SUNLINK HEALTH SYSTEMS, INC.

[X]

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

[ ]

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

SUNLINK HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Ohio	31-0621189

(State or other jurisdiction of incorporation	(I.R.S. Employer
or organization)	Identification No.)

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

(Address of principal executive offices)
(Zip 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.

The number of Common Shares, without par value, outstanding as of November 8, 2002 was 4,997,592.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

	September 30, 2002			June 30, 2002

ASSETS
Current Assets:
Cash and cash equivalents	$	724		$	5,719
Receivables - net		12,075			10,857
Medical supplies		1,761			1,774
Prepaid expenses and other		1,537			1,212

Total Current Assets		16,097			19,562
Property, Plant and Equipment, At Cost		33,626			30,457
Less accumulated depreciation and amortization		2,217			1,861

Property, Plant and Equipment - Net		31,409			28,596
Other Assets		504			413

Total Assets	$	48,010		$	48,571

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	3,205		$	3,988
Third-party payor settlements		5,129			5,088
Current maturities of long-term debt		963			940
Accrued expenses		5,809			6,331
Net current liabilities of discontinued operations		164			164

Total Current Liabilities		15,270			16,511
Long-Term Liabilities:
Long-term debt		23,604			23,281
Noncurrent liability for professional liability risks		1,118			1,151
Noncurrent liabilities of discontinued operations		1,650			1,673

Total Long-term Liabilities		26,372			26,105
Shareholders’ Equity:
Common shares, without par value:
Issued and outstanding, 4,998 at September 30, 2002 and June 30, 2002		2,499			2,499
Additional paid-in capital		3,628			3,628
Retained earnings		602			167
Accumulated other comprehensive loss		(361	)		(339	)

Total Shareholders’ Equity		6,368			5,955

Total Liabilities and Shareholders’ Equity	$	48,010		$	48,571

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 September 30,

		2002			2001

Net Revenues	$	23,801		$	21,549
Operating Expenses:
Salaries, wages and benefits		10,873			10,793
Provision for bad debts		2,790			2,822
Supplies		2,721			2,431
Purchased services		1,896			1,782
Other operating expenses		3,333			2,826
Rent and lease expense		557			523
Depreciation and amortization		356			288
Gain on sale of property and equipment		—			(19	)

Operating Profit		1,275			103
Other Income (Expense):
Interest expense		(749	)		(709	)
Interest income		16			14

Earnings (Loss) From Continuing Operations Before Income Taxes		542			(592	)
Income Tax Expense		92			—

Earnings (Loss) From Continuing Operations		450			(592	)
Discontinued Operations:
Loss from operations of Life Sciences and Engineering Segment		(15	)		(8	)
Gain on disposal of Housewares Segment		—			254

Earnings (Loss) from Discontinued Operations		(15	)		246

Net Earnings (Loss)	$	435		$	(346	)

Earnings (Loss) Per Share:
Continuing Operations:
Basic	$	0.09		$	(0.12	)

Diluted	$	0.08		$	(0.12	)

Net Earnings:
Basic	$	0.09		$	(0.07	)

Diluted	$	0.08		$	(0.07	)

Weighted-Average Common Shares Outstanding:
Basic		4,998			4,976

Diluted		5,339			4,976

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	THREE MONTHS ENDED September 30,

	2002			2001

Net Cash Used in Operating Activities	$	(1,685	)	$	(449	)
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment		—			315
Expenditures for property, plant and equipment		(3,081	)		(1,000	)

Net Cash Used in Investing Activities		(3,081	)		(685	)
Cash Flows From Financing Activities:
Payment of long-term debt		(229	)		(1,000	)

Net Cash Used in Financing Activities		(229	)		(1,000	)
Effect of Exchange Rate Changes on Cash		—			4

Net Decrease in Cash and Cash Equivalents		(4,995	)		(2,130	)
Cash and Cash Equivalents at Beginning of Period		5,719			3,540

Cash and Cash Equivalents at End of Period	$	724		$	1,410

Supplemental Disclosure of Cash Flow Information:
Cash Paid For:
Interest, net of amounts capitalized	$	51		$	154

Income taxes	$	45

See notes to condensed consolidated financial statements.

SUNLINK HEALTH SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2002
(dollars in thousands)
(unaudited)

The accompanying unaudited Condensed Consolidated Financial Statements as of and for the three months ended September 30, 2002 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, 2002, filed on September 16, 2002. 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 months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

SunLink operates six community hospitals and related businesses which were acquired on February 1, 2001. In the fiscal year ended March 31, 2001, SunLink redirected its business strategy toward the operation of community hospitals in the United States and away from European operations. On October 5, 2001, SunLink sold all of the capital stock of what was then its wholly owned United Kingdom housewares subsidiary, Beldray Limited (“Beldray”), ceasing its remaining non-U.S. business operations. See Note 4 - “Discontinued Operations.” In August 2001, the Company changed its name to SunLink Health Systems, Inc. from KRUG International Corp. and changed its fiscal year-end from March 31 to June 30.

On October 15, 2002, SunLink announced that it and a wholly owned subsidiary of SunLink had signed a definitive merger agreement to acquire all of the outstanding capital stock of HealthMont, Inc. (“HealthMont”), a privately held operator of community hospitals. Upon consummation of the transaction, SunLink is to acquire 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. HealthMont currently operates another community hospital in San Benito, Texas, which is to be sold prior to the completion of the acquisition. Upon completion of the acquisition, the Company would operate eight community hospitals with a total of 442 beds.

Under the terms of the merger agreement, SunLink would issue to the shareholders of HealthMont up to 1,155,000 common shares of SunLink in consideration for all issued and outstanding capital stock of HealthMont. HealthMont currently has approximately 120 shareholders and approximately 6,248,000 HealthMont shares are expected to be outstanding immediately prior to closing. Accordingly, each HealthMont shareholder is expected to receive one common share of SunLink for each 5.4142 HealthMont shares (approximately 0.1847 of a common share of SunLink for each share of HealthMont).

In addition, SunLink would issue 95,000 common shares in connection with the transaction to settle certain contractual obligations of HealthMont to its officers and directors. SunLink would also become obligated to issue approximately 20,000 common shares upon exercise of outstanding HealthMont options, approximately 27,000 SunLink common shares upon exercise of outstanding HealthMont warrants and 75,000 SunLink common shares upon exercise of warrants to be issued by SunLink in connection with the financing of the transaction.

In connection with the transaction, SunLink also intends to assume up to a total of $9,800 in HealthMont senior debt and capital lease obligations, and enter into a $3,000, 3-year term loan intended primarily to provide additional working capital.

Based on the closing price of SunLink’s common shares of $2.36 on October 14, 2002, plus the amount of senior debt and capital lease obligations to be assumed, and including estimated transaction costs, the price to SunLink of the transaction would have been approximately $15,300. SunLink’s share price at the transaction closing date will be used to determine the actual transaction cost.

