accordance with this Agreement, the Loan Term shall run from the Closing Date through the Maturity Date.

1.2.1 Maturity Date . The Maturity Date shall be August 31, 2003.

1.3 Interest Rate . Interest shall be at a fluctuating rate per annum compounded daily (on the basis of the actual number of days elapsed over a year of 360 days) equal to the Prime Rate plus two percent (Prime plus 2%) (the “ Base Rate ”). For purposes of the foregoing, the term “ Prime Rate ” means that rate of interest designated as such by Citibank, N.A. (the “ Bank ”), or any successor to the Bank, as the rate may from time to time fluctuate. If the Bank ceases to designate such a base lending rate, Lender shall reasonably select an alternate, nationally recognized commercial bank as the designator of such interest rate.

1.4 Payments . Payments of principal and interest shall be made at the time and in the manner set forth in the Note.

1.5 Prepayments of Loan . Borrower may prepay the Note in full or in part at any time without premium provided Borrower gives Lender at least five (5) days prior written notice and pays the Exit Fee.

1.6 Exit Fee . As additional consideration for entering into this Agreement and making the Loan and in lieu of a larger commitment fee, Borrower shall pay to Lender an amount equal to $100,000.00 (the “ Exit Fee ”) on the date payment in full of the Loan is made, whether at maturity, after maturity, upon prepayment, acceleration or otherwise.

1.7. Joint and Several Liability; Binding Obligations . Each entity comprising Borrower and executing this Agreement on behalf of Borrower shall be jointly and severally liable for all of the Obligations. In addition, each entity comprising Borrower hereby acknowledges and agrees that all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in this Agreement shall be applicable to and shall be binding upon each entity comprising Borrower, and shall be binding upon all such entities when taken together.

ARTICLE II

Security

2.1 Collateral . The Loan and all other indebtedness and obligations under the Mortgage Documents shall be secured by the following: (a) the Mortgage, (b) the Assignment of Leases, and (c) any other collateral or security described in this Agreement or in any of the other Loan Documents or required by Lender in connection with the Loan.

ARTICLE III

Conditions Precedent

Subject to the terms and conditions of this Agreement, the Closing Date shall be not later than the business day on which the following conditions precedent are satisfied:

3.1 Borrower shall have executed and delivered, or caused to be executed and delivered, to Lender three (3) originals (one (1) original of the Note) of the following documents in forms approved by Lender in its sole discretion:

3.1.1 The Note;

3.1.2 This Loan Agreement;

3.1.3 The Mortgages;

3.1.4 The Woodland Assignment;

3.1.5 That certain Environmental Indemnity Agreement dated as of the date hereof by Borrower and Borrower’s stockholders (collectively, the “Stockholder”) in favor of Lender, relating to the Mortgage Properties (the “ Environmental Indemnity ”);

3.1.6 That certain Assignment of Permits, Licenses and Agreements dated as of the date hereof by Borrower in favor of Lender;

3.1.7 INTENTIONALLY DELETED

3.1.8 a Landlord Estoppel letter executed by the Les Ashbar Trust, Ernest B. Martin, the Connie L. McKnight Trust Dated April 6, 1993, David L. Harris as Successor Trustee fbo

Joan K. Bailey (nka Joan L. Ayala), Marti Ridout and Jan L. Schilder, and A.E. Brim, as landlords, in form and substance satisfactory to Lender;

3.1.9 All financing statements and other documents, certificates, agreements and legal opinions reasonably deemed necessary or appropriate by Lender to effectuate the transactions contemplated under the Loan Documents;

3.1.10 An opinion of Borrower’s counsel rendered under the laws of the state or states where the Collateral is located, in form and substance satisfactory to Lender.

3.2 All representations and warranties made in writing in connection with any of the Loan Documents by or on behalf of Borrower shall be true and correct in all material respects;

3.3 Lender shall have received Uniform Commercial Code, judgment and tax lien searches from the Secretary of State and local filing offices of each jurisdiction where Borrower maintains a place of business or in which the Properties is located, which searches yield results consistent with the representations and warranties made by or on behalf of Borrower; and

3.4 Equity Investment; Cash on Hand . On the Closing Date, Borrower shall have received a minimum cash equity infusion of $8,685,0000 (including $265.000 in notes to management) and will have cash on hand of $2,500,000 (exclusive of loan proceeds).

3.5 Appraisal . Lender shall have obtained an appraisal report for Memorial Hospital of Adel, in form and content acceptable to Lender, prepared by an independent MAI appraiser in accordance with the Financial Institutions Reform, Recovery and Enforcement Act (“ FIRREA ”) and the regulations promulgated pursuant to such act.

3.6 Title Policy and Endorsements . Lender shall have received a commitment for title insurance in an amount and issued by a title insurance company satisfactory to Lender. On the Closing Date, Lender shall receive a title insurance policy (“ Title Policy ”), acceptable to Lender, insuring marketability of title and insuring that the lien of the Mortgage is a valid first lien on the Properties, subject only to exceptions to title approved by Lender. The Title Policy shall also contain any reinsurance and endorsements required by Lender including without limitation creditors’ rights, zoning 3.1, negative amortization, variable rate and extended coverage endorsements (Comprehensive Form 1).

3.7 Survey . Lender shall have received and approved a survey of the Properties, dated no more than forty-five (45) days prior to the Closing Date, prepared by a registered land surveyor in accordance with the 1992 American Land Title Association/American Congress on Surveying and Mapping Standards and certified in favor of Lender and the title insurer. The surveyor shall certify that the Properties is not in a flood hazard area as identified by the Secretary of Housing and Urban Development. The survey shall also be sufficient for the title insurer to remove the general survey exception.

3.8 Environmental Report . Lender shall have received a Phase I Environmental audit of the Properties. The audit shall (i) be addressed to Lender; (ii) state that Lender may rely thereon; and (iii) be acceptable to Lender in its sole discretion.

3.9 Leases . All leases of the Properties (“ Leases ”) shall be in form and substance acceptable to Lender. The attached Exhibit B , which Borrower will update through the Closing Date, describes all existing Leases. On the Closing Date, all existing Leases shall be in full force and effect and Borrower shall submit a revised and recertified rent roll.

3.10 Insurance . Borrower shall have provided Lender with and Lender shall have approved copies of certificates evidencing the insurance policies required to be delivered pursuant to the Mortgages.

3.11 Compliance with Laws . Borrower shall have submitted and Lender shall have approved (a) a final certificate of occupancy (or the equivalent) for the Properties, (b) evidence satisfactory to Lender that the Properties comply in all material respects with all applicable laws (including without limitation all building, zoning, density, land use, ordinances, regulations and planning requirements), covenants, conditions and restrictions, subdivision requirements (including without limitation parcel maps), and environmental impact and other environmental requirements.

3.12 Commitment Fee . Borrower shall have paid Lender a commitment fee in the amount of $75,000 which commitment fee shall be nonrefundable and shall be deemed fully earned upon receipt.

3.13 INTENTIONALLY DELETED

3.14 Revolving Loan Agreement . All of the Conditions Precedent set forth in Section 5.1 of the Revolving Loan Agreement shall have been satisfied.

3.15 Additional Items . Lender shall have received such other documents and information as Lender may reasonably require.

ARTICLE IV

Representations and Warranties

As an inducement to Lender to disburse the Loan, Borrower hereby represents and warrants as follows, which representations and warranties shall be true as of the Closing Date and shall remain true throughout the term of the Loan:

4.1 Organization . Borrower is a corporation/limited liability company duly organized, validly existing, and in good standing under the laws of the state of its formation, is in good standing as a foreign corporation/limited liability company in each jurisdiction in which the character of the properties owned or leased by it or the nature of its business makes such qualification necessary, has the necessary power and authority to own its assets and transact the business in which it is engaged, and has obtained all certificates, licenses, permits, governmental authorizations and other qualifications required under all laws, regulations, ordinances, or orders of public authorities necessary for the ownership and operation of all of its properties and transaction of all of its business, except where the failure to qualify will not result in a materially adverse effect.

4.2 Power . Borrower has full corporate/limited liability company power and authority to enter into, execute, and deliver this Agreement and to perform its obligations under this Agreement, to borrow the Loan, to execute and deliver the Note, and to incur and perform the obligations provided for in the Loan Documents, all of which have been duly authorized by all necessary corporate/limited liability company action. No consent or approval of shareholders of, or lenders to, Borrower and no consent, approval, filing or registration with any Governmental Authority is required as a condition to the validity of the Loan Documents or the performance by Borrower of its obligations under the Loan Documents.

4.3 Valid . This Agreement and all other Loan Documents constitute, and the Note, when issued and delivered pursuant to this Agreement for value received, will constitute, the valid and legally binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms.

4.4 No Conflicts . The execution and delivery by Borrower of this Agreement and the other Loan Documents do not, and the performance of its obligations under the Loan Documents will not, violate, conflict with, constitute a default under, or result in the creation of a lien or encumbrance upon the property of Borrower (other than for the benefit of Lender) under: (i) any provision of Borrower’s articles of Incorporation/Organization or bylaws/operating agreement, (ii) any provision of any law, rule, or regulation applicable to Borrower, or (iii) any of the following: (A) any indenture or other agreement or instrument to which Borrower is a party or by which Borrower or its property is bound; or (B) any judgment, order or decree of any court, arbitration tribunal, or Governmental Authority having jurisdiction over Borrower which is applicable to Borrower.

4.5 Litigation . Except as disclosed on Exhibit C hereto, there are no actions, suits, proceedings or investigations pending or, to the knowledge of Borrower, threatened, against or adversely affecting Borrower’s properties or assets or the validity or enforceability of the Loan Documents, or the ability of Borrower to perform any obligations under the Loan Documents. Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court, arbitration tribunal or governmental authority having jurisdiction over Borrower. Borrower is not the subject of any proceeding by any governmental agency, and no notice of any violation has been or will be issued by a governmental agency that would, directly or indirectly, or with the passage of time: (i) have a material adverse impact on Borrower’s ability to accept and/or retain patients or operate the Improvements for the licensed use or result in the imposition of a fine, a sanction, a lower rate certification or a lower reimbursement rate for services rendered to eligible patients; (ii) modify, limit or annul or result in the transfer, suspension, revocation or imposition of probationary use of any of the licenses; or (iii) if applicable, affect Borrower’s continued participation in the Medicaid or Medicare programs or any other of the third-party payors’ programs, or any successor programs thereto, at current rate certifications.

operations and changes in financial condition as of the dates and for the periods referred to, and have been prepared in accordance with generally accepted accounting principles, consistently applied (“ GAAP ”). There are no material unrealized or anticipated liabilities, direct or indirect, fixed or contingent, of Stockholder or Borrower as of the dates of such financial statements that are not reflected in the financial statements or the notes thereto. There has been no material adverse change in the business, properties, condition (financial or otherwise) of Borrower or Stockholder since the dates of such statements.

4.7 No Defaults . Borrower is not in default under or with respect to any obligation in any respect that could be materially adverse to its business, operations, property or financial condition, or that could materially adversely affect the ability of Borrower to perform its obligations under the Loan Documents. No Event of Default or event that, with the giving of notice or lapse of time, or both, could become an Event of Default, has occurred and is continuing.

4.8 Title . Borrower has good and marketable title to its properties and assets, including the Properties, Improvements and other Collateral, subject to no lien, mortgage, pledge, encumbrance or charge of any kind other than the Permitted Liens. Borrower has not agreed or consented to cause any of its properties or assets, whether owned now or hereafter acquired, to be subject in the future (upon the happening of a contingency or otherwise) to any lien, mortgage, pledge, encumbrance or charge of any kind other than the Permitted Liens. For the purposes hereof, “ Permitted Liens ” shall mean those easements, restrictions, liens, leases and encumbrances identified in Schedule B, Part I of the policy or policies of title insurance delivered to Lender as of the recordation of the Mortgages, together with the lien of any real property taxes or assessments which are not delinquent.

4.9 Taxes . Borrower has filed, or has obtained extensions for the filing of, all federal, state and other material tax returns which are required to be filed, and has paid all taxes shown as due on those returns and all assessments, fees and other amounts due as of the date hereof. All tax liabilities of Borrower are adequately provided for on Borrower’s books. Notwithstanding the foregoing, Borrower shall not be required to pay and discharge or cause to be paid and discharged any tax, assessment, charge, levy or claim (other than payroll taxes) so long as the validity or amount thereof shall be contested in good faith and by appropriate proceedings by Borrower, as determined in the reasonable judgment of Lender, and Borrower shall have set aside on its books adequate reserve therefor; and provided further , that such deferment of payment is permissible only so long as Borrower’s title to, and its right to use, the Collateral is not adversely affected thereby and Lender’s lien and priority on the Collateral are not adversely affected, altered or impaired thereby. No tax liability has been asserted by the Internal Revenue Service or other taxing authority against Borrower for taxes in excess of those already paid.

extend credit to others for such purpose. Borrower is current with all reports and documents required to be filed with any state or federal securities commission or similar governmental authority and is in full compliance with all applicable rules and regulations of such commissions.

4.11 Investment Company Act . Borrower is not an investment company within the meaning of the Investment Company Act of 1940, as amended, nor is it, directly or indirectly, controlled by or acting on behalf of any Person which is an investment company within the meaning of that Act.

4.12 No Violations . Borrower is not in violation of any material statute, rule or regulation of any governmental authority including without limitation applicable rules, regulations and requirements of federal, state and local commissions, boards, bureaus and agencies having jurisdiction over the Improvements and of the operations of the Improvements (and including without limitation any statute, rule or regulation relating to employment practices or to environmental, occupational and health standards and controls) and Borrower has timely filed all reports, data and other information required to be filed with such commissions, boards, bureaus and agencies where the failure to so comply would have a material adverse effect on Borrower’s financial condition or operations. The Improvements and the use thereof comply and will continue to comply in all material respects with all applicable local, state and federal building codes, fire codes, health care, senior housing and other regulatory requirements (the “ Physical Plant Standards ”) and no waivers of Physical Plant Standards exist at the Improvements. The Improvements have not received a “Level A” (or equivalent) violation, and no statement of charges or deficiencies has been made or penalty enforcement action has been undertaken against the Improvements, Stockholder or Borrower, or against any officer, director, partner, member, stockholder or affiliate of Borrower by any governmental agency during the last three calendar years, and there have been no violations over the past three years which have threatened the Improvements’, Borrower’s certification for participation in Medicare or Medicaid or other third-party payors’ programs. There are no current, pending or outstanding Medicaid, Medicare or third-party payors’ programs reimbursement audits or appeals pending at the Improvements, and there are no years that are subject to audit.

4.13 Environmental . No use, exposure, release, generation, manufacture, storage, treatment, transportation or disposal of hazardous material has occurred or is occurring on or from any of the Properties or other real property on which the Collateral is located or which is owned, leased or otherwise occupied by Borrower, or has occurred off the Properties as a result of any action of Borrower, except as described in Schedule 4.13 hereto. All hazardous material used, treated, stored, transported to or from, generated or handled on the Properties, or off the Properties by Borrower, has been disposed of by or on behalf of Borrower in a lawful manner. Except as disclosed in Schedule 4.13 hereto, there are no underground storage tanks present on or under the Properties. No other environmental, public health or safety hazards exist with respect to the Properties. Except as provided in Schedule 4.13 hereto, to the knowledge of Borrower neither the Improvements nor any of the other Collateral contain any asbestos in any form.

4.14 Places of Business . The only places of business of Borrower, and the places where it keeps and intends to keep the Collateral and records concerning the Collateral, are at the

addresses set forth in Schedule 4.14 hereto, which also lists the owner of record of each such property.

4.15 Intellectual Properties . Borrower exclusively owns or possesses all the patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, franchises, licenses, and rights with respect to the foregoing necessary for the current and planned future conduct of its business, without any conflict with the rights of others. A list of all such intellectual property (indicating the nature of Borrower’s interest), as well as all outstanding franchises and licenses given by or held by Borrower, is attached as Schedule 4.15 . Borrower is not in default of any obligation or undertaking with respect to such intellectual property or rights. Borrower is not infringing on any patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, franchises, licenses, any rights with respect to the foregoing, or any other intellectual property rights of others and the Borrower is not aware of any infringement by others of any such rights owned by Borrower.

4.16 Shareholders . The identity of the shareholders of all classes of the outstanding capital stock of Borrower and Stockholder, together with the respective percentages held by such shareholders, are as set forth on Schedule 4.16 hereto.

4.17 Investments . Borrower does not own or hold any equity or long-term debt investments in, have any outstanding advances to, have any outstanding guarantees for the obligations of, or have any outstanding borrowings from, any Person. Borrower is not a party to any contract or agreement, or subject to any corporate/limited liability company restriction, which adversely affects its business.

4.18 Labor . Except as set forth on Schedule 4.18 , within five years before the date of this Agreement, neither the business, property or assets, or operations of Borrower or, to the best of Borrower’s knowledge, Borrower’s predecessor New American Healthcare Corporation, has been adversely affected in any way by any casualty, strike, lockout, combination of workers, or order of the United States of America or other Governmental Authority, directed against Borrower. Except as set forth on Schedule 4.18 , there are no pending or threatened labor disputes, strikes, lockouts, or similar occurrences or grievances against Borrower or its business.

4.19 Business Name . Except as set forth on Schedule 4.19 , within five (5) years before the date hereof, Borrower has not conducted business under or used any other name (whether corporate, partnership or assumed). Borrower is the sole owner of its name and any and all business done and invoices issued in such name are Borrower’s sales, business, and invoices. Each trade name of Borrower represents a division or trading style of Borrower and not a separate Person or independent Affiliate.

4.20 INTENTIONALLY DELETED

4.21 No Joint Venture . Except as set forth on Schedule 4.21 , Borrower is not engaged in any joint venture or partnership with any other Person.

Borrower’s knowledge, there currently exist no restrictions, deficiencies, required plans of corrective actions or other such remedial measures with respect to federal and state Medicare or Medicaid certifications or licensure. Schedule 4.22 lists all Permits. The Permits (i) may not be, and have not been, and will not be transferred to any location other than the Improvements; (ii) are not now and will not be pledged as collateral security for any other loan or indebtedness; and (iii) are held free and will remain free from restrictions or known conflicts which would materially impair the use or operation of the Improvements for the licensed use, and shall not be provisional, probationary or restricted in any way.

4.23 Recoupments . There are no Medicare or Medicaid recoupments or recoupments of any third-party payor being sought, requested or claimed, or to the Borrower’s knowledge, threatened against the Borrower, or any of its Affiliates.

4.24 Participation Agreements . Schedule 4.24 hereto, sets forth an accurate, complete and current list of all participation agreements with health maintenance organizations, insurance programs, third party payors and preferred provider organizations with respect to the Improvements. Borrower has delivered to Lender true, correct and complete copies of all such agreements listed on Schedule 4.24 .