The HealthMont acquisition is expected to be completed in the first calendar quarter of 2003. Completion of the merger is subject to a number of conditions, including regulatory approvals, approval of the transaction by the shareholders of both SunLink and HealthMont and modification of the terms of HealthMont’s existing senior debt or availability to SunLink of alternative financing.

The unaudited net revenues of the two HealthMont facilities to be acquired through the merger were approximately $28,500, as reported by HealthMont for the twelve months ended June 30, 2002. SunLink does not plan to add any corporate staff or to significantly increase its overhead as a result of the acquisition. SunLink will not acquire HealthMont’s corporate staff and facilities in connection with the acquisition.

In connection with the proposed HealthMont acquisition, SunLink expects to assume approximately $9,800 of HealthMont senior debt, consisting of a senior credit facility of approximately $8,900 and capital leases, primarily for equipment, of approximately $900. Subject to a number of conditions, HealthMont obtained the consent of its senior lender to the proposed acquisition of HealthMont by SunLink and the modification of certain terms of HealthMont’s senior debt, including the principal repayment of $600 at the closing of the merger and an extension of the maturity date of the remaining debt through August 31, 2005. Post acquisition, the remaining senior debt is expected to be comprised of term loans of approximately $5,000 with interest at prime plus 2% per annum and revolving credit loans of approximately $3,900 with interest at prime plus 1 ½%. Upon completion of the merger, HealthMont’s senior lender would hold warrants to purchase 27,000 shares of SunLink’s common shares at an exercise price of $0.01 per share.

Certain HealthMont investors have arranged letters of credit which support up to $1,650 of HealthMont’s revolving credit loans. Subject to completion of the acquisition, SunLink has agreed, in the event the letters of credit are drawn and the proceeds reduce the outstanding balance of the revolving credit loans, to issue to those investors 350,000 of SunLink’s common shares in full satisfaction of HealthMont’s reimbursement obligations under the letters of credit.

In connection with the proposed acquisition of HealthMont, SunLink intends to enter into a $3,000, 3-year secured term loan with a private investment fund. The proceeds of the loan will be used primarily for the repayment of $600 of HealthMont’s senior debt at closing, payment of certain transaction costs and for working capital. The loan will bear interest at 15% per annum and will require SunLink to pay certain fees to the investment fund. SunLink will also issue warrants to purchase 75,000 of its common shares to the investment fund at an exercise price of $0.01 per share.

Upon consummation of the acquisition, the board of directors of SunLink intends to elect Gene Burleson, a current HealthMont director, to the unexpired the term of Ronald J. Vannuki, who would step down from the Company’s board. SunLink also has agreed to nominate Mr. Burleson for election by its shareholders to a two-year term on its board of directors at its 2003 Annual Meeting.

Housewares Segment – SunLink sold its U.K. housewares subsidiary, Beldray, on October 5, 2001 for nominal consideration. During the three months ended September 30, 2001, a gain from discontinued operations of $254 related to the disposal of the housewares segment was reported. The gain resulted from realized currency gains on certain transactions and adjustments to the foreign currency translation adjustment component of SunLink’s shareholders’ equity related to the housewares segment. During the three months ended June 30, 2001, SunLink reported a charge to discontinued operations relating to Beldray of $3,989. The charge was composed of losses from operations of $2,433 (including an asset impairment provision of $2,088 to reduce the carrying value of Beldray’s net assets to net realizable value of $0) and a loss on disposal of Beldray of $1,556, including $687 for operating losses through the disposal date. Revenues of Beldray were $6,098 for the three months ended September 30, 2001.

Noncurrent liabilities of discontinued operations at September 30, 2002 include $1,061 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 Beldray’s obligations under a lease covering a portion of Beldray’s manufacturing location. A currently inactive U.K. subsidiary of SunLink has an option to repurchase the capital stock of Beldray for nominal consideration if any U.K. subsidiary of SunLink is called upon to perform under the lease guarantee, or under certain other conditions.

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. Noncurrent liabilities of discontinued operations at September 30, 2002 and June 30, 2002 of $589 and $637, respectively, relate to the industrial segment.

Over the past thirteen years SunLink has discontinued operations carried on by its former industrial, U.K. leisure marine, life sciences and engineering, and U.K. child safety segments, as well as the U.K. housewares segment. Reserves for losses relating to discontinued operations of these segments represent SunLink’s best estimate of the possible liability for property, product liability, and other claims for which it may incur liability. These estimates are based on SunLink’s judgments using currently available information as well as, in certain instances, consultation with its insurance carriers and legal counsel. SunLink historically has purchased insurance policies to reduce certain of its product liability exposure and may continue to

purchase such insurance if available at commercially reasonable rates. While SunLink has based its estimates on its 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.

In August 2001, the FASB issued SFAS No. 144, Impairment or Disposal of Long-Lived Assets. The provisions of this statement provide a single accounting model for the impairment or disposal of long-lived assets. As required by SFAS No. 144, SunLink adopted this new accounting standard on July 1, 2002. During the quarter ended September 30, 2002, there was no impact of adopting SFAS No. 144 reflected in the Company’s financial statements, however SunLink continues to review the impact of the standard on its long-lived assets, in particular the current facility for Mountainside Medical Center in Jasper, Georgia where a replacement hospital is currently being constructed.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires the recording of costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

	September 30,				June 30,
	2002				2002

Senior subordinated note, net of unamortized discount of $2,155 and $2,278		$	17,382			$	16,856
Senior subordinated zero coupon note, net of unamortized discount of $290 and $339			1,710				1,661
Term loan			5,358				5,577
Other			117				127

			24,567				24,221
Less current maturities			(963	)			(940	)

		$	23,604			$	23,281

In connection with the acquisition of SunLink’s six existing 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, both to the seller. The senior subordinated note is due on January 31, 2006 with interest payable semiannually either in cash or additional promissory notes through February 1, 2003 and in cash thereafter. Additional promissory notes of $1,999 for interest from February 1, 2001 through May 31, 2002 have been issued and the accrued interest payable at September 30, 2002 of $538 is included in the senior subordinated note. 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 original discount recorded on the senior subordinated note was $2,809.

The purchase agreement for the six hospitals includes a provision for a potential adjustment to the senior subordinated note to the extent working capital at the purchase date is determined to be greater or less than an agreed-upon amount. SunLink has proposed a working capital adjustment which would reduce the balloon note by $1,000. The seller has not agreed to the adjustment and SunLink and the seller currently are seeking to conclude the working capital adjustment under the dispute resolution provisions of the purchase agreement. No adjustment for any working capital settlement has been made to the balloon note at September 30, 2002.

The senior subordinated zero coupon note is due January 31, 2004. 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 $594.

The discounts on the long-term debt were determined by SunLink in consultation with its 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 September 30, 2002 and 2001, SunLink recognized amortization expense on the discounts of $172 and $126, respectively.

The loan agreement pursuant to which the senior subordinated note and the senior subordinated zero coupon note 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 senior subordinated note and the senior subordinated zero coupon note presently are not collateralized. Each of the individual hospital subsidiaries of SHC is a guarantor of these notes. Further, these notes are subordinate in payment and collateral to all defined senior indebtedness of SHC which in the aggregate does not exceed $15,000, other than debt incurred in connection with certain future acquisitions.

On January 4, 2002, SunLink entered into a $14,000 credit facility comprised of a 36-month secured revolving line of credit for up to $8,000 with interest at prime plus 1.25% and a $6,000 secured term loan repayable over 66 months at an interest rate of 9.78%. The availability of borrowings under the 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, provides borrowing capacities of approximately $8,000 at September 30, 2002. The revolving credit facility is secured by the patient accounts receivable of SHC. No amount was outstanding on the revolving credit facility at September 30, 2002. The net proceeds from the term loan of $5,800 are being used for working capital and to fund a portion of SunLink’s hospital capital projects which include a new replacement hospital in Jasper, Georgia, and a new emergency room at its hospital in Ellijay, Georgia. The term loan is secured by liens on the real and personal property, except for patient accounts receivables, as well as the capital stock owned by SHC and its subsidiaries. Also, each of the hospital subsidiaries is a guarantor of the loan.

On September 30, 2002, SunLink entered into a $6,000 secured bank financing facility in connection with its Mountainside Medical Center replacement hospital currently under construction in Jasper, Georgia. The replacement hospital is scheduled to open in May 2003. This financing facility includes a construction loan of up to $6,000 with interest at prime plus 1% per annum. SunLink has funded the construction costs from the term loan and internal funds.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

SunLink expects to fund additional construction costs from availability under its revolving credit agreement and expects funding under the construction loan to commence during its third fiscal quarter ending March 31, 2003.

The financing facility also includes a 20-year mortgage loan with 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 mortgage loan interest rate is adjustable every 5 years. The construction loan may be converted to a 20-year mortgage loan three months after completion of construction, subject to certain conditions. The financing facility requires SunLink to comply with certain conditions and covenants including hospital financial and operational covenants, information requirements and limitations on secured debt by the hospital subsidiary.

Comprehensive earnings (loss) for SunLink includes foreign currency translation and minimum pension liability adjustments. Total comprehensive earnings (loss) for the following periods was as follows:

	Three Months Ended

	September 30, 2002			September 30, 2001


Net earnings (loss):	$	435		$	(346	)
Other comprehensive income net of tax:
Change in equity due to:
Foreign currency Translation adjustments		(22	)		(119	)

Comprehensive earnings (loss)	$	413		$	(465	)

As discussed in Note 4 – “Discontinued Operations”, a U.K. subsidiary of SunLink remains contingently liable as guarantor of Beldray’s obligations under a lease covering a portion of Beldray’s manufacturing location.

Reserves relating to discontinued operations represent management’s best estimates of possible liability for the contingent liabilities of discontinued operations. While SunLink has based its estimates on its 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.

As of September 30, 2002, SunLink had future commitments for capital expenditures relating to the new Jasper, Georgia hospital of approximately $10,300 and for the new emergency room at the North Georgia Medical Center in Ellijay, Georgia, of approximately $1,400. Subject to internal approval of specific capital items and the availability of funds, SunLink expects to spend approximately $1,750 in additional capital expenditures during the remaining nine months of the fiscal year ended June 30, 2003, 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in thousands, except per share and admissions data)

On October 15, 2002, SunLink announced that it and a wholly owned subsidiary of SunLink signed a definitive merger agreement to acquire all of the outstanding shares of HealthMont, Inc. (“HealthMont’), a privately held operator of community hospitals. Upon consummation of the transaction, SunLink would acquire 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. HealthMont currently operates another community hospital in San Benito, Texas, which is to be sold prior to the acquisition. Upon completion of the acquisition, SunLink would operate eight community hospitals with a total of 442 beds.

Based on the closing price of SunLink’s common shares of $2.36 on October 14, 2002, plus the amount of senior debt and capital lease obligations to be assumed and including estimated transaction costs, the price of the transaction would be approximately $15,300. SunLink’s share price at the transaction closing date will be used to determine the actual transaction cost.

Under the terms of the merger agreement, we are to issue to the shareholders of HealthMont up to 1,155,000 of SunLink common shares in consideration for all issued and outstanding stock of HealthMont. HealthMont currently has approximately 120 shareholders and expects to have approximately 6,248,000 shares outstanding immediately prior to closing. Accordingly, each HealthMont shareholder is expected to receive one SunLink common share for each 5.4142 HealthMont shares (approximately 0.1847 of a SunLink common share for each share of HealthMont).

SunLink is to issue 95,000 additional SunLink common shares in connection with the transaction to settle certain contractual obligations of HealthMont to its officers and directors. We will also reserve for issuance approximately 20,000 common shares in connection with certain outstanding HealthMont options, approximately 27,000 common shares to be issued upon exercise of outstanding HealthMont warrants and 75,000 common shares to be issued upon exercise of warrants which we will issue in connection with the financing of the transaction.

In connection with the transaction, we will also assume up to $9,800 in HealthMont senior debt and capital lease obligations, and enter into a $3,000, 3-year term loan intended primarily to provide additional working capital.

The acquisition of HealthMont is expected to close in the first calendar quarter of 2003. Completion of the merger is subject to a number of conditions, including regulatory approvals, approval of the transaction by shareholders of both SunLink and HealthMont and modification of the terms of HealthMont’s existing senior debt or the availability to SunLink of alternative financing.

The unaudited net revenues of the two HealthMont facilities to be acquired through the merger were approximately $28,500, as reported by HealthMont for the twelve months ended June 30, 2002. HealthMont reported unaudited EBITDA (earnings before interest, taxes, depreciation and amortization) of approximately $3,000 for the twelve months ended June 30, 2002 for the two facilities to be acquired. HealthMont’s corporate staff and facilities will not be acquired in connection with the acquisition and we do not plan to add any corporate staff or to significantly increase our overhead as a result of our proposed acquisition of HealthMont.

	THREE MONTHS ENDED September 30,

	2002			2001

NET REVENUES:
Community hospital segment	$	23,801		$	21,549

EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES:
Community hospital segment	$	1,673		$	598
Corporate expenses		(398	)		(495	)

		1,275			103
Interest expense		(749	)		(709	)
Interest income		16			14

Earnings (Loss) from Continuing Operations Before Income Taxes	$	542		$	(592	)

Equivalent Admissions		4,662			4,067

Revenue per Equivalent Admissions	$	5,105		$	5,299

All of our net revenues relate to our U.S. community hospital segment which was acquired February 1, 2001. The operations of our former U.K. housewares business segment, which was disposed of on October 5, 2001, are reported in discontinued operations for the three months ended September 30, 2001.