4.25 Reports . Borrower has timely filed or caused to be timely filed, all cost reports and other material reports of every kind whatsoever required by law or by written or oral contracts or otherwise to have been filed or made with respect to the Improvements. True and correct copies of all such reports for the three (3) most recent fiscal years of the providers have been furnished to Lender. Except as set forth on Schedule 4.25 , there are no claims, actions or appeals pending (and Borrower has not filed any claims or reports which should result in any such claims, actions or appeals) before any commission, board or agency including without limitation any intermediary or carrier, the Provider Reimbursement Review Board or the Administrator of the Health Care Financing Administration, with respect to any state or federal Medicare or Medicaid cost reports or claims filed by Borrower on or before the date hereof, or any disallowance by any commission, board or agency in connection with any audit of such cost reports.

Laws. Except as set forth on Schedule 4.26 , Borrower and its Affiliates and the owners of the facilities and other businesses managed by the Borrower or its Affiliates have such permits, licenses, franchises, certificates and other approvals or authorizations of governmental or regulatory authorities as are necessary under applicable law to own their respective properties and to conduct their respective business (including without limitation such permits as are required under such federal, state and other health care laws, and under such HMO or similar licensure laws and such insurance laws and regulations, as are applicable thereto), and with respect to those facilities and other businesses that participate in Medicare and/or Medicaid, to receive reimbursement under Medicare and Medicaid.

4.27 Software . Borrower has the right to use, free and clear of any royalty or other payment obligations, claims or other liens, all computer software, programs and similar systems used in its operation of the Improvements, all of which are disclosed in Schedule 4.27 hereto; and to Borrower’s knowledge, Borrower is not in conflict with or in violation or infringement of an intellectual property, or any computer software, programs or similar systems disclosed on Schedule 4.27 . Borrower is, without further action or the payment of additional fees, royalties or other compensation to any Person, entitled to unrestricted use of all computer software programs and similar systems currently used in the operation of the Improvements including without limitation those set forth in Schedule 4.27 .

4.28 Certificate of Need . In the event that Lender acquires the Improvements through foreclosure or otherwise, neither the Borrower, Lender, nor any purchaser of the Improvements (through a foreclosure or otherwise), must obtain a certificate of need from any applicable state healthcare regulatory authority or agency (other than giving such notice required under the applicable state law or regulation) prior to applying for and receiving a license to operate the Improvements and certification to receive Medicare and Medicaid payments (and any successor program) for patients having coverage thereunder, provided that neither the services offered at the Improvements nor the number of beds operated would be changed.

4.29 Properties Access . The Properties are accessible through fully improved and dedicated roads accepted for maintenance and public use by the public authority having jurisdiction.

4.30 Utilities . All utility services necessary and sufficient for the use or operation of the Properties are available including water, storm, sanitary sewer, gas, electric and telephone facilities.

4.31 Flood Hazards/Wetlands . The Properties are not situated in an area designated as having special flood hazards as defined by the Flood Disaster Protection Act of 1973, as amended, or as a wetlands by any governmental entity having jurisdiction over the Properties.

4.32 Eminent Domain . There is no eminent domain or condemnation proceeding pending or, to the best of Borrower’s knowledge threatened, relating to the Properties.

4.33 Accuracy . Neither this Agreement nor any document, financial statement, credit information, certificate or statement furnished to Lender by Borrower contains any untrue

statement of a material fact or omits to state a material fact which would affect Lender’s decision to make the Loan.

4.34 Solvency . Both before and after giving effect to the transactions contemplated by the terms and provisions of this Agreement, Borrower (taken as a whole) (i) owns property whose fair saleable value is greater than the amount required to pay all of Borrower’s Indebtedness (including contingent debts), (ii) was and is able to pay all of its Indebtedness as such Indebtedness matures, and (iii) had and has capital sufficient to carry on its business and transactions and all business and transactions in which it about to engage. For purposes of this Agreement, the term “Indebtedness” means, without duplication (x) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Borrower as of the date on which Indebtedness is to be determined, (y) all obligations of any other person or entity which such Borrower has guaranteed, and (z) the Obligations.

4.35 No Broker . Other than Harpeth Capital (which will be paid by Borrower), no brokerage commission or finder’s fee is owing to any broker or finder arising out of any actions or activity of Borrower in connection with the Loan. Borrower shall defend, indemnify and hold Lender harmless against from and against any and all claims for brokerage commission or finder’s fees arising out or in connection with the Loan.

4.36 Subsidiaries . Except as set forth on Schedule 4.36 , Borrower has no subsidiaries.

4.37. Material Facts . Neither this Agreement nor any other Loan Document nor any other agreement, document, certificate, or statement furnished to Lender by or on behalf of Borrower in connection with the transactions contemplated by this Agreement contains any untrue statement of material fact or omits to state a material fact necessary to make the statements contained in this Agreement or other Loan Document not misleading. There is no fact known to Borrower that adversely affects or in the future may adversely affect the business, operations, affairs or financial condition of Borrower, or any of its properties or assets.

ARTICLE V

Affirmative Covenants

5.1. Inspection . Subject to the rights of tenants under Leases approved by Lender, Lender and its authorized agents may enter upon and inspect the Properties at all reasonable times during normal business hours upon reasonable notice given orally or in writing to Borrower. Subject to the preceding sentence, Lender, at Borrower’s expense, may retain one or more independent consultants to periodically inspect the Properties and all documents, drawings, plans, and consultants’ reports relating thereto.

independent consultant, if any, and other documents affecting the Properties. Lender and its designated agents shall have the right to inspect and copy any of the foregoing during normal business hours. Additionally, Lender may audit and determine, in Lender’s sole and absolute discretion, the accuracy of Borrower’s records and computations. The costs and expenses of any audit shall be paid by Borrower in accordance with the terms of the Revolving Loan Agreement.

5.2.1 Financial Statements; Balance Sheets . Borrower shall furnish to Lender and shall cause the Stockholder to furnish to Lender on a monthly basis or annual basis, as appropriate, such financial statements as are required under Section 6.1 of the Revolving Loan Agreement. All such financial statements shall show all material contingent liabilities and shall accurately and fairly present the results of operations and the financial condition of Borrower at the dates and for the period indicated.

5.3 Use of Proceeds . Borrower shall use the proceeds of the Loan for proper business purposes. No portion of the proceeds of the Loan shall be used by Borrower in any manner that might cause the borrowing or the application of such proceeds to violate Regulation U, Regulation T or Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Act of 1933 or the Securities Exchange Act of 1934.

5.4 Affiliate Transactions . Prior to entering into any agreement with an Affiliate pertaining to the Properties, Borrower shall deliver to Lender a copy of such agreement, which shall be satisfactory to Lender in its sole discretion. If requested by Lender, such agreement shall provide Lender the right to terminate it upon Lender’s (or its designee’s) acquisition of the Properties through foreclosure, a deed-in-lieu of foreclosure, UCC sale or otherwise. “ Affiliate ” means with respect to any individual, trust, estate, partnership, limited liability company, corporation or any other incorporated or unincorporated organization (each a “ Person ”), a Person that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with Borrower; any officer, director, partner or shareholder of Borrower; any relative of any of the foregoing. The term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

5.5 Licenses . Borrower will also provide to Lender evidence, satisfactory to Lender, of the receipt and maintenance of all necessary local and state licenses (including without limitation state health department licenses), certificates of need, Medicaid and Medicare provider agreements, and evidence of the good standing of the Improvements with the state licensing and Medicare and Medicaid certifying agencies including without limitation copies of finalized Medicare and Medicaid cost reports and any other permits. Borrower shall furnish to Lender upon request from Lender from time to time letters from the appropriate agencies that the Borrower, and any lessee (if applicable) has the authority to be licensed and to operate the Improvements.

5.6 Reports . Borrower shall maintain at all times a system of accounting established and administered in accordance with sound business practices, and deliver, or cause to be delivered, to Lender:

5.6.1 copies of all state and federal tax returns filed by Stockholder and Borrower, within twenty (20) days after the filing thereof.

5.6.2 within twenty (20) days of actual filing or receipt by Stockholder or Borrower, copies of (i) all Medicare and Medicaid cost reports and any amendments thereto, (ii) all responses, audit reports, or inquiries received with respect to such cost reports, and (iii) any and all exceptions filed by the Borrower with respect to such cost reports;

5.6.3 within twenty (20) days of receipt by the Borrower of any of the Improvements, copies of all licensure and certification survey reports and statements of deficiencies (with plans of correction attached thereto provided in the time period required by the particular agency for submitting a plan of correction), together with any correspondence and/or other documentation of any kind related thereto;

5.6.4 at such reasonable intervals as the Lender may require, such assignments, schedules, statements, reports, certifications, records and other documents with respect to the Collateral in such form and detail as shall be satisfactory to the Lender;

5.6.5 promptly after filing, a copy of each annual report filed in respect of any Plan subject to ERISA;

5.6.6 within ten (10) Business Days of the receipt by Borrower or the manager for the Improvements, a complete and accurate copy of any and all notices (regardless of form) from any licensing and/or certifying agency that license, or Medicare or Medicaid certification of the Improvements is being downgraded to a substandard category, revoked, limited, or suspended, or that action is pending or being considered to downgrade to a substandard category, revoke, limit or suspend the licenses or certifications of a Improvement;

5.6.7 If requested by Lender, evidence by Borrower of any applicable bed taxes or similar taxes, which if assessed against Borrower, Borrower agrees to pay;

5.6.8 within three (3) business days of receipt, copies of any and all notices (regardless of form) from any licensing and/or certifying agency that any license and/or any Medicare certification and/or any Medicaid certification is being downgraded, revoked or suspended, or that such action is pending or under consideration.

5.7 Existence, Good Standing, and Compliance with Laws . Borrower will do or cause to be done all things necessary (i) to obtain and keep in full force and effect all corporate/limited liability company existence, rights, licenses, privileges, and franchises of Borrower necessary to the ownership of its property or the conduct of its business, and comply with all applicable current and future laws, ordinances, rules, regulations, orders and decrees of any Governmental Authority having or claiming jurisdiction over Borrower; and (ii) to maintain and protect the properties used or useful in the conduct of the operations of Borrower, including the Properties, in a prudent manner, including without limitation the maintenance at all times of such insurance upon its insurable property and operations as required by law or by subsection (e) below.

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

5.9 Insurance . Borrower will carry adequate public liability and professional liability insurance with responsible companies reasonably satisfactory to Lender in such amounts and against such risks as is customarily maintained by similar businesses and by owners of similar property in the same general area and such property insurance and other insurance as is required by the Mortgages.

5.10 Maintenance of Properties . Borrower will maintain, keep and preserve the Collateral in good repair, working order and condition and from time to time make all needful and proper repairs, renewals, replacements, betterments and improvements to the Collateral.

5.11 Notification of Events of Default and Adverse Developments . Borrower promptly will notify Lender upon the occurrence of: (i) any Event of Default; (ii) any event, of which Borrower has, or has reason to have, knowledge, which, with the giving of notice or lapse of time, or both, could constitute an Event of Default; (iii) any event, development or circumstance whereby the financial statements previously furnished to Lender fail in any material respect to present fairly, in accordance with GAAP, the financial condition and operational results of Borrower; (iv) any default claimed by any other creditor for Borrowed Money of Borrower other than Lender; and (v) any other development in the business or affairs of Borrower which may be materially adverse; in each case describing the nature thereof and (in the case of notification under clauses (i) and (ii)) the action Borrower proposes to take with respect thereto.

will make all contributions when due with respect to any multi-employer pension plan in which it participates and will promptly advise Lender: (i) upon its receipt of notice of the assertion against Borrower of a claim for withdrawal liability; (ii) upon the occurrence of any event which could trigger the assertion of a claim for withdrawal liability against Borrower; and (iii) upon the occurrence of any event which would place Borrower in a Controlled Group as a result of which any member (including Borrower) thereof may be subject to a claim for withdrawal liability, whether liquidated or contingent.

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

5.14 Business Conducted . Borrower shall continue in the business presently conducted by it. Borrower shall not engage, directly or indirectly, in any line of business substantially different from the business conducted by it immediately before the Closing Date, or engage in business or lines of business which are not reasonably related thereto without the prior written consent of Lender, such consent to be withheld or granted based on Lender’s determination in its sole discretion whether such action would have a detrimental impact on (a) Borrower’s ability to repay the Loan and/or (b) the Lender’s rights in the Collateral.

5.15 Litigation and Other Proceedings . Borrower shall give prompt notice to Lender of any litigation or arbitration, or any proceeding before any Governmental Authority, against or affecting Borrower if the amount at issue in any single proceeding is more than $50,000 for any single claim, or if the amounts at issue in all proceedings pending against Borrower at any point in time exceed $250,000 in the aggregate.

5.16 Licensure; Medicaid/Medicare Cost Reports . Borrower will maintain all certificates of need, provider numbers and licenses necessary to conduct its business as currently conducted, and take any steps required to comply with any such new or additional requirements that may be imposed on providers of medical products and services. If required, all Medicaid/Medicare cost reports will be properly filed. Borrower will not (i) rescind, withdraw, revoke, amend, modify, supplement, or otherwise alter the nature, tenor or scope of the Permits for the Improvements; (ii) amend or otherwise change either of the Improvements’ authorized units/beds capacity and/or the number of units/beds approved by the applicable state department of health; (iii) replace or transfer all or any part of either of the Improvements’ units/beds to another site or location; or (iv) voluntarily transfer or encourage the transfer of any resident of any Improvements to any other facility not subject to the Mortgages, unless such transfer is at the request of the resident or is for reasons relating to the health, required level of medical care or safety of the resident to be transferred.

to be paid in connection with such filing or recording, and (iii) do such other acts as the Lender may reasonably request in order to perfect, preserve, maintain, or continue the perfection of the Lender’s security interest in the Collateral and/or its priority.

5.18 Management . Borrower shall at all times be the sole manager of the Improvements. Borrower’s agreements and other arrangements with a 3 ^rd party manager or management company with respect to the Improvements shall at all times be governed by a written management agreement. Borrower shall take all actions necessary to ensure that any management agreement and any management fees to be paid thereunder are subject and subordinate in all respects to the liens arising under the Loan Documents. All management fees to be paid to any manager by Borrower shall at all times be (i) fully described and disclosed in the management agreements, and (ii) be paid by Borrower (a) directly to each manager and to no other Person, and (b) not less frequently than quarterly in equal installments. Borrower shall at no time have any agreement or arrangement with any manager with respect to the Improvements which is not set forth in a management agreement. Borrower shall not enter into, modify, change or amend the management agreement without the prior written consent of Lender, which consent Lender may withhold in its sole discretion.

5.19 Lender Preservation of Licenses . From time to time, upon the request of Lender, regardless of whether or not an Event of Default has occurred hereunder or under the other Loan Documents, Borrower shall complete, execute and deliver to Lender any applications, notices, documentation, and other information necessary or desirable, in Lender’s sole judgment, to permit Lender or its designee (including a receiver) to obtain, maintain or renew any one or more of the licenses for the Improvements (or to become the owner of the existing Licenses for the Improvements and to obtain any other provider agreements, licenses or governmental authorizations then necessary or desirable for the operation of the Improvements by Lender or its designee for the licensed use (including without limitation any applications for change or ownership of the existing licenses or change of control of the owner of the existing licenses). Upon an occurrence of an Event of Default, (i) Lender is hereby authorized (without the consent of Borrower) to submit any such applications, notices, documentation or other information which Borrower caused to be delivered to Lender in accordance with the above provisions to the applicable governmental authorities, or to take such other steps as Lender may deem advisable to obtain, maintain or renew any license or governmental authorization in connection with the operation of the Improvements, and Borrower agrees to cooperate with Lender in connection with the same (ii) Borrower, upon demand by Lender, shall take any action necessary or desirable, in Lender’s sole judgment, to permit Lender or its designee (including a receiver) to use, operate and maintain the Improvements for the licensed use. If Borrower fails to comply with the provisions of this subsection for any reason whatsoever, Borrower hereby irrevocably appoints Lender and its designee as Borrower’s attorney-in-fact, with full power of substitution, to take any action and execute any documents and instruments necessary or desirable in Lender’s sole judgment to permit Lender or its designee to undertake Borrower’s obligations under this subsection including without limitation obtaining any licenses or governmental authorizations then required for the operation of the Improvements by Lender or its designee for the licensed use. The foregoing power of attorney is coupled with an interest and is irrevocable and Lender may exercise its rights thereunder in addition to any other remedies which Lender may have against Borrower, or Stockholder as a result of Borrower’s breach of the obligations contained in this subsection.

5.20 Debt Service Coverage Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower shall have maintained a Debt Service Coverage Ratio of at least 1.12:1.0 for the quarter ending December 31, 2000 and 1.25:1.0 thereafter. For purposes of this covenant, “ Debt Service Coverage Ratio ” shall mean the ratio of (i) Cash Flow (defined below) from the Facilities (determined as set forth below) to (ii) Debt Service (defined below). The Debt Service Coverage Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full. For purposes of this covenant, “ Cash Flow ” shall mean, for any given accounting period, net income (as determined in accordance with generally accepted accounting principles applied on a basis consistent with prior periods) plus amortization, depreciation, interest, accrued taxes, and management fees. For purposes of this covenant, “ Debt Service ” shall mean, for any given period, all regularly scheduled interest payments due under all loans to Lender, plus all interest on capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender.

5.21 EBITDA . Commencing with a measurement on December 31, 2000, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower shall have maintained minimum annualized EBITDAs (based upon the preceding six months of operations) as follows:


Quarter Ending	EBITDA

12/31/00 (preceding 3 months)	$	1,748,000
3/31/01	$	2,644,000
6/30/01	$	2,986,000
9/30/01	$	2,168,000
12/31/01	$	2,780,000
3/31/02	$	4,446,000
6/30/02	$	4,064,000
9/30/02	$	2,730,000
12/31/02	$	3,856,000
3/31/03	$	6,498,000
6/30/03	$	7,150,000

5.22 Working Capital Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower shall have maintained a Working Capital Ratio of at least 2 .15:1. For purposes of this covenant, “ Working Capital Ratio ” shall mean the ratio of Borrower’s current assets to Borrower’s current liabilities (excluding amounts due and owing under the Loan and the Revolving Loan). The Working Capital Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full.

ARTICLE VI

Negative Covenants

6.1 No Amendments . Borrower shall not materially amend, modify or terminate, or permit the amendment, modification or termination of the Borrower’s Articles of Incorporation/Organization and bylaws/operating agreement.

6.2 No Commingling Funds . Borrower shall not commingle the funds related to the Properties with funds from any other property.

6.3 Lienable Work . No excavation, construction, earth work, site work or any other mechanic’s lienable work shall be done to or for the benefit of the Properties, without Lender’s approval except for normal repair and maintenance in the ordinary course of business.

6.4 Conversion . Borrower shall not permit the Properties or any portion thereof to be converted or take any preliminary actions which could lead to a conversion to condominium or cooperative form of ownership.