Our U.S. community hospital segment reported aggregate net revenues of $23,801, a total of 4,662 equivalent admissions and revenues per equivalent admission of $5,105 for the quarter ended September 30, 2002 compared to net revenues of $21,549, a total of 4,067 equivalent admissions and revenues per equivalent admission of $5,299 for the three months ended September 30, 2001. The 10.4% increase in net revenues in the current year was due to the 14.6% increase in equivalent admissions. Total surgeries increased 9.7% in the current year. We added 13 net new doctors during the year ended June 30, 2002 and six net new doctors during the three months ended September 30, 2002. We also have expended approximately $4,300 for capital expenditures to upgrade services and facilities since the acquisition on February 1, 2001. We believe the upgraded services and facilities and the new doctors contributed to the 10.4% increase in net revenues for the quarter ended September 30, 2002 compared to the same period last year. We continue to seek increased equivalent admissions by attracting additional physicians to our hospitals, further upgrading the services offered by the hospitals and improving the hospitals’ physical facilities. The source of the increase in the current year’s net revenues was primarily Medicare and Medicaid payors while net revenues from commercial and private payors were relatively unchanged. Net outpatient service revenues for the quarter ended September 30, 2002 were $12,001 or 50.4% of total net revenues, an increase of 12.4% from the quarter ended September 30, 2001 which included net outpatient service revenues of $10,673 or 49.5% of total net revenues.

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 September 30,

	2002		2001

Source
Medicare	48.4	%	46.3	%
Medicaid	14.0	%	12.4	%
Self pay	7.9	%	8.4	%
Private and others	29.7	%	32.9	%

	100.0	%	100.0	%

Operating expenses, including depreciation, were $22,526 and $21,465 for the quarters ended September 30, 2002 and 2001, respectively.

	Operating Expenses as % of Net Revenues Three Months Ended September 30,

	2002		2001

Salaries, wages and benefits	45.7	%	50.1	%
Provision for bad debts	11.7	%	13.1	%
Supplies	11.4	%	11.3	%
Purchased services	8.0	%	8.3	%
Other operating expenses	14.0	%	13.0	%
Rent and lease expense	2.3	%	2.4	%

Most operating expense categories decreased as a percentage of net revenues in the current year due to the increased net revenues and efforts to control costs in the hospitals. Salaries, wages and benefits expense decreased as a percentage of net revenues for the current quarter due to cost control initiatives undertaken in each facility to reduce labor costs. The provision for bad debts was 11.7% of net revenues in the quarter, a decrease of 1.4% of net revenues from the prior year due to improved collections and increased Medicare and Medicaid net revenues as a percentage of total net revenues. Improved collections were facilitated by the hospitals implementing additional business office systems and procedures designed to minimize bad debts. Supplies expense increased slightly as a percentage of net revenues in the current year due to the 9.7% increase in total surgeries. The increase in other operating expenses as a percent of net revenue in the current year reflects increased physician guarantee expense in the current year resulting from the 19 net new physicians recruited during the last 15 months and increased insurance expense.

Interest expense was $749 and $709 for the three months ended September 30, 2002 and 2001, respectively. This increase in the current year was due to our increased debt level resulting from the term loan closed on January 4, 2002 and the increasing principal balance of the senior subordinated debt due to the interest paid in kind. Cash interest paid during the three months ended September 30, 2002 was $138, including $87 of interest capitalized in property, plant and equipment.

We recorded income tax expense of $92, $50 federal and $42 for state, for the three months ended September 30, 2002. We had a U.S. net operating loss carryforward of approximately $6,300 at September 30, 2002. Use of this net operating loss carryforward is subject to the limitations of the provisions of Internal Revenue Service 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 and federal income tax expense results. We have provided a valuation allowance for the entire amount of our deferred tax assets (the majority of which is the U.S. net operating loss carryforward) as it is our 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. We recorded no income tax expense in the three months ended September 30, 2001 due to the loss before tax for such prior period.

Our earnings from continuing operations were $450 ($0.08 per share fully diluted) in the quarter ended September 30, 2002 compared to a loss from continuing operations of $592 ($0.12 per fully diluted share) in the comparable quarter last year. Our operating profit of $1,275 for the three months ended September 30, 2002 resulted from operating profit of $1,673 achieved by the community hospital segment offset by corporate expenses of $398. The prior year operating profit of $103 resulted from operating profit of $598 achieved by our community hospital segment offset by corporate expenses of $495. The increased operating profit of our community hospital segment in the current year resulted from the increased net revenues.

We used $1,685 of cash from operating activities during the three months ended September 30, 2002 compared to $449 used during the comparable period last year. The cash used in the current year resulted primarily from our use of cash for working capital of $3,123 and interest paid of $51 offset by cash generated from net income of $435, and the noncash deprecation expense of $356 and non-cash interest expense of $698. Receivables of our community hospital segment increased $1,218 due to the increased net revenues and accounts payable and accrued expenses decreased $783, primarily from the payment of construction costs recorded in accounts payable at the beginning of the year and payment of accrued expenses.

We expended $3,081 for capital improvements at our hospitals during the three months ended September 30, 2002. In addition to routine capital expenditures of $550 during the three months, primarily for new and replacement equipment, we expended $2,183 for costs related to the replacement hospital in Jasper, Georgia and $348 for costs related to a new emergency room at North Georgia Medical Center in Ellijay, Georgia. We believe an attractive physical facility assists in recruiting quality staff and physicians, as well as attracting patients. Subject to availability of financing, we expect to expend approximately $13,500 for capital expenditures during the remaining nine months of the fiscal year ended June 30, 2003, approximately $10,300 of which will be used for the replacement hospital in Jasper, Georgia and approximately $1,400 will be used for the new emergency in Ellijay, Georgia. The total estimated cost of the new Jasper hospital is approximately $15,800 of which approximately $5,500 has been expended as of September 30, 2002. Our capital expenditures are contemplated to be funded by a new $6,000 construction facility, the $8,000 revolving line of credit and cash generated from operations of the community hospital segment.

Our primary sources of liquidity are funds from operations and borrowing under our existing credit facilities. Our credit facilities include an $8,000 secured revolving line of credit which matures December 31, 2004 and a $6,000 secured bank financing facility for the construction of the Jasper replacement hospital The net proceeds from the term loan in the amount of $5,800 have been used for working capital and to fund a portion of the hospital capital projects which include a replacement hospital in Jasper, Georgia, and a new emergency room at the Company’s hospital in Ellijay, Georgia. At September 30, 2002, the term loan balance was $5,358.

The availability of borrowing under the revolving line of credit is based upon, among other things, a borrowing base keyed to the level of the hospital’s receivables. Based upon SunLink’s estimates, the secured revolving line of credit provides borrowing capacity of approximately $8,000 at September 30, 2002. If the amount or quality of receivables is lower than expected, our borrowing capacity under the secured revolving line of credit will also be lower. If SunLink experiences a material adverse change in its businesses, assets, financial condition, management, or operations, or the value of the collateral securing the credit facility, we may be unable to draw on the revolving line of credit.