6.5 Use of Properties . Unless required by applicable law, Borrower shall not permit changes in the use of any part of the Properties from the use existing at the time the Mortgages were executed. Borrower shall not initiate or acquiesce in a change in the plat of subdivision, or zoning classification of the Properties without Lender’s prior written consent.

6.6 Borrowing . Borrower will not create, incur, assume or suffer to exist any lease or liability for borrowed money except: (i) indebtedness to Lender; (ii) indebtedness of Borrower secured by mortgages, encumbrances or liens expressly permitted by Lender; (iii) capital leases existing as of the date of this Agreement, and (iv) capital equipment leases entered into following the date of this Agreement provided that the aggregate amount obligated on all such capital equipment leases does not exceed $300,000 per Borrower facility without the prior written consent of Lender, and (v) accounts payable to trade creditors and current operating expenses (other than for borrowed money) which are not aged more than one hundred twenty (120) days from the billing date or more than thirty (30) days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being contested in good faith and by appropriate and lawful proceedings, and Borrower shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower and its independent accountants. Borrower will not make prepayments on any existing or future indebtedness for borrowed money in excess of $10,000 to any third person or entity (other than Lender).

6.7 Merger. Acquisition, or Sale of Assets . Without the prior written consent of Lender, such consent to be withheld or granted based on Lender’s determination in its sole discretion whether the requisite following actions would have a detrimental impact on (a) Borrower’s ability to repay the Loan and/or (b) the Lender’s rights in the Collateral, Borrower will not Borrower will not: (i) enter into any transaction of merger or consolidation; (ii) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); (iii) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, any of its assets (except to the extent no longer used or useful in its business), or the capital stock of any

subsidiary of Borrower, whether now owned or hereafter acquired; or (iv) acquire by purchase or otherwise all or any substantial part of the business or assets of, or stock or other evidence of beneficial ownership of, any Person.

6.8 Sale and Leaseback . Borrower will not, directly or indirectly, enter into any arrangement whereby Borrower sells or transfers all or any part of its assets and thereupon and within one year thereafter rents or leases the assets so sold or transferred without prior written notice to and the prior written consent of Lender, which consent shall not be unreasonably withheld.

6.9 Subsidiaries . Borrower does not have, and will not form, any subsidiary, or make any equity investment in or any loan in the nature of an equity investment to, any other person without prior written notice to and the prior written consent of Lender, which consent shall not be unreasonably withheld.

6.10 Change in Capital Structure . There shall occur no Change in Control (as defined in the Revolving Loan Agreement).

6.11 Contracts and Agreements . Borrower will not become or be a party to any contract or agreement which would breach a covenant in any of the Loan Documents, or breach any other instrument, agreement, or document to which Borrower is a party or by which it is or may be bound.

6.12 Dividends and Distributions . Upon the occurrence of an Event of Default, or if any events or circumstances exist which, after notice, the passage of time or both, would constitute an Event of Default, Borrower will not (a) declare or pay any distributions with respect to, purchase, redeem or otherwise acquire for value, any of its outstanding interests now or hereafter outstanding, or return any capital of its shareholders, nor (b) make any other distributions or pay any fees of any kind to its shareholders, including without limitation distributions of cash that would otherwise be available for distribution under its organizational documents.

6.13 Compliance with ERISA . Borrower will not permit with respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or any Reportable Event.

6.14 Certificates of Need . Borrower will not amend, alter or suspend or terminate or make provisional in any material way, any certificate of need or provider number without prior written notice to and the prior written consent of Lender, which consent shall not be unreasonably withheld.

6.15 Use of Lender’s Name . Borrower will not use Lender’s name (or the name of any of Lender’s affiliates) in connection with any of its business operations. Borrower may disclose to third parties that Borrower has a borrowing relationship with Lender. Nothing contained in the Loan Documents is intended to permit or authorize Borrower to make any contract on behalf of Lender.

6.16 Year One Capital Expenditures . Borrower’s capital expenditures during the twelve month period following closing shall not exceed $2.3 million without the written consent of Lender.

ARTICLE VII

Events of Default; Acceleration of Indebtedness; Remedies

7.1. Events of Default . The occurrence of any one or more of the following events shall constitute an “ Event of Default ” under this Agreement:

7.1.1 Failure of Borrower to pay, within five (5) days of the due date, any of the payment obligations of Borrower to Lender (“ Indebtedness ”), including any payment due under the Note and any other Loan Document; or

7.1.2 Failure of Borrower to strictly comply with the provisions of Sections 5.1, 5.4, 5.5, 5.17, 5.19, 5.20, 5.21 or 5.22 of this Agreement or a misrepresentation, when made, under any of Sections 4.16, 4.17, 4.19, 4.20, 4.21, 4.22, 4.24, or 4.34 of this Agreement; or

7.1.3 Breach of any covenant other than as set forth in subsections 7.1.1 and 7.1.2 above which is not cured within thirty (30) days after notice; provided, however, if such breach cannot by its nature be cured within thirty (30) days, and Borrower diligently pursues the curing thereof (and then in all events cures such failure within sixty (60) days after the original notice thereof). Borrower shall not be in default hereunder; or

7.1.4 If any representation or warranty made by Borrower in this Note (other than as set forth in subsection 7.1.2 above) or in any of the other Loan Documents, any financial statement, or any statement or representation made in any other certificate, report or opinion delivered in connection herewith or therewith proves to have been incorrect or misleading in any material respect when made, which default shall have continued unremedied for a period of twenty (20) days after written notice from Lender; or

7.1.5 Borrower shall (i) apply for, or consent in writing to, the appointment of a receiver, trustee or liquidator; or (ii) file a voluntary petition seeking relief under the Bankruptcy Code, or be unable, or admit in writing Borrower’s inability, to pay their debts as they become due; or (iii) make a general assignment for the benefit of creditors; or (iv) file a petition or an answer seeking reorganization or an arrangement or a readjustment of debt with creditors, apply for, take advantage, permit or suffer to exist the commencement of any insolvency, bankruptcy, suspension of payments, reorganization, debt arrangement, liquidation, dissolution or similar event, under the law of the United States or of any state in which Borrower is a resident; or (v) file an answer admitting the material allegations of a petition filed against Borrower in any such bankruptcy, reorganization or insolvency case or proceeding, or (vi) take any action authorizing, or in furtherance of, any of the foregoing; or

insolvent, or appointing a receiver, trustee or liquidator of Borrower or of all or substantially all of the assets of Borrower and the order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days or shall not be discharged within ten (10) days after the expiration of any stay of such order, judgment, or decree; or

7.1.7 Any obligation of Borrower for the payment of borrowed money in excess of $100,000 is not paid when due or within any applicable grace period, or such obligation becomes or is declared to be due and payable before the expressed maturity of the obligation, or there shall have occurred an event that, with the giving of notice or lapse of time, or both, would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable; or

7.1.8 One or more final judgments against Borrower or attachments against its property not fully and unconditionally covered by insurance shall be rendered by a court of record and shall remain unpaid, unstayed on appeal, undischarged, unbonded and undismissed for a period of thirty (30) days; or

7.1.9 Borrower ceases any material portion of its business operations as presently conducted; or

7.1.10 There shall occur a material adverse change in the financial condition or business prospects of Borrower, which default shall have continued unremedied for a period often (10) days after written notice from Lender; or

7.1.11 The occurrence of a default and the expiration of any cure period applicable thereto under any Loan Document.

7.1.12 Borrower shall repay the Revolving Loan in full or otherwise terminate the Revolving Loan Agreement.

7.2 Acceleration; Remedies . Upon the occurrence of an Event of Default at the option of Lender, the Indebtedness shall become immediately due and payable without notice to Borrower and Lender shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever.

ARTICLE VIII

Miscellaneous

(including fees of Lender’s inside counsel), receivers’ fees, engineers’ fees, accountants’ fees, independent consultants’ fees (including environmental consultants), all costs and expenses incurred in connection with any of the foregoing, Lender’s out-of-pocket costs and expenses related to any audit or inspection of the Properties, outlays for documentary and expert evidence, stenographers’ charges, stamp taxes, publication costs, and costs (which may be estimates as to items to be expended after entry of an order or judgment) for procuring all such abstracts of title, title and UCC searches, and examination, title insurance policies, and similar data and assurances with respect to title as Lender may deem reasonably necessary either to prosecute any action or to evidence to bidders at any foreclosure sale of the Properties the true condition of the title to, or the value of, the Properties.

8.2 Disclosure of Information . Lender shall have the right (but shall be under no obligation) to make available to any party for the purpose of granting participations in or selling, transferring, assigning or conveying all or any part of the Loan (including any governmental agency or authority and any prospective bidder at any foreclosure sale of the Properties) any and all information which Lender may have with respect to the Properties and Borrower, whether provided by Borrower, the Stockholder or any third party or obtained as a result of any environmental assessments. Borrower and the Stockholder agree that Lender shall have no liability whatsoever as a result of delivering any such information to any third party, and Borrower and the Stockholder, on behalf of themselves and their successors and assigns, hereby release and discharge Lender from any and all liability, claims, damages, or causes of action, arising out of, connected with or incidental to the delivery of any such information to any third party.

8.3 Sale of Loan . Lender, at any time and without the consent of Borrower or the Stockholder, may grant participations in or sell, transfer, assign and convey all or any portion of its right, title and interest in and to the Loan, this Agreement and the other Loan Documents, any guaranties given in connection with the Loan and any collateral given to secure the Loan.

8.4. Forbearance by Lender Not a Waiver . Any forbearance by Lender in exercising any right or remedy under any of the Loan Documents, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. Lender’s acceptance of payment of any sum secured by any of the Loan Documents after the due date of such payment shall not be a waiver of Lender’s right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. The procurement of insurance or the payment of taxes or other liens or charges by Lender shall not be a waiver of Lender’s right to accelerate the maturity of the Loan, nor shall Lender’s receipt of any awards, proceeds, or damages the Mortgage operate to cure or waive Borrower’s or the Stockholder’s default in payment of sums secured by any of the Loan Documents. With respect to all Loan Documents, only waivers made in writing by Lender shall be effective against Lender.

8.5 GOVERNING LAW: CONSENT TO JURISDICTION . THIS AGREEMENT IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT RESPECT TO ANY OTHERWISE APPLICABLE CONFLICTS-OF-LAWS PRINCIPLES, BOTH AS TO INTERPRETATION AND PERFORMANCE, AND THE PARTIES EXPRESSLY CONSENT AND AGREE TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MARYLAND

AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN MARYLAND, WAIVING ALL CLAIMS OR DEFENSES BASED ON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE, INCONVENIENT FORUM OR THE LIKE. BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER, BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER’S ADDRESS SET FORTH IN SECTION 19 ABOVE. BORROWER FURTHER WAIVES ANY CLAIM FOR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY LENDER IN GOOD FAITH. ANY MATTERS AFFECTING THE ENFORCEMENT OR INTERPRETATION OF LENDER’S SECURITY INTEREST IN THE COLLATERAL SHALL (TO THE EXTENT NOT GOVERNED BY MARYLAND LAW PURSUANT TO THE AGREEMENT SET FORTH HEREIN) BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE COLLATERAL IS LOCATED.

8.6 CONFESSION OF JUDGMENT . BORROWER IRREVOCABLY AUTHORIZES AND EMPOWERS ANY ATTORNEY OF RECORD, OR THE PROTHONOTARY, CLERK OR SIMILAR OFFICER OF ANY COURT IN ANY COUNTY OF THE STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND, AS ATTORNEY FOR BORROWER, AS WELL AS FOR ANY PERSONS CLAIMING UNDER, BY OR THROUGH BORROWER, UPON THE OCCURRENCE OF AN EVENT OF DEFAULT (AS CERTIFIED BY LENDER), TO APPEAR FOR BORROWER IN ANY SUCH COURT IN ANY SUCH ACTION BROUGHT AGAINST BORROWER AT THE SUIT OF LENDER TO CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF LENDER IN THE FULL AMOUNT DUE UNDER THIS AGREEMENT PLUS ATTORNEYS FEES FOR FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR HEARING. BORROWER WAIVES THE BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT AND PROPER.

8.7 Relationship . The relationship between Lender and Borrower shall be that of creditor-debtor only. No term in this Agreement or in the other Loan Documents and no course of dealing between the parties shall be deemed to create any relationship of agency, partnership or joint venture or any fiduciary duty by Lender to any other party.

8.8 Indemnity . Borrower shall indemnify, protect, hold harmless and defend Lender, its successors, assigns, shareholders, directors, officers, employees, and agents from and against any and all loss, damage, cost, expense (including attorneys’ fees), and claims arising out of or in connection with (a) the Properties, (b) the Collateral, (c) any act or omission of Borrower, any Stockholder, or their respective employees or agents, whether actual or alleged, and (d) any and all brokers’ commissions or other costs of similar type by any party in connection with the Loan, in each case except to the extent arising from the indemnitee’s gross negligence or willful misconduct. Upon written request by an indemnitee, Borrower will undertake, at its own costs and expense, on behalf of such indemnitee, using counsel satisfactory to the indemnitee, the defense of any legal action or proceeding whether or not such indemnitee shall be a party and for which such indemnitee is entitled to be indemnified pursuant to this section. At Lender’s option, Lender may, at Borrower’s expense, prosecute or defend any action involving the priority, validity or enforceability of any of the Loan Documents.

8.9 Notice . Any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier or U.S. Mail and shall be deemed given: (a) if served in person, when served; (b) if telecopied, on the date of transmission if before 3:00 p.m. EST on a business day; provided that a hard copy of such notice is also sent pursuant to (c) or (d) below; (c) if by overnight courier, on the first business day after delivery to the courier; or (d) if by U.S. Mail, certified or registered mail, return receipt requested on the fourth (4th) day after deposit in the mail postage prepaid.


Notices to Borrower:		c/o Healthmont, Inc.
		Gateway Building, Suite 310
		Brentwood, Tennessee 37027
		Attn: President
		Telephone: 615-309-6900
		Telecopy: 615-309-6901

Notices to Lender:		Heller Healthcare Finance, Inc.
		Loan No.
		2 Wisconsin Circle, Suite 400
		Chevy Chase, Maryland 20815
		Attn: General Counsel
		Telecopy: (301) 664-9866

and to:		Heller Financial, Inc.
		Real Estate Financial Services
		500 West Monroe Street
		Chicago, Illinois 60661
		Attn: Kevin McMeen, Senior Vice President
		Telecopy: (312) 441-7119

8.10 Successors and Assigns Bound; Agents; and Captions . The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to,

the respective successors and assigns of Lender, Borrower and the Stockholder, subject to the provisions of this Agreement. In exercising any rights under the Loan Documents or taking any actions provided for therein, Lender may act through its employees, agents or independent contractors as authorized by Lender. The captions and headings of the paragraphs and sections of this Agreement are for convenience only and are not to be used to interpret or define the provisions hereof.

8.11 Terms and Usage . As used in the Loan Documents “ business day ” means any day, other than a Saturday or a Sunday, when banks in Chicago, Illinois are not required or authorized to be closed.

8.12 Time of Essence . Time is of the essence of this Agreement and the other Loan Documents and the performance of each of the covenants and agreements contained herein and therein.

8.13 WAIVER OF TRIAL BY JURY . LENDER AND BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO TRIAL BY JURY IN RESPECT TO ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY. BORROWER ACKNOWLEDGES THAT THIS WAIVER OF JURY TRIAL IS A MATERIAL INDUCEMENT TO THE LENDER IN EXTENDING CREDIT TO THE BORROWER, THAT THE LENDER WOULD NOT HAVE EXTENDED SUCH CREDIT WITHOUT THIS JURY TRIAL WAIVER, AND THAT BORROWER HAS BEEN REPRESENTED BY AN ATTORNEY OR HAS HAD AN OPPORTUNITY TO CONSULT WITH AN ATTORNEY IN CONNECTION WITH THIS JURY TRIAL WAIVER AND UNDERSTANDS THE LEGAL EFFECT OF THIS WAVIER.

8.14 Counterparts . This Agreement may be executed in multiple counterparts, each of which shall constitute an original, and together shall constitute the Agreement.

8.15 Entire Agreement . This Agreement and the other Loan Documents embody the entire agreement among the parties hereto and supersede all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof, and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto.

[SIGNATURES ON FOLLOWING PAGE]

The parties hereto have executed this Agreement or has caused the same to be executed by their duly authorized representatives under seal as of the date first above written.


LENDER:

HELLER HEALTHCARE FINANCE, INC. a Delaware corporation

By:		/s/ D AVID G. M OORE

Name:		DAVID G. MOORE
Title:		SENIOR VICE PRESIDENT


BORROWER:

HEALTHMONT, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	CEO


HEALTHMONT OF GEORGIA, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON I, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON II, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON III, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager

Exhibit 10.9

$5,000,000.00

AMENDMENT NO. 1

MORTGAGE LOAN AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC., a Tennessee corporation

HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

(dba Memorial Hospital of Adel, Memorial Convalescent Center

and Memorial Home Health)

HEALTHMONT OF TEXAS, INC., a Tennessee corporation

HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

(dba Dolly Vinsant Memorial Hospital)

HEALTHMONT OF OREGON I, INC., a Tennessee corporation

HEALTHMONT OF OREGON II, INC., a Tennessee corporation

HEALTHMONT OF OREGON III, INC., a Tennessee corporation

(dba Woodland Park Medical Plaza)

HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company

(dba Woodland Park Hospital)

HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company

dba Eastmoreland Hospital

(“Borrower”)

and

HELLER HEALTHCARE FINANCE, INC.

(“Lender”)

Amended as of December 31, 2000

AMENDMENT NO. 1 TO MORTGAGE LOAN AGREEMENT

THIS AMENDMENT NO. 1 TO MORTGAGE LOAN AND AGREEMENT (the “Amendment”) is made as of December 31, 2000, by and between HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation dba Memorial Hospital of Adel, Memorial Convalescent Center and Memorial Home Health, HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company dba Dolly Vinsant Memorial Hospital HEALTHMONT OF OREGON I, INC., a Tennessee corporation, HEALTHMONT OF OREGON II, INC., a Tennessee corporation, HEALTHMONT OF OREGON III, INC., a Tennessee corporation dba Woodland Park Medical Plaza, HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company dba Woodland Park Hospital, and HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company dba Eastmoreland Hospital (collectively, “ Borrower ”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“Lender”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated August 31, 2000 by and between Borrower and Lender (the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. Lender has agreed to lend $1,900,000 (the “ Missouri Loan ”) to HealthMont of Missouri, Inc., a Tennessee corporation that is affiliated with Borrower, pursuant to a mortgage loan agreement (the “ Missouri Loan Agreement ”, mortgage note (the “ Missouri Note ”) and deed of trust, assignment of rents and leases, security agreement and financing statement (the “ Missouri Mortgage ”)(collectively, the “ Missouri Loan Documents ”), all dated as of even date herewith.

C. As consideration for Lender’s making the Missouri Loan (and as a condition precedent thereto), Borrower has agreed to cross-collateralize and cross-default the Loan Agreement (and related documents) with the Missouri Loan Documents in accordance with the terms and condition set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

1. Amendment to Loan Agreement .

A. Section 2.1 of the Loan Agreement is hereby deleted in its entirety and the following is inserted in lieu thereof:

2.1 Collateral . The Loan, the Missouri Loan and all other indebtedness and obligations under the Mortgage Documents and the Missouri Mortgage Documents shall be secured by the following: (a) the Mortgage, (b) the Assignment of Leases, (c) the Missouri Mortgage, and (d) any other collateral or security described in this Agreement or in any of the other Loan Documents or required by Lender in connection with the Loan.

B. Sections 5.20, 5.21 and 5.22 of the Loan Agreement are hereby amended to include HealthMont of Missouri, Inc. as a Borrower in calculating the financial thresholds required by such Sections.

C. The following Section 7.1.13 is hereby added to Article VII of the Loan Agreement:

7.1.14 There shall occur an Event of Default or an event which is reasonably likely to result in an Event of Default under the Missouri Loan Documents.

2. Costs . Borrower shall be responsible for the payment of all costs of Lender incurred in connection with the preparation of this Amendment, including all reasonable fees of Lender’s in-house counsel.

3. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

4. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

5. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

6. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

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


LENDER:

HELLER HEALTHCARE FINANCE, INC. a Delaware corporation

By:		/s/ D AVID G. M OORE

Name:		DAVID G. MOORE
Title:		SENIOR VICE PRESIDENT


BORROWER:
HEALTHMONT, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	CEO


HEALTHMONT OF GEORGIA, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF TEXAS I, LLC a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON I, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON II, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON III, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President


HEALTHMONT OF OREGON IV, LLC. a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager


HEALTHMONT OF OREGON V, LLC. a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	Chief Manager

Exhibit 10.10

$5,000,000.00

AMENDMENT NO. 2

MORTGAGE LOAN AGREEMENT

originally dated as of August 31, 2000

by and between

HEALTHMONT, INC,

HEALTHMONT OF GEORGIA, INC.

HEALTHMONT OF TEXAS, INC.

HEALTHMONT OF TEXAS I, LLC

HEALTHMONT OF OREGON I, INC.

HEALTHMONT OF OREGON II, INC.

HEALTHMONT OF OREGON III, INC.

HEALTHMONT OF OREGON V, LLC

HEALTHMONT OF OREGON IV, LLC

Amended as of June 30, 2001

AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT (the “Amendment”) is made as of this 30th day of June, 2001, by and between HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., dba Memorial Hospital of Adel, Memorial Convalescent Center and Memorial Home Health, a Tennessee corporation, HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, dba Dolly Vinsant Memorial Hospital, a Tennessee limited liability company, HEALTHMONT OF OREGON I, INC., a Tennessee corporation, HEALTHMONT OF OREGON II, INC., a Tennessee corporation, HEALTHMONT OF OREGON III, INC., dba Woodland Park Medical Plaza, a Tennessee corporation, HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company dba Woodland Park Hospital, HEALTHMONT OF OREGON IV, LLC, dba Eastmoreland Hospital, a Tennessee limited liability company (collectively the “Borrower”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated August 31, 2001 by and between Borrower and Lender (the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. The parties now desire to amend the Loan Agreement, in accordance with the terms and conditions set forth below.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

Section 1. Definitions. Unless otherwise defined herein, all capitalized terms herein shall have the meanings assigned to such terms in the Loan Agreement.

Section 2. Amendment to Loan Agreement . The Loan Agreement is hereby amended as follows:

(a) Section 5.22 of the Loan Agreement is hereby amended and restated to read as follows:

“5.22 Working Capital Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower shall have maintained a Working Capital Ratio as follows:


Period Ending		Working Capital Ratio
12/31/00		2.15:1
3/31/01		1.40:1
6/30/01 through 3/31/02		1.25:1
6/30/02 through Maturity		2.15:1

For purposes of this covenant, “ Working Capital Ratio ” shall mean the ratio of Borrower’s current assets to Borrower’s current liabilities (excluding amounts due and owing under the Loan and the Revolving Loan). The Working Capital Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full.”

(b) Section 8.9 of the Loan Agreement is hereby amended and restated to read as follows:

“8.9 Notice . Any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier or U.S. Mail and shall be deemed given: (a) if served in person, when served; (b) if telecopied, on the date of transmission if before 3:00 p.m. EST on a business day; provided that a hard copy of such notice is also sent pursuant to (c) or (d) below; (c) if by overnight courier, on the first business day after delivery to the courier; or (d) if by U.S. Mail, certified or registered mail, return receipt requested on the fourth (4th) day after deposit in the mail postage prepaid.


Notices to Borrower:		c/o Healthmont, Inc. 113 Seaboard Lane Suite C-200 Franklin, Tennessee 37067 Attn: President Telephone: 615-309-6900 Telecopy: 615-309-6901

Notices to Lender:		Heller Healthcare Finance, Inc. Loan No. 1254 2 Wisconsin Circle, Suite 400 Chevy Chase, Maryland 20815 Attn: Chief Counsel Telecopy: (301) 664-9866

and to:		Heller Financial, Inc. Real Estate Financial Services Loan No. 1254 500 West Monroe Street Chicago, Illinois 60661 Attn: Kevin McMeen, Senior Vice President Telecopy: (312) 441-7119”

Section 3. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

Section 4. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

Section 5. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

Section 6. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

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


LENDER:

HELLER HEALTHCARE FINANCE, INC. a Delaware corporation

By:		/s/ J EFFREY D. S TEIN

Name:		Jeffrey D. Stein
Title:		VP


BORROWER:

HEALTHMONT, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF GEORGIA, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF TEXAS, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF TEXAS I, LLC a Tennessee limited liability company

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF OREGON I, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF OREGON II, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF OREGON III, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF OREGON IV, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO


HEALTHMONT OF OREGON V, LLC a Tennessee limited liability company

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CEO

Exhibit 10.11

$5,000,000.00 SECURED TERM LOAN

AMENDMENT NO. 3

MORTGAGE LOAN AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF TEXAS, INC.,

HEALTHMONT OF TEXAS I, LLC (dba Dolly Vinsant Memorial Hospital),

HEALTHMONT OF OREGON I, INC.,

HEALTHMONT OF OREGON II, INC.,

HEALTHMONT OF OREGON III, INC. (dba Woodland Park Medical Plaza),

HEALTHMONT OF OREGON V, LLC (dba Woodland Park Hospital), and

HEALTHMONT OF OREGON IV, LLC (dba Eastmoreland Hospital)

(collectively, “Borrower”)

and

HELLER HEALTHCARE FINANCE, INC.

(“Lender”)

Amended as of February 28, 2002

AMENDMENT NO. 3 TO MORTGAGE LOAN AGREEMENT

THIS AMENDMENT NO. 3 TO MORTGAGE LOAN AGREEMENT (this “Amendment”) is made as of (February 28, 2002, by and among HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company (dba Dolly Vinsant Memorial Hospital), and HEALTHMONT OF MISSOURI, INC., a Tennessee corporation (dba Callaway County Community Hospital) (collectively, the “Continuing Borrower”), HEALTHMONT OF OREGON I, INC., a Tennessee corporation, HEALTHMONT OF OREGON II, INC., a Tennessee corporation, HEALTHMONT OF OREGON III, INC., a Tennessee corporation (dba Woodland Park Medical Plaza), HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company (dba Woodland Park Hospital), and HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company (dba Eastmoreland Hospital) (collectively, the “Withdrawing Borrower”; the Continuing Borrower and the Withdrawing Borrower are sometimes collectively referred to herein as the “Borrower”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“Lender”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated August 31, 2000 by and among Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “Loan Agreement”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. Borrower now wishes to effect the withdrawal of Withdrawing Borrower as a Borrower under the Loan Agreement, and to make such further amendments as are necessary to effect such transaction.

C. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement.

2. Other Amendments to Loan Agreement.

(a) Recital B. Recital E shall be deleted in its entirety and substituted with the following language:

“B. Borrower is the owner of Memorial Hospital of Adel in Adel, Georgia, and Dolly Vinsant Memorial Hospital in San Benito, Texas (collectively, the “Mortgage Properties”). The Mortgage Properties may also hereinafter be referred to as the “Properties”). The Properties are more particularly described on Exhibit A attached hereto.”

(b) Recital D. Recital D shall be deleted in its entirety and substituted with the following language:

“Borrower’s obligations under the Loan will be secured by, among other things, a first priority Mortgage, Assignment of Rents and Security Agreement of even date herewith encumbering each of the Mortgage Properties (the “Mortgages”). This Agreement, the Note, the Mortgages, the Environmental Indemnity’, the Revolving Loan Agreement and any other documents evidencing or securing the Loan or the Revolving Loan or executed in connection therewith, including, without limitation, the instruments and agreements identified in Section 3.1 hereof, and any modifications, renewals and extensions thereof, are referred to herein collectively as the “Loan Documents”.”

(c) Section 5.20 – Debt Service Coverage Ratio. The first sentence of Section 5.20 is hereby deleted in its entirety and replaced by the following sentence:

“5.20 Debt Service Coverage Ratio . Commencing with a measurement on March 31, 2002, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower shall have maintained the following Debt Service Coverage Ratios:


Quarter Ending		DSC Ratio
3/31/02		1.1 to 1.0
6/30/02		1.2 to 1.0
9/30/02		1.2 to 1.0
12/31/02		1.2 to 1.0
3/31/03		1.3 to 1.0
6/30/03		1.3 to 1.0.”

(d) Section 5.21 – EBITDA Requirements. Section 5.21 is hereby deleted in its entirety and replaced by the following:

“5.21 EBITDA . Commencing with a measurement on March 31, 2002, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower shall have maintained minimum annualized EBITDAs (based upon the preceding six months of operations) as follows:


Quarter Ending	EBITDA
3/31/02	$	800,000.00
6/30/02	$	800,000.00
9/30/02	$	750,000.00
12/31/02	$	700,000.00
3/31/03	$	800,000.00
6/30/03	$	800,000.00”

(e) Exhibit A. Exhibit A shall be amended by omitting the descriptions of the Eastmoreland Hospital in Portland, Oregon and the Woodland Park Hospital in Portland, Oregon.

5. Costs . Borrower shall be responsible for the payment of all costs of Lender incurred in connection with the preparation of this Amendment, including all reasonable fees of Lender’s in-house counsel.

6. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

7. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

8. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

9. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

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


LENDER:

HELLER HEALTHCARE FINANCE, INC., a Delaware corporation

By:	/s/ J OSEPH P RANDONI	(SEAL)

Name:	JOSEPH PRANDONI
Title:	VICE PRESIDENT


CONTINUING BORROWER:

HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF TEXAS, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF MISSOURI, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	Chief Manager



WITHDRAWING BORROWER:

HEALTHMONT OF OREGON I, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF OREGON II, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF OREGON III, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President


HEALTHMONT OF OREGON IV, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	Chief Manager


HEALTHMONT OF OREGON V, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	Chief Manager

Exhibit 10.12

$5.000,000.00 SECURED TERM LOAN

AMENDMENT NO. 4

MORTGAGE LOAN AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF TEXAS, INC.,

HEALTHMONT OF TEXAS I, LLC (dba Dolly Vinsant Memorial Hospital),

HEALTHMONT OF OREGON I, INC.,

HEALTHMONT OF OREGON II, INC.,

HEALTHMONT OF OREGON III, INC. (dba Woodland Park Medical Plaza),

HEALTHMONT OF OREGON V, LLC (dba Woodland Park Hospital), and

HEALTHMONT OF OREGON IV, LLC (dba Eastmoreland Hospital)

(collectively, “Borrower”)

and

HELLER HEALTHCARE FINANCE, INC.

(“Lender”)

Amended as of March 31, 2002

AMENDMENT NO. 4 TO MORTGAGE LOAN AGREEMENT

THIS AMENDMENT NO. 4 TO MORTGAGE LOAN AGREEMENT (this “ Amendment ”) is made as of March 31, 2002, by and among HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company (dba Dolly Vinsant Memorial Hospital), and HEALTHMONT OF MISSOURI, INC., a Tennessee corporation (dba Callaway County Community Hospital) (collectively, “ Borrower ”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated August 31, 2000 by and among Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. Borrower has requested, and Lender has agreed, to make certain modifications to certain financial covenant provisions in the Loan Agreement, all as set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement.

1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

2. Other Amendments to Loan Agreement.

(a) Section 5.20 – Debt Service Coverage Ratio. Section 5.20 is hereby deleted in its entirety and replaced by the following:

“5.20 Debt Service Coverage Ratio. Commencing with a measurement on March 31, 2002, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower shall have maintained the following Debt Service Coverage Ratios:


Quarter Ending		DSC Ratio
3/31/02		.70 to 1.0
6/30/02		.55 to 1.0
9/30/02		.60 to 1.0
12/31/02		.55 to 1.0
3/31/03		1.2 to 1.0
6/30/03		1.50 to 1.0

For purposes of this covenant, “ Debt Service Coverage Ratio ” shall mean the ratio of (i) Cash Flow (defined below) from the Facilities (determined as set forth below) to (ii) Debt Service (defined below). The Debt Service Coverage Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full. For purposes of this covenant, “ Cash Flow ” shall mean, for any given accounting period, net income (as determined in accordance with generally accepted accounting principles applied on a basis consistent with prior periods) plus amortization, depreciation, interest, accrued taxes, and management fees. For purposes of this covenant, “ Debt Service ” shall mean, for any given period, all regularly scheduled interest payments due under all loans to Lender, plus all interest on capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender.”

(b) Section 5.21 – Cash Flow Requirements. Section 5.21 is hereby deleted in its entirety and replaced by the following:

“5.21 Cash Flow . Commencing with a measurement on March 31, 2002, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower shall have maintained minimum annualized Cash Flow (as defined in Section 5.20) for the preceding twelve (12) months of operations as follows:


Quarter Ending	Cash Flow
3/31/02	$	150,000.00
6/30/02	$	235,000.00
9/30/02	$	120,000.00
12/31/02	$	450,000.00
3/31/03	$	500,000.00
6/30/03	$	800,000.00”

(c) Section 5.22 – Working Capital Requirements. Section 5.22 of the Loan Agreement is hereby amended and restated to read as follows:

“5.22 Working Capital Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower shall have maintained a Working Capital Ratio as follows:


Period Ending		Working Capital Ratio
12/31/00		2.15 to 1.0
3/31/01		1.4 to 1.0
6/30/01 through 3/31/02		1.18 to 1.0
6/30/02 through Maturity		1.25 to 1.0

3. Confirmation of Representations and Warranties. Each of the entities comprising Borrower hereby confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to Borrower, and specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity.

4. Costs . In consideration of Lender’s agreement to modify certain financial covenants of the Loan Agreement as described in Section 2 of this Amendment, and for Lender’s consent to certain actions of Borrower as described in a letter agreement dated of even date of this Amendment, Borrower hereby agrees to pay to Lender a modification fee equal to Fifteen Thousand Dollars ($15,000). In addition, Borrower shall be responsible for the payment of all reasonable fees of Lender’s in-house counsel incurred in connection with the preparation of this Amendment and any related documents. All of the fees described in this Section 4 shall constitute a portion of the Obligations evidenced by the Revolving Credit Note and secured by the Revolving Loan Agreement and other Loan Documents, and Borrower hereby authorizes Lender to deduct all of such fees set forth in this Section 4 from the proceeds of the next Revolving Credit Loan.

5. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

documents, instruments and agreements executed or delivered in connection with the Loan Agreement.

6. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

7. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

8. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGE]

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


LENDER:

HELLER HEALTHCARE FINANCE, INC., a Delaware corporation

By:	/s/ J OSEPH P RANDANI	(SEAL)

Name: Title:	Joseph Prandani Vice President


BORROWER:

HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name: Title:	Timothy S. Hill President


HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name: Title:	Timothy S. Hill President


HEALTHMONT OF TEXAS, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name: Title:	Timothy S. Hill President


HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name: Title:	Timothy S. Hill President


HEALTHMONT OF MISSOURI, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name: Title:	Timothy S. Hill President

Exhibit 10.13

$5,000,000.00 SECURED TERM LOAN

AMENDMENT NO. 5

MORTGAGE LOAN AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF TEXAS, INC.,

HEALTHMONT OF TEXAS I, LLC (dba Dolly Vinsant Memorial Hospital),

and

HEALTHMONT OF MISSOURI, INC.

and

HELLER HEALTHCARE FINANCE, INC.

Amended as of December 31, 2002

AMENDMENT NO. 5 TO MORTGAGE LOAN AGREEMENT

THIS AMENDMENT NO. 5 TO MORTGAGE LOAN AGREEMENT (this “ Amendment ”) is made as of December 31, 2002, by and among HEALTHMONT, INC. , a Tennessee corporation, HEALTHMONT OF GEORGIA, INC. , a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), HEALTHMONT OF TEXAS, INC., a Tennessee corporation, HEALTHMOMT OF TEXAS I, LLC, a Tennessee limited liability company (dba Dolly Vinsant Memorial Hospital), and HEALTHMONT OF MISSOURI, INC. , a Tennessee corporation (dba Callaway County Community Hospital) (collectively, “ Borrower ”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated August 31, 2000 by and among Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. Borrower has requested, and Lender has agreed, to make certain modifications to certain financial covenant provisions in the Loan Agreement, all as set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement.

1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement .

2. Partial Waiver of Certain Financial Covenants. The Debt Service Coverage Ratio covenant set forth in Section 5.20 of the Loan Agreement and the Working Capital Requirement set forth in Section 5.22 of the Loan Agreement are each hereby waived for the calendar quarter ending on September 30, 2002.

3. Amendments to Loan Agreemen t.

(a) Section 5.20 – Debt Service Coverage Ratio. Section 5.20 is hereby deleted in its entirety and replaced by the following:

“5.20 Debt Service Coverage Ratio. Commencing with a measurement on March 31, 2002, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower shall have maintained the following Debt Service Coverage Ratios:


Quarter Ending		DSC Ratio
3/31/02		.70 to 1.00
6/30/02		.55 to 1.00
9/30/02		[WAIVED]
12/31/02		.30 to 1.00
3/31/03		1.20 to 1.00
6/30/03		1.50 to 1.00

For purposes of this covenant, “ Debt Service Coverage Ratio ” shall mean the ratio of (i) Cash Flow (defined below) from the Facilities (determined as set forth below) to (ii) Debt Service (defined below). The Debt Service Coverage Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full. For purposes of this covenant, “ Cash Flow ” shall mean, for any given accounting period, net income (as determined in accordance with generally accepted accounting principles applied on a basis consistent with prior periods) plus amortization, depreciation, interest, accrued taxes, and management fees. For purposes of this covenant, “ Debt Service ” shall mean, for any given period, all regularly scheduled interest payments due under all loans to Lender, plus all interest on capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender.”