On September 30, 2002, we closed a $6,000 secured bank financing facility in connection with the construction of our Mountainside Medical Center replacement hospital currently under construction in Jasper, Georgia. The replacement hospital is scheduled to open in May 2003. This financing facility includes a construction loan of up to $6,000 with interest at prime plus 1% per annum. We expect funding under the construction loan to commence during the quarter ending March 31, 2003. We have funded construction costs to date from the term loan and internal funds and we expect to fund additional construction costs from availability under our revolving credit facility and the construction loan.

The secured bank financing facility also includes a 20-year mortgage loan with interest at prime plus 1% per annum or, at our option, interest at the 5-year U.S. Treasury Constant Maturity Yield plus 3 ½%. The mortgage loan interest rate is adjustable every 5 years. The construction loan may be converted to the 20-year mortgage loan three months after completion of construction, subject to certain conditions.

The secured bank financing facility requires us to comply with certain conditions and covenants including hospital financial and operational covenants, information requirements and limitations on secured debt by our hospital subsidiary which owns and operates the Jasper, Georgia hospital.

The debt capacity of the our subsidiary, SunLink Healthcare Corp. (“SHC”), which holds the stock of our existing 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 September 30, 2002, have been able to incur up to approximately $9,600 of additional indebtedness. This does not include any amount relating to the HealthMont acquisition which is not currently expected to involve SHC.

Payments	Long-Term		Operating		Physician
due in:	Debt		Leases		Guarantees

1 year	$	963	$	2,228	$	2,147
2 years		2,768		1,784		928
3 years		1,153		1,060		83
4 years		18,648		370
5 years		1,035		57
More than 5 years		—		3,306

	$	24,567	$	8,805	$	3,158

At September 30, 2002, we had outstanding long-term debt of $24,567, of which $19,092 was incurred in connection with our purchase on February 1, 2001 of our six existing community hospitals and related businesses, $5,358 was outstanding from the term loan and $117 related to capital leases. Our U.S. debt includes a seller financed balloon note of $17,382 and a seller financed zero coupon note of $1,710. The balloon note, due January 31, 2006, has a face amount of $17,000 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%. The balloon note has a payment-in-kind (PIK) feature for interest accrued through January 31, 2003. Interest due and payable through that date may be paid in additional balloon notes due in 2006 and we presently intend to issue PIK notes for interest due through January 31, 2003. Additional promissory notes have been issued for interest payable from February 1, 2001 to May 31, 2002 totaling $1,999 and the interest accrued through September 30, 2002 of $538 has been included in the principal amount of the balloon note at September 30, 2002.

The purchase agreement for the six hospitals provides for an adjustment to the balloon note to the extent working capital at the purchase date was greater or less than an agreed upon amount. We have submitted to the seller a proposed working capital adjustment which would reduce the balloon note by $1,000. The seller has not agreed to the adjustment and the Company and seller currently are seeking to conclude the working capital settlement under the dispute resolution provisions of the purchase agreement. No adjustment for any working capital settlement has been made to the balloon note at September 30, 2002.

The zero coupon note is due January 31, 2004, has a face amount of $2,000, and has been discounted to a market interest rate of 11.3%. The principal amount of the zero coupon note is subject to reduction for certain indemnified items pursuant to the purchase agreement.

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 September 30, 2002 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 our best estimates of potential liabilities, no material amounts are reserved for any contingencies related to these liquidations.

We believe we have adequate financing and liquidity to support our current level of operations through the end of the next fiscal year. As noted above, our current sources of liquidity are our $8,000 revolving credit facility, our $6,000 secured financing facility related to the hospital being constructed in Jasper, Georgia and cash generated from our community hospital operations. The availability under the revolving credit facility is based upon the levels of our receivables. The current availability of approximately $8,000 could be adversely affected by, among other things, decreases in 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 Potential Acquisition of HealthMont on Liquidity and Capital Resources

In connection with the proposed acquisition of HealthMont, we expect to assume approximately $9,800 in HealthMont senior debt consisting of a senior credit facility of approximately $8,900 and capital leases, primarily for equipment, of approximately $900. Subject to a number of conditions, HealthMont has obtained the consent of its senior lender to our proposed acquisition of HealthMont and the modification of certain terms of HealthMont’s senior credit facility, which include a principal repayment of $600 at the closing of the merger and an extension of the maturity date of the remaining debt through August 31, 2005. Post acquisition, the remaining senior credit facility is expected to be comprised of term loans of approximately $5,000 with interest at prime plus 2% per annum and revolving credit loans of approximately $3,900 with interest at prime plus 1 ½%.

Certain HealthMont investors have arranged letters of credit which support up to $1,650 of HealthMont’s revolving credit loans. We have agreed that if the acquisition is completed and, in the event the letters of credit are drawn and the proceeds reduce the outstanding balance of the revolving credit loans, to issue to these investors 350,000 of the SunLink common shares in full satisfaction of HealthMont’s reimbursement obligations under the letters of credit.

In connection with the proposed acquisition of HealthMont, we will enter into a $3,000, 3-year, secured term loan with a private investment fund. The proceeds of such loan will be used primarily for working capital, including to repay $600 of HealthMont’s senior debt at closing and to pay certain transaction costs. The loan will bear interest at 15% per annum and requires SunLink to pay certain fees and issue warrants to the lender to purchase 75,000 of SunLink’s common shares at $0.01 per share.

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 economic and business conditions in the U.S. both nationwide and in the states in which we operate hospital facilities;

-	the competitive nature of the U.S. community hospital business;

-	demographic changes in areas where we operate hospital facilities;

-	the availability of cash 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;

-	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;

-	claims under leases, guarantees, and other obligations relating to discontinued operations, acquired subsidiaries and former subsidiaries;

-	potential adverse impact of known and unknown government investigations;

-	claims for product and environmental liabilities from continuing and discontinued operations; and,

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

-	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 the Company’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);

-	our ability to integrate acquired hospitals and implement our business strategy; and,

-	competition in the market for acquisition 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.

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, 2002, filed with the SEC on September 16, 2002. In the opinion of management, the Condensed Consolidated Financial Statements as of and for the three months ended September 30, 2002, 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.

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.

Net Patient Service Revenues – Like all operators of community hospitals, 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 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.

Allowance for Doubtful Accounts – Accounts receivable are reduced by an allowance for amounts estimated to become uncollectable in the future. Substantially all of the Company’s receivables are related to 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 provide 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 existing six hospitals, we assumed responsibility for professional liability claims reported after 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. As a component of the related liability for professional liability risks, we have included the premiums related to the estimated cost of insurance for claims incurred, but not reported prior to the acquisition date.

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 historical loss patterns.