For purposes of calculating the Debt Service Coverage Ratio, Lender and Borrower agree to exclude (x) the $1,196,737 write-down on the Dolly Vinsant Hospital in San Benito, TX, (y) the $ 92,504 loss on the deposal of the corporate office furniture, and (z) the $275,000 cost of the release from the five-year office space lease in Franklin, TN.

(b) Section 5.21 – Cash Flow Requirements. Section 5.21 is hereby deleted in its entirety and replaced by the following:


Quarter Ending		Cash Flow
3/31/02		$150,000.00
6/30/02		$235,000.00
9/30/02		$120,000.00
12/31/02		$ (20,000.00)
3/31/03		$500,000.00
6/30/03		$800,000.00

For purposes of calculating the Cash Flow, Lender and Borrower agree to exclude (x) the $1,196,737 write-down on the Dolly Vinsant Hospital in San Benito, TX, (y) the $92,504 loss on the deposal of the corporate office furniture, and (z) the $275,000 cost of the release from the five-year office space lease in Franklin, TN.

(c) Section 5.22 – Working Capital Requirements. Section 5.22 of the Loan Agreement is hereby amended and restated to read as follows:

“5.22 Working Capital Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower shall have maintained a Working Capital Ratio as follows:


Period Ending		Working Capital Ratio
12/31/00		2.15 to 1.00
3/31/01		1.40 to 1.00
6/30/01 through 3/31/02		1.18 to 1.00
6/30/02		1.25 to 1.00
9/30/02		[WAIVED]
12/31/02		1.00 to 1.00
3/31/03 through Maturity		1.25 to 1.00

For purposes of this covenant, “ Working Capital Ratio ” shall mean the ratio of Borrower’s current assets (including Agency receivables/payables) to Borrower’s current liabilities (excluding amounts due and owing under the Loan and the Revolving Loan, deferred income related to the indigent fund at Adel Hospital and the Agency receivables/payables). The Working Capital Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full.”

4. Confirmation of Representations and Warranties. Each of the entities comprising Borrower hereby confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to Borrower, and specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity.

5. Costs . In consideration of the modifications of covenants set forth herein, and without limiting any other fee to which Lender is entitled under the Loan Agreement, Borrower hereby agrees to pay to Lender a fee equal to Five Thousand Dollars ($5,000.00). Borrower shall be responsible for the payment of all reasonable fees of Lender’s in-house counsel incurred in connection with the preparation of this Amendment and any related documents. All of the fees described in this Section 5 shall constitute a portion of the Obligations evidenced by the Revolving Credit Note and secured by the Revolving Loan Agreement and other Loan Documents. Borrower hereby authorizes Lender to deduct all of such fees set forth in this Section 5 from the proceeds of the next Revolving Credit Loan.

6. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

8. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

9. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGE]

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


LENDER :

HELLER HEALTHCARE FINANCE, INC., a Delaware corporation

By:	/s/ M ICHAEL G. G ARDULLO	(SEAL)

Name:	Michael G. Gardullo
Title:	Vice President

BORROWER:

HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

HEALTHMONT OF TEXAS, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

HEALTHMONT OF MISSOURI, INC., a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Timothy S. Hill
Title:	President

Exhibit 10.14

$5,000,000.00 SECURED TERM LOAN

AMENDMENT NO. 6

MORTGAGE LOAN AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF TEXAS, INC., and

HEALTHMONT OF TEXAS I, LLC (dba Dolly Vinsant Memorial Hospital)

and

HELLER HEALTHCARE FINANCE, INC.

Amended as of March 24, 2003

AMENDMENT NO. 6 TO MORTGAGE LOAN AGREEMENT

THIS AMENDMENT NO. 6 TO MORTGAGE LOAN AGREEMENT (this “ Amendment ”) is made as of March 24, 2003, by and among HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center) (collectively, “ Continuing Borrower ”), HEALTHMONT OF TEXAS, INC., a Tennessee corporation, and HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company (dba Dolly Vinsant Memorial Hospital) (collectively, the “ Withdrawing Borrower ”; the Continuing Borrower and the Withdrawing Borrower are sometimes collectively referred to herein as the “ Borrowe r”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated August 31, 2000 by and among Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. Borrower now wishes to effect the withdrawal of Withdrawing Borrower as a Borrower under the Loan Agreement, and to make such further amendments as are necessary to effect such transaction.

C. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement.

1. Withdrawal of Withdrawing Borrower. Lender, Continuing Borrower and Withdrawing Borrower agree that Withdrawing Borrower shall no longer be party to the Loan Agreement or the other Loan Documents and will not be bound by any of the conditions, covenants, representations, warranties and other agreements set forth in the Loan Agreement and other Loan Documents.

2. Other Amendments to Loan Agreement. Section 7.1 shall be amended by adding the following as additional Events of Default:

“7.1.13. an Event of Default shall have occurred under any of the loan documents entered into between Healthmont, Inc. and Sunlink Health Systems, Inc. dated on or about the date hereof (the “ Sunlink Loan Documents ”); or

7.1.14. a material default, the Termination Date or the Scheduled Maturity Date shall have occurred under that certain Agreement and Plan of Merger dated as of October 15, 2002 among Sunlink Health Systems, Inc., Healthmont, Inc. and HM Acquisition Corp. (as amended, the “ Merger Agreement ”), or the Scheduled Maturity Date shall have occurred under the Sunlink Loan Documents.”

5. Release . Borrower hereby fully, finally, and absolutely and forever releases and discharges Lender and its present and former directors, shareholders, officers, employees, agents, representatives, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns, from any and all actions, causes of action, claims, debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity of Borrower, whether now known or unknown to Borrower, and whether contingent or matured (collectively, “ Claims ”): (a) in respect of the Loan Agreement, the Loan Documents, or the actions or omissions of Lender in respect of the Loan Agreement and the Loan Documents; and (b) arising from events occurring prior to the date of this Amendment. The foregoing release and discharge shall, automatically and without further action of the Borrower, be deemed renewed as of the date of each advance of Loan proceeds with respect to all Claims in respect of the Loan Agreement, the Loan Documents, or the actions or omissions of Lender in respect of the Loan Agreement and the Loan Documents and arising from events occurring prior to the date of such advance.

6. Costs . Continuing Borrower shall be responsible for the payment of all costs of Lender incurred in connection with the preparation of this Amendment, including all reasonable fees of Lender’s in-house counsel.

7. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

8. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

9. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

10. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGE]

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

WITNESS/ATTEST:


		LENDER: HELLER HEALTHCARE FINANCE, INC., a Delaware corporation

By:	/s/ L ISA L ENDERMAN	By:	/s/ D AVID G. M OORE	(SEAL)

Name: Title:	Lisa Lenderman Senior Counsel & VP	Name: Title:	DAVID G. MOORE AUTHORIZED SIGNATORY


		CONTINUING BORROWER: HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name: Title:	Timothy S. Hill Chief Executive Officer and President


		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name: Title:	Timothy S. Hill President


		WITHDRAWING BORROWER: HEALTHMONT OF TEXAS, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name: Title:	Timothy S. Hill President


		HEALTHMONT OF TEXAS I, LLC, a Tennessee limited liability company

By:	/s/ T HOMAS H. B UTLER , J R	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name: Title:	Timothy S. Hill Chief Manager

Exhibit 10.15

$5,000,000.00 SECURED TERM LOAN

AMENDMENT NO. 7

MORTGAGE LOAN AGREEMENT

originally dated as of August 31, 2000

by and among

HEALTHMONT, INC.,

HEALTHMONT OF GEORGIA, INC.

(dba Memorial Hospital of Adel and Memorial Convalescent Center),

HEALTHMONT OF MISSOURI, INC.

(dba Callaway County Community Hospital), and

HM ACQUISITION CORP.,

and guaranteed

SUNLINK HEALTH SYSTEMS, INC.

and

GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.)

Amended as of September 30, 2003

AMENDMENT NO. 7 TO MORTGAGE LOAN AGREEMENT

THIS AMENDMENT NO. 7 TO MORTGAGE LOAN AGREEMENT (this “ Amendment ”) is made as of September 30, 2003, by and among HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), HEALTHMONT OF MISSOURI, INC., a Tennessee corporation (dba Callaway County Community Hospital), (collectively, the “ Original Borrower ”), and HM ACQUISITION CORP., a Delaware corporation (the “ New Borrower ”; the Original Borrower and the New Borrower are sometimes collectively referred to herein as “ Borrower ”), and GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated August 31, 2000 by and among Original Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Original Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

B. Original Borrower now wishes to add HM Acquisition Corp. as a Borrower under the Loan Agreement, to extend the Maturity Date of the Loan, and to make such further amendments as are necessary to effect such transaction, all as set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement:

1. Amendments to Loan Agreement . The Loan Agreement is hereby amended as follows:

Delaware corporation, will be the surviving corporation, and shall file an amendment to its articles of incorporation changing its name to Healthmont, Inc.

1.2. Section 1.2.1 – Maturity Date . Section 1.2.1 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ 1.2.1. Maturity Date. The Maturity Date shall be August 31, 2005. ”

1.3. Section 5.20 – Debt Service Coverage Ratio. Section 5.20 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

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


Quarter Ending		DSC Ratio
6/30/04		1.1 to 1.00
9/30/04		1.1 to 1.00
12/31/04		1.1 to 1.00
3/31/05		1.1 to 1.00
6/30/05		1.2 to 1.00

For purposes of this covenant, “ Debt Service Coverage Ratio ” shall mean the ratio of (i) Cash Flow (defined below) from the Facilities (determined as set forth below) to (ii) Debt Service (defined below). The Debt Service Coverage Ratio shall be measured on a quarterly basis beginning with the quarter ending June 30, 2004 and continuing until the Loan is repaid in full. For purposes of this covenant, “ Cash Flow ” shall mean, for any given accounting period, net income (as determined in accordance with generally accepted accounting principles applied on a basis consistent with prior periods) plus amortization, depreciation, interest, and accrued taxes. For purposes of this covenant, “ Debt Service ” shall mean, for any given period, all regularly scheduled interest payments due under all loans to Lender, plus all interest on capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender. ”

1.4. Section 5.21 – Cash Flow Requirements. Section 5.21 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ 5.21 Cash Flow . Commencing with a measurement on September 30, 2004, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower shall have maintained minimum annualized Cash Flow (as defined in Section 5.20) for the preceding twelve (12) months of operations as follows:


Quarter Ending		Cash Flow
9/30/04		$1,000,000
12/31/04		$1,100,000
3/31/05		$1,200,000
6/30/05		$1,200,000 ”

1.5. Section 5.22 – Working Capital Requirements. Section 5.22 of the Loan Agreement is hereby deleted in its entirety.

1.6. Section 6.12 – Dividends and Distributions . Section 6.12 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“Section 6.12. Dividends, Distributions and Management Fees. Borrower will not declare or pay any dividends or other distributions with respect to, purchase, redeem or otherwise acquire for value any of its outstanding stock now or hereafter outstanding, or return any capital of its stockholders, nor shall Borrower pay management fees or fees of a similar nature to any Person. Notwithstanding the foregoing, so long as no Event of Default has occurred under any of the Loan Documents or the Callaway Mortgage Loan Documents or the Revolving Loan Documents, Borrower shall be entitled to make (a) distributions to its parent, SunLink Health Systems, Inc. (“ SHS ”), (b) payments of principal on the intercompany indebtedness owed by Borrower to SHS, and (c) amounts in respect of payments made by Borrower to SHS for Borrower’s allocable share of costs for goods or services that SHS obtains from third persons in the ordinary course of business for the benefit of Borrower and that Borrower would otherwise have to obtain itself from a third person in the ordinary course of business, but in each case in (a), (b) or (c), such Distribution may only be made to the extent that such distribution or other payments will not cause or result in an Event of Default (including, without limitation, a violation of any financial covenants in the Loan Documents or the Callaway Mortgage Loan Documents or the Revolving Loan Documents). In furtherance of the foregoing, the parties acknowledge and agree that, prior to any distribution made by Borrower to SHS, Borrower must first provide evidence reasonably satisfactory to Lender that Borrower is currently in compliance with each of its financial covenants set forth in this Agreement and the other Loan Documents, and that any such payment intended to be made to SHS will not result in a violation of any such financial covenants. ”

1.7. Section 7.1 – Events of Default . Section 7.1.7 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ 7.1.7. Any obligation of Borrower for the payment of borrowed money in excess of $100,000 is not paid when due or within any applicable grace period, or such obligation becomes or is declared to be due and payable before the expressed maturity of the obligation, or there shall have occurred an event that, with the giving of notice or lapse of time, or both, would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable (including, without limitation, all of the subordinated Indebtedness owed by one or more entities comprising Borrower to Chatham Investment Fund I, LLC); ”

1.8. Section 7.1 – Events of Default . Section 7.1.14 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ 7.1.14. any material default or Event of Default shall have occurred under any of the loan documents entered into between any entity comprising Borrower and Chatham Investment Fund I, LLC dated on or about September 30, 2003. ”

1.9. Notices . Section 8.9 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“Section 8.9. Notices . Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement:

(a)

If to Lender, at:

GE HFS Holdings, Inc.

c/o GE Healthcare Financial Services

2 Bethesda Metro Center, Suite 600

Bethesda, Maryland 20814

Attention: General Counsel

Telephone: (301) 961-1640

Telecopier: (301) 664-9866

(b)

If to Borrower, at:

c/o SunLink Health Systems, Inc.

900 Circle 75 Parkway

Suite 1300

Atlanta, Georgia 30339

Telephone: (770) 933-7000

Telecopier: (770) 933-70_0

Attention: Robert M. Thornton, Jr., Chairman and CEO ”

2. Grant by New Borrower of Security Interest . Consistent with the intent of the parties, New Borrower hereby grants to Lender a continuing first priority lien on and security interest in, upon, and to the Collateral, pursuant to and in accordance with the terms of Article III of the Loan Agreement.

3. Enforceability . This Amendment constitutes the legal, valid and binding obligation of New Borrower, and is enforceable against New Borrower in accordance with its terms.

4. Confirmation of Representations and Warranties . New Borrower hereby (a) confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to New Borrower, (b) covenants to perform its obligations under the Loan Agreement, and (c) specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity. Each Original Borrower hereby (x) confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to such Borrower as of the date hereof, (y) covenants to perform its obligations under the Loan Agreement, and (z) specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity.

6. Conditions to Effectiveness of this Amendment . This Amendment shall be effective upon execution and delivery to Lender of the following documents and satisfaction of the following conditions (as applicable), all of which must be in a form reasonably acceptable to Lender, and all of which shall constitute conditions precedent to the effectiveness of this Amendment:

(a) at least one (1) original of each of this Amendment, the Amendment No. 4 to Secured Term Note, the Unconditional Guaranty of Payment and Performance by SunLink Health Systems, Inc., the Amended and Restated Subordination Agreement among Borrower,

Lender and SunLink Health Systems, Inc., and the Subordination Agreement among Borrower, Lender, SunLink Health Systems, Inc. and Chatham Investment Fund I, LLC;

(d) copies of each of the executed loan documents relating to the $2,300,000 loan facility made by Chatham Investment Fund I, LLC to New Borrower;

(e) evidence reasonably satisfactory to Lender that the loan term for the indebtedness from SunLink Health Systems, Inc to Borrower has been extended to no sooner than September 30, 2005; and

(f) evidence reasonably satisfactory to Lender that the indebtedness owed by Healthmont, Inc. to Healthmont of Texas, Inc. has been satisfied in full.

7. Costs and Fees . Borrower shall be responsible for the payment of all reasonable fees of Lender’s in-house counsel incurred in connection with the preparation of this Amendment and any related documents. Borrower hereby authorizes Lender to deduct all of such fees set forth in this Section 7 from the proceeds of the Revolving Credit Loans made under the Loan Agreement.

8. Release . Borrower hereby fully, finally, and absolutely and forever releases and discharges Lender and its present and former directors, shareholders, officers, employees, agents, representatives, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns, from any and all actions, causes of action, claims, debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity of Borrower, whether now known or unknown to Borrower, and whether contingent or matured (collectively, “ Claims ”): (a) in respect of the Loan Agreement, the Loan Documents, or the actions or omissions of Lender in respect of the Loan Agreement and the Loan Documents; and (b) arising from events occurring prior to the date of this Amendment.

9. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

(c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided in this Amendment, operate as a waiver of any right, power or

remedy of Lender, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments and agreements executed or delivered in connection with the Loan Agreement.

10. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

11. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

12. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGE]

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

WITNESS/ATTEST:


	LENDER:

	GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:	By:	/s/ M ICHAEL G. G ARDULLO	(SEAL)

Name:	Name:	MICHAEL G. GARDULLO
Title:	Title:	AUTHORIZED SIGNATORY

	ORIGINAL BORROWER:

	HEALTHMONT, INC., a Tennessee corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

	HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

	HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

	NEW BORROWER:

	HM ACQUISITION CORP., a Delaware corporation

By:	By:		(SEAL)

Name:	Name:
Title:	Title:

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

WITNESS/ATTEST:


		LENDER:

		GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		ORIGINAL BORROWER:

		HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Assistant Secretary	Title:	Chief Executive Officer and President

		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Secretary	Title:	President

		HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Secretary	Title:	President

		NEW BORROWER:

		HM ACQUISITION CORP., a Delaware corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

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

WITNESS/ATTEST:


		LENDER:

		GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		ORIGINAL BORROWER:

		HEALTHMONT, INC., a Tennessee corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:		By:		(SEAL)

Name:		Name:
Title:		Title:

		NEW BORROWER:

		HM ACQUISITION CORP., a Delaware corporation

By:	/s/ M ARIA M ADISON	By:	/ S / J. T. M ORRIS	(SEAL)

Name:	Maria Madison	Name:	J. T. Morris
Title:	Vice President	Title:	President

Exhibit 10.16

MORTGAGE LOAN AGREEMENT

between

HELLER HEALTHCARE FINANCE, INC.,

a Delaware corporation,

as Lender,

AND

HEALTHMONT OF MISSOURI, INC., a Tennessee corporation

$1,900,000 Loan

Callaway County Community Hospital, 10 SE Hospital Drive, Fulton, MO

December 31, 2000

TABLE OF CONTENTS


ARTICLE I	The Loan	2

ARTICLE II	Security	3

ARTICLE III	Conditions Precedent	3

ARTICLE IV	Representations and Warranties	5

ARTICLE V	Affirmative Covenants	12

ARTICLE VI	Negative Covenants	18

ARTICLE VII	Events of Default; Acceleration of Indebtedness; Remedies	20

ARTICLE VIII	Miscellaneous	22

Loan No.

MORTGAGE LOAN AGREEMENT

THIS MORTGAGE LOAN AGREEMENT (this “ Agreement ”) is made as of December 31, 2000 between HEALTHMONT OF MISSOURI, INC., a Tennessee corporation dba Callaway County Community Hospital (the “Borrower”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“Lender”).

RECITALS

A. Lender has agreed to make (i) a mortgage loan (the “ Loan ”) of One Million Nine Hundred Thousand Dollars ($1,900,000) to Borrower subject to the terms and conditions contained herein, and (ii) a revolving credit loan (the “ Revolving Loan ”) of Eight Million Dollars ($8,000,000), subject to the terms and conditions contained in that certain Revolving Loan Agreement (the “ Revolving Loan Agreement ”) dated as of August 31, 2000 by and between Lender and the HealthMont Affiliates (as defined in Recital E below) and amended as of even date herewith to add Borrower as a party.

B. Borrower is or on the Closing Date will be the owner of Callaway County Community Hospital in Fulton, Missouri (the “Property”) and certain of the improvements located thereon (collectively called the “ Improvements ”). The Property is more particularly described on Exhibit A attached hereto.

C. Borrower will use the proceeds of the Loan for the purpose of acquiring the Property, funding certain capital improvements and working capital, establishing an interest reserve and paying the commitment fee and certain other legal and closing costs.

D. Borrower’s obligations under the Loan will be secured by, among other things, a first priority Mortgage, Assignment of Rents and Security Agreement of even date herewith encumbering the Property (the “Mortgage”). This Agreement, the Note, the Mortgage, the Environmental Indemnity, the Revolving Loan Agreement and any other documents evidencing or securing the Loan or the Revolving Loan or executed in connection therewith including without limitation the instruments and agreements identified in Section 3.1 hereof, and any modifications, renewals and extensions thereof, are referred to herein collectively as the “ Loan Documents .”

E. Borrower’s obligations under the Loan will be further secured by those several Mortgage, Security Agreement and Assignment of Leases (the “ Affiliates’ Mortgages ”) provided by several of Borrower’s Affiliates (HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Texas, Inc., HealthMont of Texas I, LLC, HealthMont of Oregon, I, Inc., HealthMont of Oregon, II, Inc., HealthMont of Oregon III, Inc., HealthMont of Oregon V, LLC and HealthMont of Oregon IV, LLC, a Tennessee limited liability company - collectively the “ HealthMont Affiliates ”) to Lender pursuant to that certain mortgage loan in the amount of $5,000,000 made as of August 31, 2000 from Lender to Borrower (the “ Affiliates’ Loan ”), as evidenced by a

mortgage note (the “ Affiliates’ Note ”), a mortgage loan agreement (the “ Affiliates’ Loan Agreement ”), and each and every other document now or hereafter delivered in connection with such mortgage documents, as any of them may be amended, modified, or supplemented from time to time (collectively, the “ Affiliates’ Mortgage Documents ”).

F. An index of defined terms appears on the attached Schedule I. All initially capitalized terms used but not defined herein or in Schedule I shall have the meanings ascribed to them in the Note.

NOW, THEREFORE, in consideration of the foregoing and the mutual conditions and agreements contained herein, the parties agree as follows:

ARTICLE I

The Loan

1.1 Disbursements .

1.1.1 Initial Funding . The Initial Funding Amount shall be $1,900,000.00. The Closing Date shall be as set forth in the Note.

1.2 Loan Term . Unless otherwise terminated in accordance with this Agreement, the Loan Term shall run from the Closing Date through the Maturity Date.

1.2.1 Maturity Date . The Maturity Date shall be August 31, 2003.

1.4 Payments . Payments of principal and interest shall be made at the time and in the manner set forth in the Note.

1.5 Prepayments of Loan . Borrower may prepay the Note in full or in part at any time without premium provided Borrower gives Lender at least five (5) days prior written notice and pays the Exit Fee.

1.6 Exit Fee . As additional consideration for entering into this Agreement and making the Loan and in lieu of a larger commitment fee, Borrower shall pay to Lender an amount equal to $38,000.00 (the “ Exit Fee ”) on the date payment in full of the Loan is made, whether at maturity, after maturity, upon prepayment, acceleration or otherwise.

ARTICLE II

Security

2.1 Collateral . The Loan and all other indebtedness and obligations under the Mortgage Documents shall be secured by the following: (a) the Mortgage, (b) the Assignment of Leases, (c) the Affiliates’ Mortgages and (d) any other collateral or security described in this Agreement or in any of the other Loan Documents or required by Lender in connection with the Loan.

ARTICLE III

Conditions Precedent

Subject to the terms and conditions of this Agreement, the Closing Date shall be not later than the business day on which the following conditions precedent are satisfied:

3.1.1 The Note;

3.1.2 This Loan Agreement;

3.1.3 The Mortgage;

3.1.4 That certain Environmental Indemnity Agreement dated as of the date hereof by Borrower and Borrower’s stockholder (the “Stockholder”) in favor of Lender, relating to the Property (the “ Environmental Indemnity ”);

3.1.5 That certain Assignment of Permits, Licenses and Agreements dated as of the date hereof by Borrower in favor of Lender;

3.1.6 All financing statements and other documents, certificates, agreements and legal opinions reasonably deemed necessary or appropriate by Lender to effectuate the transactions contemplated under the Loan Documents;

3.1.7 An opinion of Borrower’s counsel rendered under the laws of the state or states where the Collateral is located, in form and substance satisfactory to Lender.

3.2 All representations and warranties made in writing in connection with any of the Loan Documents by or on behalf of Borrower shall be true and correct in all material respects;

3.3 Lender shall have received Uniform Commercial Code, judgment and tax lien searches from the Secretary of State and local filing offices of each jurisdiction where Borrower maintains a place of business or in which the Property is located, which searches yield results consistent with the representations and warranties made by or on behalf of Borrower; and

3.4 Equity Investment; Cash on Hand . On the Closing Date, Borrower shall have received a minimum cash equity infusion of $ and will have cash on hand of $ (exclusive of loan proceeds).

3.5 Appraisal . Lender shall have obtained an appraisal report for the Property, in form and content acceptable to Lender, prepared by an independent MAI appraiser in accordance with the Financial Institutions Reform, Recovery and Enforcement Act (“ FIRREA ”) and the regulations promulgated pursuant to such act.

3.6 Title Policy and Endorsements . Lender shall have received a commitment for title insurance in an amount and issued by a title insurance company satisfactory to Lender. On the Closing Date, Lender shall receive a title insurance policy (“ Title Policy ”), acceptable to Lender, insuring marketability of title and insuring that the lien of the Mortgage is a valid first lien on the Property, subject only to exceptions to title approved by Lender. The Title Policy shall also contain any reinsurance and endorsements required by Lender including without limitation creditors’ rights, zoning 3.1, negative amortization, variable rate and extended coverage endorsements (Comprehensive Form 1).

3.7 Survey . Lender shall have received and approved a survey of the Property, dated no more than forty-five (45) days prior to the Closing Date, prepared by a registered land surveyor in accordance with the 1992 American Land Title Association/American Congress on Surveying and Mapping Standards and certified in favor of Lender and the title insurer. The surveyor shall certify that the Property is not in a flood hazard area as identified by the Secretary of Housing and Urban Development. The survey shall also be sufficient for the title insurer to remove the general survey exception.

3.8 Environmental Report . Lender shall have received a Phase I Environmental audit of the Property. The audit shall (i) be addressed to Lender; (ii) state that Lender may rely thereon; and (iii) be acceptable to Lender in its sole discretion.

3.9 Leases . All leases of the Property (“ Leases ”) shall be in form and substance acceptable to Lender. The attached Exhibit B , which Borrower will update through the Closing Date, describes all existing Leases. On the Closing Date, all existing Leases shall be in full force and effect and Borrower shall submit a revised and recertified rent roll.

3.10 Insurance . Borrower shall have provided Lender with and Lender shall have approved copies of certificates evidencing the insurance policies required to be delivered pursuant to the Mortgage.

3.11 Compliance with Laws . Borrower shall have submitted and Lender shall have approved (a) a final certificate of occupancy (or the equivalent) for the Property, (b) evidence satisfactory to Lender that the Property comply in all material respects with all applicable laws (including without limitation all building, zoning, density, land use, ordinances, regulations and planning requirements), covenants, conditions and restrictions, subdivision requirements (including without limitation parcel maps), and environmental impact and other environmental requirements.

3.12 Commitment Fee . Borrower shall have paid Lender a commitment fee in the amount of $28,500 which commitment fee shall be nonrefundable and shall be deemed fully earned upon receipt.

3.13 Revolving Loan Agreement . All of the Conditions Precedent set forth in Section 5.1 of the Revolving Loan Agreement shall have been satisfied.

3.15 Additional Items . Lender shall have received such other documents and information as Lender may reasonably require.

ARTICLE IV

Representations and Warranties

4.1 Organization . Borrower is a corporation company duly organized, validly existing, and in good standing under the laws of the state of its formation, is in good standing as a foreign corporation in each jurisdiction in which the character of the Property owned or leased by it or the nature of its business makes such qualification necessary, has the necessary power and authority to own its assets and transact the business in which it is engaged, and has obtained all certificates, licenses, permits, governmental authorizations and other qualifications required under all laws, regulations, ordinances, or orders of public authorities necessary for the ownership and operation of all of its Property and transaction of all of its business, except where the failure to qualify will not result in a materially adverse effect.

4.2 Power . Borrower has full corporate power and authority to enter into, execute, and deliver this Agreement and to perform its obligations under this Agreement, to borrow the Loan, to execute and deliver the Note, and to incur and perform the obligations provided for in the Loan Documents, all of which have been duly authorized by all necessary corporate/limited liability company action. No consent or approval of shareholders of, or lenders to, Borrower and no consent, approval, filing or registration with any Governmental Authority is required as a condition to the validity of the Loan Documents or the performance by Borrower of its obligations under the Loan Documents.

4.3 Validity . This Agreement and all other Loan Documents constitute, and the Note, when issued and delivered pursuant to this Agreement for value received, will constitute, the valid and legally binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms.

other agreement or instrument to which Borrower is a party or by which Borrower or its property is bound; or (B) any judgment, order or decree of any court, arbitration tribunal, or Governmental Authority having jurisdiction over Borrower which is applicable to Borrower.

4.6 Financial Statements . The most recent financial statements of Borrower and Stockholder previously delivered to Lender are true, correct and complete and fairly present the financial condition of Borrower and Stockholder and the results of Borrower’s and Stockholder’s operations and changes in financial condition as of the dates and for the periods referred to, and have been prepared in accordance with generally accepted accounting principles, consistently applied (“ GAAP ”). There are no material unrealized or anticipated liabilities, direct or indirect, fixed or contingent, of Stockholder or Borrower as of the dates of such financial statements that are not reflected in the financial statements or the notes thereto. There has been no material adverse change in the business, properties, condition (financial or otherwise) of Borrower or Stockholder since the dates of such statements.

4.8 Title . Borrower has good and marketable title to its properties and assets, including the Property, Improvements and other Collateral, subject to no lien, mortgage, pledge, encumbrance or charge of any kind other than the Permitted Liens. Borrower has not agreed or consented to cause any of its Property or assets, whether owned now or hereafter acquired, to be subject in the future (upon the happening of a contingency or otherwise) to any lien, mortgage, pledge, encumbrance or charge of any kind other than the Permitted Liens. For the purposes hereof, “ Permitted Liens ” shall mean those easements, restrictions, liens, leases and encumbrances identified in Schedule B, Part I of the policy or policies of title insurance

delivered to Lender as of the recordation of the Mortgage, together with the lien of any real property taxes or assessments which are not delinquent.

4.10 Securities Laws . The use of the proceeds of the Loan and Borrower’s issuance of the Note will not, directly or indirectly, violate or result in a violation of the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including without limitation Regulations U, T, or X of the Board of Governors of the Federal Reserve System. Borrower is not engaged in the business of extending credit for the purpose of the purchasing or carrying “margin stock” within the meaning of those regulations. No part of the proceeds of the Loan will be used to purchase or carry any margin stock or to extend credit to others for such purpose. Borrower is current with all reports and documents required to be filed with any state or federal securities commission or similar governmental authority and is in full compliance with all applicable rules and regulations of such commissions.

undertaken against the Improvements, Stockholder or Borrower, or against any officer, director, partner, member, stockholder or affiliate of Borrower by any governmental agency during the last three calendar years, and there have been no violations over the past three years which have threatened the Improvements’, Borrower’s certification for participation in Medicare or Medicaid or other third-party payors’ programs. There are no current, pending or outstanding Medicaid, Medicare or third-party payors’ programs reimbursement audits or appeals pending at the Improvements, and there are no years that are subject to audit.

4.13 Environmental . No use, exposure, release, generation, manufacture, storage, treatment, transportation or disposal of hazardous material has occurred or is occurring on or from any of the Property or other real property on which the Collateral is located or which is owned, leased or otherwise occupied by Borrower, or has occurred off the Property as a result of any action of Borrower, except as described in Schedule 4.13 hereto. All hazardous material used, treated, stored, transported to or from, generated or handled on the Property, or off the Property by Borrower, has been disposed of by or on behalf of Borrower in a lawful manner. Except as disclosed in Schedule 4.13 hereto, there are no underground storage tanks present on or under the Property. No other environmental, public health or safety hazards exist with respect to the Property. Except as provided in Schedule 4.13 hereto, to the knowledge of Borrower neither the Improvements nor any of the other Collateral contain any asbestos in any form.

4.14 Places of Business . The only places of business of Borrower, and the places where it keeps and intends to keep the Collateral and records concerning the Collateral, are at the addresses set forth in Schedule 4.14 hereto, which also lists the owner of record of each such property.

4.16 Shareholders . The identity of the shareholders of all classes of the outstanding capital stock of Borrower, together with the respective percentages held by such shareholders, are as set forth on Schedule 4.16 hereto.

4.18 Labor . Except as set forth on Schedule 4.18 , within five years before the date of this Agreement, neither the business, property or assets, or operations of Borrower or, to the best of Borrower’s knowledge, Borrower’s predecessor Callaway Community Hospital Association, Inc., has been adversely affected in any way by any casualty, strike, lockout, combination of workers, or order of the United States of America or other Governmental Authority, directed against Borrower. Except as set forth on Schedule 4.18 , there are no pending or threatened labor disputes, strikes, lockouts, or similar occurrences or grievances against Borrower or its business.

4.20 No Joint Venture . Except as set forth on Schedule 4.2 1, Borrower is not engaged in any joint venture or partnership with any other Person.

4.22 Permits . The Improvements participate in federal and state Medicare and Medicaid programs and have all licenses, certificates of need, permits and other regulatory approvals (collectively, “ Permits ”) which are necessary to operate the Improvements. To Borrower’s knowledge, there currently exist no restrictions, deficiencies, required plans of corrective actions or other such remedial measures with respect to federal and state Medicare or Medicaid certifications or licensure. Schedule 4.22 lists all Permits. The Permits (i) may not be, and have not been, and will not be transferred to any location other than the Improvements; (ii) are not now and will not be pledged as collateral security for any other loan or indebtedness; and (iii) are held free and will remain free from restrictions or known conflicts which would materially impair the use or operation of the Improvements for the licensed use, and shall not be provisional, probationary or restricted in any way.

limitation any intermediary or carrier, the Provider Reimbursement Review Board or the Administrator of the Health Care Financing Administration, with respect to any state or federal Medicare or Medicaid cost reports or claims filed by Borrower on or before the date hereof, or any disallowance by any commission, board or agency in connection with any audit of such cost reports.

4.26 Compliance With Laws . Except as set forth on Schedule 4.26 , to Borrower’s knowledge, each of the Improvements and each of its licensed employees and contractors (other than contracted agencies) in the exercise of their respective duties on behalf of the Improvements, is in compliance in all material respects with all applicable statutes, laws, ordinances, rules and regulations of any governmental authority with respect to regulatory matters primarily relating to patient healthcare (including without limitation Section 1128B(b) of the Social Security Act, as amended, 42 U.S.C. Section 1320a-7(b) (Criminal Penalties Involving Medicare or State Health Care Programs), commonly referred to as the “Federal Anti-Kickback Statute,” and the Social Security Act, as amended, Section 1877, 42 U.S.C Section 1395nn (Prohibition Against Certain Referrals), commonly referred to as “Stark Statute” (collectively, “ Healthcare Law s”)). Borrower has maintained in all material respects all records required to be maintained by the Food and Drug Administration, Drug Enforcement Agency and State Boards of Pharmacy and the federal and state Medicare and Medicaid programs as required by the Healthcare Laws and, to the knowledge of Borrower, there are no presently existing circumstances which would result or likely would result in material violations of the Healthcare Laws. Except as set forth on Schedule 4.26 , Borrower and its Affiliates and the owners of the facilities and other businesses managed by the Borrower or its Affiliates have such permits, licenses, franchises, certificates and other approvals or authorizations of governmental or regulatory authorities as are necessary under applicable law to own their respective Property and to conduct their respective business (including without limitation such permits as are required under such federal, state and other health care laws, and under such HMO or similar licensure laws and such insurance laws and regulations, as are applicable thereto), and with respect to those facilities and other businesses that participate in Medicare and/or Medicaid, to receive reimbursement under Medicare and Medicaid.

program) for patients having coverage thereunder, provided that neither the services offered at the Improvements nor the number of beds operated would be changed.

4.29 Property Access . The Property are accessible through fully improved and dedicated roads accepted for maintenance and public use by the public authority having jurisdiction.

4.30 Utilities . All utility services necessary and sufficient for the use or operation of the Property are available including water, storm, sanitary sewer, gas, electric and telephone facilities.

4.31 Flood Hazards/Wetlands . The Property is not situated in an area designated as having special flood hazards as defined by the Flood Disaster Protection Act of 1973, as amended, or as a wetlands by any governmental entity having jurisdiction over the Property.

4.32 Eminent Domain . There is no eminent domain or condemnation proceeding pending or, to the best of Borrower’s knowledge threatened, relating to the Property.

4.33 Accuracy . Neither this Agreement nor any document, financial statement, credit information, certificate or statement furnished to Lender by Borrower contains any untrue statement of a material fact or omits to state a material fact which would affect Lender’s decision to make the Loan.

4.35 No Broker . No brokerage commission or finder’s fee is owing to any broker or finder arising out of any actions or activity of Borrower in connection with the Loan. Borrower shall defend, indemnify and hold Lender harmless against from and against any and all claims for brokerage commission or finder’s fees arising out or in connection with the Loan.

4.36 Subsidiaries . Except as set forth on Schedule 4.36 , Borrower has no subsidiaries.

fact known to Borrower that adversely affects or in the future may adversely affect the business, operations, affairs or financial condition of Borrower, or any of its properties or assets.