We record a liability pertaining to pending litigation based on our best estimate of a potential loss, if any, or at the minimum end of the range of loss in circumstances where the range of loss can be reasonably estimated. 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.

Income Taxes – We account for income taxes in accordance with Statement of Financial Accounting Standards (“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 considers 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. Currently, the most significant tax asset is a U.S. net operating loss carryforward of approximately $6,300, utilization of which is subject to limitations imposed by Section 382 of the Internal Revenue Service Code.

In August 2001, the FASB issued SFAS No. 144, Impairment or Disposal of Long-Lived Assets. The provisions of this statement provide a single accounting model for the impairment or disposal of long-lived assets. As required by SFAS No. 144, the Company adopted this new accounting standard on July 1, 2002. During the quarter ended September 30, 2002, there was no impact of adopting SFAS No. 144 reflected in the Company’s financial statements, however the Company continues to review the impact of the standard on its long-lived assets, in particular the

current facility for Mountainside Medical Center in Jasper, Georgia where a replacement hospital is currently being constructed.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires the recording of costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

We are exposed to interest rate changes, primarily as a result of borrowing under the revolving portion of our credit facility. No borrowing was outstanding on the revolving facility at September 30, 2002. 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.

(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 defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made to them by others within those entities.

(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 the Evaluation Date.

(a)	Exhibits:

	10.1 –	Amended and Restated Employment Agreement between SunLink Health Systems, Inc. and Harry R. Alvis, dated February 1, 2002.

	10.2 –	Amended and Restated Employment Agreement between SunLink Health Systems, Inc. and J. T. Morris, dated February 1, 2002.

	10.3 –	Amended and Restated Employment Agreement between SunLink Health Systems, Inc. and Robert M. Thornton, Jr., dated January 1, 2002.

	10.4 –	Loan Agreement among SunLink Healthcare Corp., Southern Health Corporation and Southern Health Corporation of Jasper, Inc, collectively as Borrowers and SunLink Health Systems, Inc. as Guarantor and Bank of North Georgia, as Bank, dated September 30, 2002.

	10.5 –	Contract of Guaranty of SunLink Health Systems, Inc. to SunLink Healthcare Corp., Southern Health Corporation and Southern Health Corporation of Jasper, Inc, collectively as Borrowers and Bank of North Georgia, as Bank, dated September 30, 2002.

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

	99.2 –	Chief Financial Officer’s Certificate 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 – On October 15, 2002, the Company filed a report on Form 8-K reporting “Item 5. Other Events”. On October 15, 2002, the Company and HM Acquisition Corp., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”) entered into an Agreement and Plan of Merger with HealthMont, Inc., a Tennessee corporation (“HealthMont”), providing for the merger of HealthMont with and into the Merger Sub.

	SunLink Health Systems, Inc.

	By: /s/ Mark J. Stockslager

	Mark J. Stockslager
	Principal Accounting Officer

I, Robert M. Thornton, Jr., President and Chief Executive Officer of SunLink Health Systems, Inc., certify that:

1.		I have reviewed this quarterly report on Form 10-Q of SunLink Health Systems, Inc.

2.		Based on my knowledge, this quarterly 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 quarterly report.

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the Registrant and we have:

	a.		designed such disclosure controls and procedures 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 quarterly report is being prepared.

	b.		evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the quarterly report (the “Evaluation Date”); and

	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and audit committee of the Registrant’s board of directors:

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls.

The Registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were any significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Joseph T. Morris, Chief Financial Officer of SunLink Health Systems, Inc., certify that:

1.		I have reviewed this quarterly report on Form 10-Q of SunLink Health Systems, Inc.

2.		Based on my knowledge, this quarterly 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 quarterly report.

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the Registrant and we have:

	a.		designed such disclosure controls and procedures 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 quarterly report is being prepared.

	b.		evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of the quarterly report (the “Evaluation Date”); and

	c.		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.

The Registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and audit committee of the Registrant’s board of directors:

	a.		all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

	b.		any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls.