ARTICLE V

Affirmative Covenants

5.1. Inspection . Subject to the rights of tenants under Leases approved by Lender, Lender and its authorized agents may enter upon and inspect the Property at all reasonable times during normal business hours upon reasonable notice given orally or in writing to Borrower. Subject to the preceding sentence. Lender, at Borrower’s expense, may retain one or more independent consultants to periodically inspect the Property and all documents, drawings, plans, and consultants’ reports relating thereto.

5.2 Books and Records/Audits . Borrower shall keep and maintain at all times at Borrower’s address stated below, or such other place as Lender may approve in writing, complete and accurate books of accounts and records adequate to reflect the results of the operation of the Property and to provide the financial statements required to be provided to Lender pursuant to Section 5.3 below and copies of all written contracts, correspondence, reports of Lender’s independent consultant, if any, and other documents affecting the Property. Lender and its designated agents shall have the right to inspect and copy any of the foregoing during normal business hours. Additionally, Lender may audit and determine, in Lender’s sole and absolute discretion, the accuracy of Borrower’s records and computations. The costs and expenses of any audit shall be paid by Borrower in accordance with the terms of the Revolving Loan Agreement.

5.4 Affiliate Transactions . Prior to entering into any agreement with an Affiliate pertaining to the Property, Borrower shall deliver to Lender a copy of such agreement, which shall be satisfactory to Lender in its sole discretion. If requested by Lender, such agreement shall provide Lender the right to terminate it upon Lender’s (or its designee’s) acquisition of the Property through foreclosure, a deed-in-lieu of foreclosure, UCC sale or otherwise. “ Affiliate ” means with respect to any individual, trust, estate, partnership, limited liability company, corporation or any other incorporated or unincorporated organization (each a “ Person ”), a Person that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with Borrower; any officer, director, partner or shareholder of Borrower;

any relative of any of the foregoing. The term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

5.6 Reports . Borrower shall maintain at all times a system of accounting established and administered in accordance with sound business practices, and deliver, or cause to be delivered, to Lender:

5.6.1 copies of all state and federal tax returns filed by Borrower, within twenty (20) days after the filing thereof.

5.6.2 within twenty (20) days of actual filing or receipt by Borrower, copies of (i) all Medicare and Medicaid cost reports and any amendments thereto, (ii) all responses, audit reports, or inquiries received with respect to such cost reports, and (iii) any and all exceptions filed by the Borrower with respect to such cost reports;

5.6.5 promptly after filing, a copy of each annual report filed in respect of any Plan subject to ERISA;

5.6.7 If requested by Lender, evidence by Borrower of any applicable bed taxes or similar taxes, which if assessed against Borrower, Borrower agrees to pay;

5.7 Existence, Good Standing, and Compliance with Laws . Borrower will do or cause to be done all things necessary (i) to obtain and keep in full force and effect all corporate/limited liability company existence, rights, licenses, privileges, and franchises of Borrower necessary to the ownership of its property or the conduct of its business, and comply with all applicable current and future laws, ordinances, rules, regulations, orders and decrees of any Governmental Authority having or claiming jurisdiction over Borrower; and (ii) to maintain and protect the Property used or useful in the conduct of the operations of Borrower, including the Property, in a prudent manner, including without limitation the maintenance at all times of such insurance upon its insurable property and operations as required by law or by subsection (e) below.

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

5.10 Maintenance of Collateral . Borrower will maintain, keep and preserve the Collateral in good repair, working order and condition and from time to time make all needful and proper repairs, renewals, replacements, betterments and improvements to the Collateral.

operational results of Borrower; (iv) any default claimed by any other creditor for Borrowed Money of Borrower other than Lender; and (v) any other development in the business or affairs of Borrower which may be materially adverse; in each case describing the nature thereof and (in the case of notification under clauses (i) and (ii)) the action Borrower proposes to take with respect thereto.

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

Medicaid/Medicare cost reports will be properly filed. Borrower will not (i) rescind, withdraw, revoke, amend, modify, supplement, or otherwise alter the nature, tenor or scope of the Permits for the Improvements; (ii) amend or otherwise change either of the Improvements’ authorized units/beds capacity and/or the number of units/beds approved by the applicable state department of health; (iii) replace or transfer all or any part of either of the Improvements’ units/beds to another site or location; or (iv) voluntarily transfer or encourage the transfer of any resident of any Improvements to any other facility not subject to the Mortgages, unless such transfer is at the request of the resident or is for reasons relating to the health, required level of medical care or safety of the resident to be transferred.

5.17 Further Assurances . Borrower will defend its title to the Collateral against all persons and will, upon request of the Lender, (i) furnish such further assurances of title as may be required by the Lender, (ii) deliver and execute or cause to be delivered and executed, in form and content satisfactory to the Lender, any financing statements, notices, certificates of title, and other documents and pay the cost of filing or recording the same in all public offices deemed necessary by the Lender, as well as any recordation, documentary, or transfer tax required by law to be paid in connection with such filing or recording, and (iii) do such other acts as the Lender may reasonably request in order to perfect, preserve, maintain, or continue the perfection of the Lender’s security interest in the Collateral and/or its priority.

applicable governmental authorities, or to take such other steps as Lender may deem advisable to obtain, maintain or renew any license or governmental authorization in connection with the operation of the Improvements, and Borrower agrees to cooperate with Lender in connection with the same (ii) Borrower, upon demand by Lender, shall take any action necessary or desirable, in Lender’s sole judgment, to permit Lender or its designee (including a receiver) to use, operate and maintain the Improvements for the licensed use. If Borrower fails to comply with the provisions of this subsection for any reason whatsoever, Borrower hereby irrevocably appoints Lender and its designee as Borrower’s attorney-in-fact, with full power of substitution, to take any action and execute any documents and instruments necessary or desirable in Lender’s sole judgment to permit Lender or its designee to undertake Borrower’s obligations under this subsection including without limitation obtaining any licenses or governmental authorizations then required for the operation of the Improvements by Lender or its designee for the licensed use. The foregoing power of attorney is coupled with an interest and is irrevocable and Lender may exercise its rights thereunder in addition to any other remedies which Lender may have against Borrower, or Stockholder as a result of Borrower’s breach of the obligations contained in this subsection.

5.20 Debt Service Coverage Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower and the HealthMont Affiliates, collectively, shall have maintained a Debt Service Coverage Ratio of at least 1.12:1.0 for the quarter ending December 31, 2000 and 1.25:1.0 thereafter. For purposes of this covenant, “ Debt Service Coverage Ratio ” shall mean the ratio of (i) Cash Flow (defined below) from the Facilities (determined as set forth below) to (ii) Debt Service (defined below). The Debt Service Coverage Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full. For purposes of this covenant, “ Cash Flow ” shall mean, for any given accounting period, net income (as determined in accordance with generally accepted accounting principles applied on a basis consistent with prior periods) plus amortization, depreciation, interest, accrued taxes, and management fees. For purposes of this covenant, “ Debt Service ” shall mean, for any given period, all regularly scheduled interest payments due under all loans to Lender, plus all interest on capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender.

5.21 EBITDA . Commencing with a measurement on December 31, 2000, and continuing with measurements on the last day of each quarter thereafter throughout the term of the Loan, Borrower and the HealthMont Affiliates, collectively, shall have maintained minimum annualized EBITDAs (based upon the preceding six months of operations) as follows:


Quarter Ending	EBITDA
12/31/00 (preceding 3 months)	$	1,748,000
3/31/01	$	2,644,000
6/30/01	$	2,986,000
9/30/01	$	2,168,000
12/31/01	$	2,780,000
3/31/02	$	4,446,000
6/30/02	$	4,064,000
9/30/02	$	2,730,000
12/31/02	$	3,856,000
3/31/03	$	6,498,000
6/30/03	$	7,150,000

5.22 Working Capital Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower and the HealthMont Affiliates, collectively, shall have maintained a Working Capital Ratio of at least 2.15:1. For purposes of this covenant, “ Working Capital Ratio ” shall mean the ratio of Borrower’s and the Healthmont Affiliates’ collective current assets to Borrower’s and the HealthMont Affiliates’ collective current liabilities (excluding amounts due and owing under the Loan, the Affiliates’ Loan and the Revolving Loan). The Working Capital Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full.

5.23 Property Condition Report . On or before January 31, 2001, Borrower shall have obtained and delivered to Lender a Property Condition or Engineering Report for the Property, in a form satisfactory to Lender.

ARTICLE VI

Negative Covenants

6.2 No Commingling Funds . Borrower shall not commingle the funds related to the Property with funds from any other property.

6.3 Lienable Work . No excavation, construction, earth work, site work or any other mechanic’s lienable work shall be done to or for the benefit of the Property, without Lender’s approval except for normal repair and maintenance in the ordinary course of business.

6.4 Conversion . Borrower shall not permit the Property or any portion thereof to be converted or take any preliminary actions which could lead to a conversion to condominium or cooperative form of ownership.

6.5 Use of Property . Unless required by applicable law, Borrower shall not permit changes in the use of any part of the Property from the use existing at the time the Mortgage were executed. Borrower shall not initiate or acquiesce in a change in the plat of subdivision, or zoning classification of the Property without Lender’s prior written consent.

consent of Lender, and (v) accounts payable to trade creditors and current operating expenses (other than for borrowed money) which are not aged more than one hundred twenty (120) days from the billing date or more than thirty (30) days from the due date, in each case incurred in the ordinary course of business and paid within such time period, unless the same are being contested in good faith and by appropriate and lawful proceedings, and Borrower shall have set aside such reserves, if any, with respect thereto as are required by GAAP and deemed adequate by Borrower and its independent accountants. Borrower will not make prepayments on any existing or future indebtedness for borrowed money in excess of $10,000 to any third person or entity (other than Lender).

6.7 Merger, Acquisition, or Sale of Assets . Without the prior written consent of Lender, such consent to be withheld or granted based on Lender’s determination in its sole discretion whether the requisite following actions would have a detrimental impact on (a) Borrower’s ability to repay the Loan and/or (b) the Lender’s rights in the Collateral, Borrower will not Borrower will not: (i) enter into any transaction of merger or consolidation; (ii) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution); (iii) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, any of its assets (except to the extent no longer used or useful in its business), or the capital stock of any subsidiary of Borrower, whether now owned or hereafter acquired; or (iv) acquire by purchase or otherwise all or any substantial part of the business or assets of, or stock or other evidence of beneficial ownership of, any Person.

6.10 Change in Capital Structure . There shall occur no Change in Control (as defined in the Revolving Loan Agreement).

distributions of cash that would otherwise be available for distribution under its organizational documents.

6.13 Compliance with ERISA . Borrower will not permit with respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or any Reportable Event.

6.16 Year One Capital Expenditures . Borrower’s capital expenditures during the twelve month period following closing shall not exceed $2.3 million without the written consent of Lender.

ARTICLE VII

Events of Default; Acceleration of Indebtedness; Remedies

7.1. Events of Default . The occurrence of any one or more of the following events shall constitute an “ Event of Default ” under this Agreement:

7.1.6 Either (i) an involuntary case is commenced against Borrower and the petition is not contested within ten (10) days or is not dismissed within sixty (60) days after the commencement of the case or (ii) an order, judgment or decree shall be entered by any court of competent jurisdiction on the application of a creditor adjudicating Borrower bankrupt or insolvent, or appointing a receiver, trustee or liquidator of Borrower or of all or substantially all of the assets of Borrower and the order, judgment or decree shall continue unstayed and in effect for a period of sixty (60) days or shall not be discharged within ten (10) days after the expiration of any stay of such order, judgment, or decree; or

7.1.9 Borrower ceases any material portion of its business operations as presently conducted; or

7.1.11 The occurrence of a default and the expiration of any cure period applicable thereto under any Loan Document.

7.1.12 Borrower shall repay the Revolving Loan in full or otherwise terminate the Revolving Loan Agreement.

7.1.13 There shall occur an Event of Default, or an event that is reasonably likely to give rise to an Event of Default, under the Affiliates’ Mortgage Documents.

7.1.14 Borrower shall fail to provide Lender with a Property Condition or Engineering Report on the Property on or before January 31, 2001.

ARTICLE VIII

Miscellaneous

8.1 Expenditures and Expenses . Borrower shall promptly pay, following written notice from Lender, all reasonable Costs (defined below) incurred by Lender in connection with the documentation, modification, workout, collection or enforcement of the Loan or any of the Loan Documents (as applicable) and all such Costs shall be included as additional Indebtedness bearing interest at the Default Rate set forth in the Note until paid. For the purposes hereof “ Costs ” means all expenditures and expenses which may be paid or incurred by or on behalf of Lender including repair costs, payments to remove or protect against liens, attorneys’ fees (including fees of Lender’s inside counsel), receivers’ fees, engineers’ fees, accountants’ fees, independent consultants’ fees (including environmental consultants), all costs and expenses incurred in connection with any of the foregoing, Lender’s out-of-pocket costs and expenses related to any audit or inspection of the Property, outlays for documentary and expert evidence, stenographers’ charges, stamp taxes, publication costs, and costs (which may be estimates as to items to be expended after entry of an order or judgment) for procuring all such abstracts of title, title and UCC searches, and examination, title insurance policies, and similar data and assurances with respect to title as Lender may deem reasonably necessary either to prosecute any action or to evidence to bidders at any foreclosure sale of the Property the true condition of the title to, or the value of, the Property.

8.2 Disclosure of Information . Lender shall have the right (but shall be under no obligation) to make available to any party for the purpose of granting participations in or selling, transferring, assigning or conveying all or any part of the Loan (including any governmental agency or authority and any prospective bidder at any foreclosure sale of the Property) any and all information which Lender may have with respect to the Property and Borrower, whether provided by Borrower, the Stockholder or any third party or obtained as a result of any environmental assessments. Borrower and the Stockholder agree that Lender shall have no liability whatsoever as a result of delivering any such information to any third party, and Borrower and the Stockholder, on behalf of themselves and their successors and assigns, hereby release and discharge Lender from any and all liability, claims, damages, or causes of action,

arising out of, connected with or incidental to the delivery of any such information to any third party.

8.5 GOVERNING LAW; CONSENT TO JURISDICTION . THIS AGREEMENT IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT RESPECT TO ANY OTHERWISE APPLICABLE CONFLICTS-OF-LAWS PRINCIPLES, BOTH AS TO INTERPRETATION AND PERFORMANCE, AND THE PARTIES EXPRESSLY CONSENT AND AGREE TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF MARYLAND AND THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN MARYLAND, WAIVING ALL CLAIMS OR DEFENSES BASED ON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE, INCONVENIENT FORUM OR THE LIKE. BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER, BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER’S ADDRESS SET FORTH IN SECTION 19 ABOVE. BORROWER FURTHER WAIVES ANY CLAIM FOR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY LENDER IN GOOD FAITH. ANY MATTERS AFFECTING THE ENFORCEMENT OR INTERPRETATION OF LENDER’S SECURITY INTEREST IN THE COLLATERAL SHALL (TO THE EXTENT NOT GOVERNED BY MARYLAND LAW PURSUANT TO THE AGREEMENT SET FORTH HEREIN) BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE THE COLLATERAL IS LOCATED.

BY OR THROUGH BORROWER, UPON THE OCCURRENCE OF AN EVENT OF DEFAULT (AS CERTIFIED BY LENDER), TO APPEAR FOR BORROWER IN ANY SUCH COURT IN ANY SUCH ACTION BROUGHT AGAINST BORROWER AT THE SUIT OF LENDER TO CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF LENDER IN THE FULL AMOUNT DUE UNDER THIS AGREEMENT PLUS ATTORNEYS FEES FOR FIFTEEN PERCENT (15%) OF THE AMOUNT DUE, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR OPPORTUNITY OF BORROWER FOR PRIOR HEARING. BORROWER WAIVES THE BENEFIT OF ANY AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED CONFERRING UPON BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS, STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT AND PROPER.

8.8 Indemnity . Borrower shall indemnify, protect, hold harmless and defend Lender, its successors, assigns, shareholders, directors, officers, employees, and agents from and against any and all loss, damage, cost, expense (including attorneys’ fees), and claims arising out of or in connection with (a) the Property, (b) the Collateral, (c) any act or omission of Borrower, any Stockholder, or their respective employees or agents, whether actual or alleged, and (d) any and all brokers’ commissions or other costs of similar type by any party in connection with the Loan, in each case except to the extent arising from the indemnitee’s gross negligence or willful misconduct. Upon written request by an indemnitee, Borrower will undertake, at its own costs and expense, on behalf of such indemnitee, using counsel satisfactory to the indemnitee, the defense of any legal action or proceeding whether or not such indemnitee shall be a party and for which such indemnitee is entitled to be indemnified pursuant to this section. At Lender’s option, Lender may, at Borrower’s expense, prosecute or defend any action involving the priority, validity or enforceability of any of the Loan Documents.

by U.S. Mail, certified or registered mail, return receipt requested on the fourth (4th) day after deposit in the mail postage prepaid.


Notices to Borrower:		c/o Healthmont, Inc. Gateway Building, Suite 310 Brentwood, Tennessee 37027 Attn: President Telephone: 615-309-6900 Telecopy: 615-309-6901

Notices to Lender:		Heller Healthcare Finance, Inc. Loan No. 2 Wisconsin Circle, Suite 400 Chevy Chase, Maryland 20815 Attn: General Counsel Telecopy: (301) 664-9866

and to:		Heller Financial, Inc. Real Estate Financial Services Loan No. 500 West Monroe Street Chicago, Illinois 60661 Attn: Kevin McMeen, Senior Vice President Telecopy: (312) 441-7119

8.10 Successors and Assigns Bound; Agents; and Captions . The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Lender, Borrower and the Stockholder, subject to the provisions of this Agreement. In exercising any rights under the Loan Documents or taking any actions provided for therein, Lender may act through its employees, agents or independent contractors as authorized by Lender. The captions and headings of the paragraphs and sections of this Agreement are for convenience only and are not to be used to interpret or define the provisions hereof.

8.12 Time of Essence . Time is of the essence of this Agreement and the other Loan Documents and the performance of each of the covenants and agreements contained herein and therein.

HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY. BORROWER ACKNOWLEDGES THAT THIS WAIVER OF JURY TRIAL IS A MATERIAL INDUCEMENT TO THE LENDER IN EXTENDING CREDIT TO THE BORROWER, THAT THE LENDER WOULD NOT HAVE EXTENDED SUCH CREDIT WITHOUT THIS JURY TRIAL WAIVER, AND THAT BORROWER HAS BEEN REPRESENTED BY AN ATTORNEY OR HAS HAD AN OPPORTUNITY TO CONSULT WITH AN ATTORNEY IN CONNECTION WITH THIS JURY TRIAL WAIVER AND UNDERSTANDS THE LEGAL EFFECT OF THIS WAIVER.

8.14 Counterparts . This Agreement may be executed in multiple counterparts, each of which shall constitute an original, and together shall constitute the Agreement.

[SIGNATURES ON FOLLOWING PAGE]

The parties hereto have executed this Agreement or has caused the same to be executed by their duly authorized representatives under seal as of the date first above written.