28 EX-10.1 3 g79084exv10w1.txt EX-10.1 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made by and between SUNLINK HEALTH SYSTEMS, INC., an Ohio corporation ("SunLink") and HARRY R. ALVIS, an individual resident of Georgia (the "Executive"), as of the 1st day of February, 2002 (the "Effective Date"). SunLink desires to employ the Executive and the Executive is willing to serve SunLink and its subsidiaries in an executive capacity on the terms and conditions herein provided. In consideration of the foregoing, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby amend and restate the Employment Agreement dated as of January 1, 2001 (the "2001 Agreement") between the Executive and SunLink's subsidiary, SunLink Healthcare Corp., to hereafter read as follows and agree that as of the Effective Date: 1. Employment. SunLink shall employ the Executive, and the Executive shall serve, as Chief Operating Officer of SunLink and as Executive Vice President--Operations of SunLink Healthcare Corp., or in such other capacity at SunLink or its subsidiaries as may from time to time be designated by SunLink's Board of Directors, upon the terms and conditions set forth herein. The Executive shall have such authority and responsibilities consistent with his position and which may be set forth in the bylaws of SunLink and/or designated to him by the Board of Directors from time to time. The Executive shall devote his full business time, attention, skill and efforts to the performance of his duties hereunder, except during periods of illness or periods of vacation and leaves of absence consistent with SunLink company policy. 2. Term. Unless earlier terminated as provided herein, the Executive's employment under this Agreement shall be for a term (the "Fixed Term") ending June 30, 2004. Unless at least 60 days written notice of non-renewal shall have been given to Executive by SunLink or by Executive to SunLink prior to the end of the Fixed Term that Executive's employment will not be continued beyond the Fixed Term, the Executive's term of employment under this Agreement shall be automatically renewed for an additional period of twelve months (the "Extended Term"). 3. Compensation and Benefits. a. SunLink shall pay the Executive a salary at a rate of (i) $190,800 per annum effective February 1, 2002 through August 31, 2002 and (ii) $199,000 per annum effective September 1, 2002 and thereafter, in each case in accordance with the salary payment practices of SunLink. The Board of Directors of SunLink shall review the Executive's salary at least annually and may increase the Executive's base salary if it determines in its sole discretion that an increase is appropriate. b. The Executive shall participate in a management incentive program and shall be eligible to receive bonus payments of up to fifty percent (50%) of Executive's annual base salary based upon criteria that the Executive Compensation Committee of the Board of Directors of SunLink shall establish from time to time pursuant to that program. c. The compensation payable by SunLink to Executive hereunder shall be inclusive of compensation for all services rendered by Executive to SunLink, SunLink Healthcare Corp. and their respective subsidiaries and Executive shall have no separate right of compensation from SunLink or any such subsidiary other than the right to be indemnified as an officer of any such subsidiary under the corporate bylaws thereof and/or insured under any directors and officers liability insurance policies maintained by SunLink or such subsidiary. 4. Stock Options and Other Benefits. a. SunLink has granted or shall grant to Executive, five-year options to purchase a total of 75,000 shares of the common stock of SunLink. Such grant is or shall be effective as of the date of grant as determined by the Board of Directors of SunLink. The options granted or to be granted pursuant and subject to such stock option plan were approved by SunLink's shareholders at their 2001 annual meeting at an exercise price per share equal to the closing sale price of SunLink's common stock on the American Stock Exchange (or such other exchange or system where such Shares are listed) as of the date of grant. The options so granted shall vest 25% one the first through fourth anniversaries of the date of grant. b. In addition to participating in the option plan pursuant to Section 4(a), Executive shall during the term of Executive's employment be eligible to participate in any additional employee stock option plan or arrangement adopted by SunLink which includes senior SunLink officers and to receive additional grants of options under such plans in such numbers and at such exercise prices as the Board of Directors of SunLink shall determine in its discretion. c. The Executive shall participate in all retirement, welfare, deferred compensation, life and health insurance, and other benefit plans or programs (exclusive of those benefits referenced in Sections 4(e), 4(f), 4(g.), and 4(h) of the 2001 Agreement) of SunLink now or hereafter applicable to a class of employees that includes senior executives of SunLink on such basis as the Board of Directors of SunLink shall from time to time determine; provided, however, that during which the Executive is subject to a Disability, and during the 90-day period of physical or mental infirmity leading up to the Executive's Disability, the amount of the Executive's compensation provided under this Section 4 shall be reduced by the sum of the amounts, if any, paid to the Executive for the same period under any disability benefit or pension plan of SunLink, SunLink or any subsidiary thereof. d. SunLink shall provide supplemental term life insurance coverage equal to $300,000. 2 e. The Executive shall receive twenty (20) days paid vacation each year. Unused vacation may not be carried over to subsequent years. 5. Termination. a. The Executive's employment under this Agreement and his offices and positions with SunLink may be terminated prior to the end of the Fixed Term only as follows: (i) automatically upon the death of the Executive; (ii) by SunLink due to the Disability of the Executive upon ninety (90) days written notice and delivery of a Notice of Termination to the Executive; (iii) by SunLink for Cause upon delivery of a Notice of Termination to the Executive; (iv) by either party for any reason upon 90 days notice to the other party. Any termination of Executive's employment by SunLink shall also constitute the concurrent termination of such Executive's employment and offices with SunLink and any other subsidiary of SunLink. b. If the Executive's employment with SunLink shall be terminated during the Fixed Term or the Extended Term (i) by reason of the Executive's death, or (ii) by SunLink for Disability or Cause, SunLink shall pay to the Executive (or in the case of his death, the Executive's estate) within thirty days after the Termination Date a lump sum cash payment equal to the Accrued Compensation. c. If the Executive's employment with SunLink shall be early terminated by SunLink other than for (i) Disability, (ii) Cause or (iii) pursuant to Section 5(d) below, Executive shall (A) in the case of any such termination by SunLink during the Fixed Term, receive severance payments equal to the lesser of (x) twelve (12) months salary or (y) the salary for the remaining number of months in the Fixed Term, or (B) in the case of any such termination by SunLink during the Extended Term, receive severance payments equal to the lesser of (x) six (6) months salary or (y) the salary for the remaining number of months in the Extended Term, (minus, in each such case, applicable withholdings), paid in accordance with the normal payroll schedule of SunLink, a pro rata portion of any annual bonus for which goals have been proportionately met, and continuation of the benefits set forth in Sections 4(c), 4(d) and 4(e), for 3 sixty (60) days following termination. If any such payment is not delivered, mailed by first class mail or sent by commercial courier service to Executive at the most recent address provided by Executive within thirty (30) days after being due, the entire balance shall, at the option of the Executive, immediately be due and payable. d. If the Executive's employment is early terminated by Executive or by SunLink for any reason other than for Cause (exclusive of Cause referred to in clause (iii) of Section 22(d)) within one (1) year after a Change in Control, Executive shall, in lieu of any payment under Sections 5(b) or 5(c), (i) receive severance payments equal to twelve (12) months base salary (minus applicable withholdings), paid in accordance with the normal payroll schedule of the company, (ii) receive Accrued Compensation, including without limitation, a pro rata portion of any annual bonus for which goals have been proportionately met, (iii) receive the balance of any other benefits set forth in sections 4(c), 4(d) and 4(e) for ninety (90) days following termination, and (iv) Executive's unvested stock options shall vest, and shall be exercisable pursuant to the terms of the applicable stock option plan and agreement. If any such payment is not delivered, mailed by first class mail or sent by commercial courier service to Executive at the most recent address provided by Executive within thirty (30) days after being due, the entire balance shall, at the option of Executive, immediately be due and payable. e. The severance pay and benefits provided for in this Section 5 shall be in lieu of any other severance or termination pay to which the Executive may otherwise be entitled under any Company severance or termination plan, program, practice or arrangement, but shall not be in lieu of any additional benefits to which Executive may be entitled under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). The Executive's entitlement to any other compensation or benefits shall be determined by the Board of Directors of SunLink or the Chief Executive Officer of SunLink in accordance with SunLink's employee benefit plans and other applicable programs, policies and practices then in effect. f. Clause (ii) of Section 5(a) shall not be effective or invoked by SunLink upon any Change in Control or within one (1) year thereafter. g. Any notice by SunLink to Executive or by Executive to SunLink of non-renewal given as contemplated by Section 2 shall not be deemed to be a termination of Executive's employment for the purposes of Section 5(b) or (c). 