LENDER:

HELLER HEALTHCARE FINANCE, INC. a Delaware corporation

By:

Name:
Title:


BORROWER:

HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	/s/ T IMOTHY S. H ILL	(Seal)

Name:	Timothy S. Hill
Its:	President

EXHIBIT A



NAME:

ADDRESS:



STORIES:

NO. OF BUILDING:

USE:

AGE:

NET AREA:

LAND:

UNITS:

PARKING:

EXHIBIT B

LEASES

[To Be Attached]

EXHIBIT C

LITIGATION

[To Be Attached]

SCHEDULE I

INDEX OF DEFINED TERMS


DEFINED TERM		Section
Affiliate		5.5
Affiliates’ Loan		Recital E
Affiliates’ Loan Agreement		Recital E
Affiliates’ Mortgage Documents		Recital E
Affiliates’ Mortgages		Recital E
Affiliates’ Note		Recital E
Agreement		Introductory
Assignment of Leases		Recital D
Base Rate		1.3.
Borrower		Introductory
Business Day		8.11.
Closing Date		1.1.1.
Collateral		2.1
Control		5.6.
Costs		8.1.
Debt Service Coverage Ratio		5.20
Environmental Indemnity		3.1.4
Event of Default		7.1.
Exit Fee		1.9.
Expenses		Schedule I
Extension Period		Note
FIRREA		3.5.
HealthMont Affiliates		Recital E
Improvements		Recital B
Indebtedness		7.1.1
Initial Funding Amount		1.1.1.
Interest Rate		1.3.
Leases		3.7.
Lender		Introductory
Loan		Recital A
Loan Documents		Recital D
Maturity Date		1.2.1
Mortgage		Recital D
Note		Recital A
Person		5.6.
Stockholder		3.1.4
Property		Recital B
Revenue		Schedule I
Revolving Note		Recital A
Title Policy		3.4.

SCHEDULES FOR BORROWER TO PREPARE AND ATTACH



4.13		Environmental Matters

4.14		Places of Business

4.15		Intellectual Properties

4.16		Shareholders

4.18		Labor Disputes

4.19		Prior Business Names

4.21		Joint Ventures

4.22		Permits

4.24		Participation Agreements

4.25		Claims, Actions or Appeals

4.26		Compliance

4.27		Software

4.36		Subsidiaries

Exhibit 10.17

$1,900,000.00

AMENDMENT NO. 1

MORTGAGE LOAN AGREEMENT

originally dated as of December 31, 2000

by and between

HEALTHMONT OF MISSOURI, INC.

Amended as of June 30, 2001

AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT

THIS AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT (the “Amendment”) is made as of this 30th day of June, 2001, by and between HEALTHMONT OF MISSOURI, INC., a Tennessee corporation, (the “ Borrower ”), and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated December 31, 2001 by and between Borrower and Lender (the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement.

B. The parties now desire to amend the Loan Agreement, in accordance with the terms and conditions set forth below.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

Section 1. Definitions. Unless otherwise defined herein, all capitalized terms herein shall have the meanings assigned to such terms in the Loan Agreement.

Section 2. Amendment to Loan Agreement . The Loan Agreement is hereby amended as follows:

(a) Section 5.22 of the Loan Agreement is hereby amended and restated to read as follows:

“5.22 Working Capital Ratio . At the end of each calendar quarter throughout the term of the Loan, Borrower shall have maintained a Working Capital Ratio as follows:


Period Ending		Working Capital Ratio
12/31/00		2.15:1
3/31/01		1.40:1
6/30/01 through 3/31/02		1.25:1
6/30/02 through Maturity		2.15:1

For purposes of this covenant, “ Working Capital Ratio ” shall mean the ratio of Borrower’s current assets to Borrower’s current liabilities (excluding amounts due and owing under the Loan

and the Revolving Loan). The Working Capital Ratio shall be measured on a quarterly basis beginning with the quarter ending December 31, 2000 and continuing until the Loan is repaid in full.”

(b) Section 8.9 of the Loan Agreement is hereby amended and restated to read as follows:


Notices to Borrower:		c/o Healthmont, Inc. 113 Seaboard Lane Suite C-200 Franklin, Tennessee 37067 Attn: President Telephone: 615-309-6900 Telecopy: 615-309-6901

Notices to Lender:		Heller Healthcare Finance, Inc. Loan No. 1337 2 Wisconsin Circle, Suite 400 Chevy Chase, Maryland 20815 Attn: Chief Counsel Telecopy: (301) 664-9866

and to:		Heller Financial, Inc. Real Estate Financial Services Loan No. 1337 500 West Monroe Street Chicago, Illinois 60661 Attn: Kevin McMeen, Senior Vice President Telecopy: (312) 441-7119”

Section 3. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

Section 4. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland.

Section 5. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

Section 6. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

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


LENDER:

HELLER HEALTHCARE FINANCE, INC. a Delaware corporation

By:		/s/ J EFFREY D. S TEIN

Name:		Jeffrey D. Stein
Title:		AVP


BORROWER:

HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:		/s/ T IMOTHY S. H ILL

Name:		Timothy S. Hill
Its:		CFO

Exhibit 10.18

$1,900,000.00 SECURED TERM LOAN

AMENDMENT NO. 2

MORTGAGE LOAN AGREEMENT

originally dated as of December 31, 2000

by and among

HEALTHMONT OF MISSOURI, INC.

(dba Callaway County Community Hospital), and

HM ACQUISITION CORP.,

and guaranteed

SUNLINK HEALTH SYSTEMS, INC.

and

GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.)

Amended as of September 30, 2003

AMENDMENT NO. 2 TO MORTGAGE LOAN AGREEMENT

THIS AMENDMENT NO. 2 TO MORTGAGE LOAN AGREEMENT (this “ Amendment ”) is made as of September 30, 2003, by and among HEALTHMONT OF MISSOURI, INC., a Tennessee corporation (dba Callaway County Community Hospital) (the “ Original Borrower ”), and HEALTHMONT, INC., a Tennessee corporation, HEALTHMONT OF GEORGIA, INC., a Tennessee corporation (dba Memorial Hospital of Adel and Memorial Convalescent Center), and HM ACQUISITION CORP., a Delaware corporation (collectively, the “ New Borrower ”; the Original Borrower and the New Borrower are sometimes collectively referred to herein as “ Borrower ”), and GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation (“ Lender ”).

RECITALS

A. Pursuant to that certain Mortgage Loan Agreement dated December 31, 2000 by and among Original Borrower and Lender (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”), the parties have established certain financing arrangements that allow Original Borrower to borrow funds from Lender in accordance with the terms and conditions set forth in the Loan Agreement. Capitalized terms used but not defined in this Amendment shall have the meanings that are set forth in the Loan Agreement.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained in this Amendment, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower have agreed to the following amendments to the Loan Agreement:

1. Amendments to Loan Agreement . The Loan Agreement is hereby amended as follows:

1.1. Addition of New Borrower; Merger of Entities . Original Borrower and Lender agree that the New Borrower shall from and hereafter be Borrower for all purposes of the Loan Agreement and other Loan Documents. Accordingly, the New Borrower hereby agrees to be bound by all of the conditions, covenants, representations, warranties, and other agreements set forth in the Loan Agreement, and hereby agrees to promptly execute all further documentation required by Lender to be executed by the New Borrower, consistent with the terms of the Loan Agreement. Without limiting the generality of the foregoing, each of the parties hereby understand, acknowledge and agree that, as of the date hereof, Healthmont, Inc. and HM Acquisition Corp. will effectuate the Merger described in that certain Agreement and Plan of Merger dated as of October 15, 2002, and as such, Healthmont, Inc. will cease to exist as a separate legal entity, and HM Acquisition Corp, a Delaware corporation, will be the surviving corporation, and shall file an amendment to its articles of incorporation changing its name to Healthmont, Inc.

1.2. Section 1.2.1 – Maturity Date . Section 1.2.1 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ 1.2.1. Maturity Date. The Maturity Date shall be August 31, 2005. ”

1.3. Section 5.20 – Debt Service Coverage Ratio. Section 5.20 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:


Quarter Ending		DSC Ratio
6/30/04		1.1 to 1.00
9/30/04		1.1 to 1.00
12/31/04		1.1 to 1.00
3/31/05		1.1 to 1.00
6/30/05		1.2 to 1.00

For purposes of this covenant, “ Debt Service Coverage Ratio ” shall mean the ratio of (i) Cash Flow (defined below) from the Facilities (determined as set forth below) to (ii) Debt Service (defined below). The Debt Service Coverage Ratio shall be measured on a quarterly basis beginning with the quarter ending June 30, 2004 and continuing until the Loan is repaid in full. For purposes of this covenant, “ Cash Flow ” shall mean, for any given accounting period, net income (as determined in accordance with generally accepted accounting principles applied on a basis consistent with prior periods) plus amortization, depreciation, interest, and accrued taxes. For purposes of this covenant, “ Debt Service ” shall mean, for any given period, all regularly scheduled interest payments due under all loans to Lender, plus all interest on capital leases, and any other debt permitted pursuant to the terms of the Loan Documents or otherwise permitted in writing by Lender. ”

1.4. Section 5.21 – Cash Flow Requirements. Section 5.21 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:


Quarter Ending	Cash Flow
9/30/04	$	1,	000,000
12/31/04	$	1,	100,000
3/31/05	$	1,2	00,000
6/30/05	$	1,2	00,000”

1.5. Section 5.22 – Working Capital Requirements. Section 5.22 of the Loan Agreement is hereby deleted in its entirety.

1.6. Section 6.12 – Dividends and Distributions . Section 6.12 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“ Section 6.12. Dividends, Distributions and Management Fees. Borrower will not declare or pay any dividends or other distributions with respect to, purchase, redeem or otherwise acquire for value any of its outstanding stock now or hereafter outstanding, or return any capital of its stockholders, nor shall Borrower pay management fees or fees of a similar nature to any Person. Notwithstanding the foregoing, so long as no Event of Default has occurred under any of the Loan Documents or the Adel Mortgage Loan Documents or the Revolving Loan Documents, Borrower shall be entitled to make (a) distributions to its parent, SunLink Health Systems, Inc. (“ SHS ”), (b) payments of principal on the intercompany indebtedness owed by Borrower to SHS, and (c) amounts in respect of payments made by Borrower to SHS for Borrower’s allocable share of costs for goods or services that SHS obtains from third persons in the ordinary course of business for the benefit of Borrower and that Borrower would otherwise have to obtain itself from a third person in the ordinary course of business, but in each case in (a), (b) or (c), such Distribution may only be made to the extent that such distribution or other payments will not cause or result in an Event of Default (including, without limitation, a violation of any financial covenants in the Loan Documents or the Adel Mortgage Loan Documents or the Revolving Loan Documents). In furtherance of the foregoing, the parties acknowledge and agree that, prior to any distribution made by Borrower to SHS, Borrower must first provide evidence reasonably satisfactory to Lender that Borrower is currently in compliance with each of its financial covenants set forth in this Agreement and the other Loan Documents, and that any such payment intended to be made to SHS will not result in a violation of any such financial covenants. ”

1.7. Section 7.1 – Events of Default . Section 7.1.7 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

would cause any such obligation to become, or allow any such obligation to be declared to be, due and payable (including, without limitation, all of the subordinated Indebtedness owed by one or more entities comprising Borrower to Chatham Investment Fund I, LLC); ”

1.8. Section 7.1 – Events of Default . Section 7.1.14 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

1.9. Notices. Section 8.9 of the Loan Agreement is hereby deleted in its entirety and amended and restated as follows:

“Section 8.9. Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement:

(a)

If to Lender, at:

GE HFS Holdings, Inc.

c/o GE Healthcare Financial Services

2 Bethesda Metro Center, Suite 600

Bethesda, Maryland 20814


Attention:		General Counsel
Telephone:		(301) 961-1640
Telecopier:		(301) 664-9866

(b)

If to Borrower, at:

c/o SunLink Health Systems, Inc.

900

Circle 75 Parkway

Suite 1300

Atlanta, Georgia 30339


Telephone:		(770) 933-7000
Telecopier:		(770) 933-7010
Attention:		Robert M. Thornton, Jr., Chairman and CEO ”

2. Grant by New Borrower of Security Interest. Consistent with the intent of the parties, New Borrower hereby grants to Lender a continuing first priority lien on and security interest in, upon, and to the Collateral, pursuant to and in accordance with the terms of Article III of the Loan Agreement.

3. Enforceability. This Amendment constitutes the legal, valid and binding obligation of New Borrower, and is enforceable against New Borrower in accordance with its terms.

4. Confirmation of Representations and Warranties. New Borrower hereby (a) confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to New Borrower, (b) covenants to perform its obligations under the Loan Agreement, and (c) specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity. Each Original Borrower hereby (x) confirms that all of the representations and warranties set forth in Article IV of the Loan Agreement are true and correct with respect to such Borrower as of the date hereof, (y) covenants to perform its obligations under the Loan Agreement, and (z) specifically represents and warrants to Lender that it has good and marketable title to all of its respective Collateral, free and clear of any lien or security interest in favor of any other person or entity.

(a) at least one (1) original of each of this Amendment, the Amendment No. 1 to Secured Term Note, the Unconditional Guaranty of Payment and Performance by SunLink Health Systems, Inc., the Amended and Restated Subordination Agreement among Borrower, Lender and SunLink Health Systems, Inc., and the Subordination Agreement among Borrower, Lender, SunLink Health Systems, Inc. and Chatham Investment Fund I, LLC;

(d) copies of each of the executed loan documents relating to the $2,300,000 loan facility made by Chatham Investment Fund I, LLC to New Borrower;

(e) evidence reasonably satisfactory to Lender that the loan term for the indebtedness from SunLink Health Systems, Inc to Borrower has been extended to no sooner than September 30, 2005; and

(f) evidence reasonably satisfactory to Lender that the indebtedness owed by Healthmont, Inc. to Healthmont of Texas, Inc. has been satisfied in full.

7. Costs and Fees . Borrower shall be responsible for the payment of all reasonable fees of Lender’s in-house counsel incurred in connection with the preparation of this Amendment and any related documents. Borrower hereby authorizes Lender to deduct all of such fees set forth in this Section 7 from the proceeds of the Revolving Credit Loans made under the Loan Agreement.

8. Release . Borrower hereby fully, finally, and absolutely and forever releases and discharges Lender and its present and former directors, shareholders, officers, employees, agents, representatives, successors and assigns, and their separate and respective heirs, personal representatives, successors and assigns, from any and all actions, causes of action, claims debts, damages, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity of Borrower, whether now known or unknown to Borrower, and whether contingent or matured (collectively, “ Claims ”): (a) in respect of the Loan Agreement, the Loan Documents, or the actions or omissions of Lender in respect of the Loan Agreement and the Loan Documents; and (b) arising from events occurring prior to the date of this Amendment.

9. Reference to the Effect on the Loan Agreement .

(b) Except as specifically amended above, the Loan Agreement, and all other Loan Documents, shall remain in full force and effect, and are hereby ratified and confirmed.

10. Governing Law . This Amendment shall be governed by and construed in accordance with the laws of the State of Maryland .

11. Headings . Section headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

12. Counterparts . This Amendment may be executed in counterparts, and both counterparts taken together shall be deemed to constitute one and the same instrument.

[SIGNATURES APPEAR ON FOLLOWING PAGE]

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

WITNESS/ATTEST:


	LENDER:

	GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:	By:	/s/ M ICHAEL G. G ARDULLO	(SEAL)

Name:	Name:	MICHAEL G. GARDULLO
Title:	Title:	AUTHORIZED SIGNATORY


	ORIGINAL BORROWER:

	HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:


	NEW BORROWER:

	HEALTHMONT, INC., a Tennessee corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:



	HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:



	HM ACQUISITION CORP., a Delaware corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:

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

WITNESS/ATTEST:


	LENDER:

	GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:


		ORIGINAL BORROWER:

		HEALTHMONT OF MISSOURI, INC. a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Secretary	Title:	President


		NEW BORROWER:

		HEALTHMONT, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Assistant Secretary	Title:	Chief Executive Officer and President



		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ T HOMAS H. B UTLER , J R .	By:	/s/ T IMOTHY S. H ILL	(SEAL)

Name:	Thomas H. Butler, Jr.	Name:	Timothy S. Hill
Title:	Secretary	Title:	President



	HM ACQUISITION CORP., a Delaware corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:

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

WITNESS/ATTEST:


	LENDER:

	GE HFS HOLDINGS, INC. (f/k/a Heller Healthcare Finance, Inc.), a Delaware corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:


	ORIGINAL BORROWER:

	HEALTHMONT, INC., a Tennessee corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:


	HEALTHMONT OF MISSOURI, INC., a Tennessee corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:


	HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	By:	(SEAL)

Name:	Name:
Title:	Title:


		NEW BORROWER:

		HEALTHMONT OF MISSOURI, INC., a Tennessee corporation

By:	/s/ M ARK S TOCKSLAGER	By:	/s/ R OBERT M. T HORNTON , J R .	(SEAL)

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


		HEALTHMONT OF GEORGIA, INC., a Tennessee corporation

By:	/s/ M ARK S TOCKSLAGER	By:	/s/ R OBERT M. T HORNTON , J R .	(SEAL)

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


		HEALTHMONT, INC. (F/K/A HM ACQUISITION CORP.), a Delaware corporation

By:	/s/ M ARK S TOCKSLAGER	By:	/s/ R OBERT M. T HORNTON , J R .	(SEAL)

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

Exhibit 31.1

CERTIFICATION

I, Robert M. Thornton, Jr., the Chief Executive Officer of SunLink Health Systems, Inc. (the “Registrant”), certify that:

(1) I have reviewed this quarterly report on Form 10-Q of the Registrant;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

(4) The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the

Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

(5) The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.


February 17, 2004				/s/ Robert M. Thornton, Jr.

				Robert M. Thornton, Jr.
				SunLink Health Systems, Inc.
				Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Joseph T. Morris, the Chief Financial Officer of SunLink Health Systems, Inc. (the “Registrant”), certify that:

(1) I have reviewed this quarterly report on Form 10-Q of the Registrant;

(c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.



February 17, 2004								/s/ Joseph T. Morris

								Joseph T. Morris SunLink Health Systems, Inc. Chief Financial Officer

Exhibit 32.1

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of SunLink Health Systems, Inc. (the “Company”) on Form 10-Q for the quarterly period ending December 31, 2003, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Robert M. Thornton, Jr., Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



By:		/s/ Robert M. Thornton, Jr.

		Robert M. Thornton, Jr. Chief Executive Officer

February 17, 2004

Exhibit 32.2

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of SunLink Health Systems, Inc. (the “Company”) on Form 10-Q for the quarterly period ending December 31, 2003, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph T. Morris, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



By:		/s/ Joseph T. Morris

		Joseph T. Morris Chief Financial Officer

February 17, 2004