6. Indemnification. SunLink agrees to indemnify, save and hold Executive harmless from all losses, expenses, damages, liabilities, obligations, claims and costs of any kind (including reasonable attorneys' fees and other legal costs and expenses) that Executive may at any time suffer or incur by reason of any claims, actions or suits brought or threatened to be brought against Executive by any person or entity, as a result of or in connection with Executive's service as an officer, employee or director of SunLink or as an employee, officer or director of any of its subsidiaries, or any entity that in the future becomes a subsidiary or affiliate of SunLink, except that no indemnification shall be made if Executive's action or failure to act involved an act or omission undertaken in bad faith or with intent to cause injury to SunLink, SunLink or any of their subsidiaries or was undertaken with reckless disregard for the best interest of SunLink, SunLink or 4 any of their subsidiaries. The provisions of this Section 6 shall survive termination of Executive's employment under this Agreement. 7. Trade Secrets. The Executive shall not, at any time, either during the term of his employment or after the Termination Date, use or disclose any Trade Secrets of SunLink, SunLink Healthcare Corp. or any of their subsidiaries, as defined herein, except in fulfillment of his duties as the Executive during his employment, for so long as the pertinent information or data remain Trade Secrets, whether or not the Trade Secrets are in written or tangible form. 8. Protection of Other Confidential Information. Executive recognizes the interest of SunLink, SunLink Healthcare Corp. or their subsidiaries in maintaining the confidential nature of their proprietary and other business and commercial information. In connection therewith, Executive covenants that during the term of Executive's employment under this Agreement, and for a period of twenty-four (24) months thereafter, Executive will not, directly or indirectly, except as necessary to perform Executive's duties for SunLink, publish, disclose or use any Confidential Information of SunLink. "Confidential Information" shall mean any internal, non-public information (other than Trade Secrets already addressed above) concerning SunLink's, SunLink Healthcare Corp.'s (or of any subsidiary of either thereof) financial position and results of operations (including revenues, assets, net income, etc.); pricing structure; annual and long-range business plans; product or service plans; marketing plans and methods; training, educational and administrative manuals; customer and supplier information and purchase histories; and employee lists. The provisions of Sections 7 and 8 shall be sufficient to protect Trade Secrets and Confidential Information of third parties provided to SunLink, SunLink Healthcare Corp. or any of their subsidiaries under an obligation of secrecy. 9. Return of Materials. Executive shall surrender to SunLink, promptly upon request and in any event upon termination of Executive's employment with SunLink, all media, documents, notebooks, computer programs, handbooks, data files, models, samples, price lists, drawings, customer lists, prospect data, or other material of any nature whatsoever (in tangible or electronic form) in Executive's possession or control, including all copies thereof, relating to SunLink, SunLink Healthcare Corp. or any of their subsidiaries, or their business, or their customers. Upon the request of SunLink, Executive shall certify in writing compliance with the foregoing requirement. 10. Non-Solicitation of Customers. During the term of this Agreement and for a period of twenty-four (24) months after termination of Executive's employment with SunLink for any reason, Executive shall not directly or indirectly, through one or more intermediaries or otherwise, solicit or attempt to solicit any Customers or to induce or encourage them to acquire or obtain from any individual or entity other than SunLink or its subsidiaries, any healthcare or other service or product competitive with or substitute for any Company service or product. For purposes of this Section, a "Customer" refers to any patient, person or group of persons with whom Executive had direct material contact with regard to the selling, delivery of healthcare services or products, including servicing such person's or group's account, during the period of twelve (12) months preceding termination of Executive's employment; and "services or products" refers to the 5 healthcare services and/or products that SunLink and/or its subsidiaries performed, offered or provided within six (6) months of the date of termination of Executive's employment. 11. Non-Solicitation of Executives or Medical Staff. During the term of this Agreement and for a period of eighteen (18) months after termination of employment with SunLink for any reason, Executive shall not, alone or in concert with others, solicit or induce any (i) employee of SunLink, or SunLink Healthcare Corp. or any of their subsidiaries, to leave the employ of SunLink, SunLink Healthcare Corp. or such subsidiary or recruit or attempt to recruit such person to accept employment with another business or (ii) medical staff member, physician or nursing, of SunLink or any subsidiary of SunLink to leave the medical staff of any hospital or healthcare facility owned or operated by SunLink or any subsidiary thereof or to serve on the staff of any other hospital or healthcare facility or recruit or attempt to recruit such person to serve on the staff of any other hospital or healthcare facility. 12. No Denigration. Executive will not at any time denigrate, ridicule or intentionally criticize SunLink, SunLink Healthcare Corp. or any of their subsidiaries or affiliates or any of their respective services, products, properties, employees, officers or directors, including without limitation, by way of news interviews, or the expression of personal views, opinions or judgments to the news media. 13. Successors; Binding Agreement. a. This Agreement shall be binding upon and shall inure to the benefit of SunLink, its Successors and Assigns. b. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 14. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other; provided, however, that all notices to SunLink shall be directed to the attention of the Chief Executive Officer of SunLink. All notices and communications shall be deemed to have been received on the date of delivered. 15. Modification and Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and SunLink. No waiver by any party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6 16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia without giving effect to the conflict of laws principles thereof. 17. Arbitration. Any controversy or claim against either party arising from, out of or relating to this Agreement, the breach thereof (other than controversies or claims arising from, out of or relating to the provisions in Sections 7, 8, 9, 10, 11 and 12 above, which may be litigated in a court of competent jurisdiction), or the employment or termination thereof of Executive by SunLink which would give rise to a claim under federal, state or local law (including but not limited to claims based in tort or contract, claims for discrimination under state or federal law, and/or claims for violation of any federal, state or local law, statute or regulation) ("Claims") shall be submitted to an impartial mediator ("Mediator") selected jointly by the parties. Both parties shall attend a mediation conference and attempt to resolve any and all Claims. If they are not able to resolve all Claims, any unresolved Claims, including any dispute as to whether a matter constitutes a Claim which must be submitted to arbitration, shall be determined by final and binding arbitration in Atlanta, Georgia in accordance with the Model Employment Dispute Resolution Rules ("Rules") of the American Arbitration Association, by an experienced arbitrator licensed to practice law in the State of Georgia in accordance with the Rules. The arbitrator shall be selected by alternate striking from a list of six arbitrators, half of which shall be supplied by SunLink and half by Executive. The party not initiating the arbitration shall strike first. The process shall be repeated twice until an arbitrator is selected. If an arbitrator is still not selected, the Mediator shall provide a list of three names which will be alternately struck, with the party initiating the arbitration striking first, until a selection is made. A demand for arbitration shall be made within a reasonable time after the Claim has arisen. In no event shall the demand for arbitration be made after the date when institution of legal and/or equitable proceedings based on such Claim would be barred by the applicable statute of limitations. Each party to the arbitration will be entitled to be represented by counsel and will have the opportunity to take one deposition of an opposing party or witness before the arbitration hearing. By mutual agreement of the parties, additional depositions may be taken. The arbitrator shall have the authority to hear and grant a motion to dismiss and/or for summary judgment, applying the standards governing such motions under the Federal Rules of Civil Procedure. Each party shall have the right to subpoena witnesses and documents for the arbitration hearing. A court reporter shall record all arbitration proceedings. With respect to any Claim brought to arbitration hereunder, either party may be entitled to recover whatever damages would otherwise be available to that party in any legal proceeding based upon the federal and/or state law applicable to the matter and as specified by Section 16 except that no punitive, special or exemplary damages shall be awardable. The decision of the arbitrator may be entered and enforced in any court of competent jurisdiction by SunLink or Executive. Each party shall pay the fees of their respective attorneys, the expenses of their witnesses and any other expenses connected with presenting their Claim or defense (except as otherwise awarded by the arbitrator). Except as otherwise awarded by the arbitrator, other costs of the arbitration, including the fees of the Mediator, the arbitrator, the cost of any record or transcript of the arbitration, administrative fees, and other fees and costs, shall be borne equally by Executive and SunLink and paid promptly as incurred. Should Executive or SunLink pursue any dispute or matter covered by 7 this Section by any method other than said arbitration, the responding party shall be entitled to recover from the other party all damages, costs, expenses, and attorneys' fees incurred as a result of such action. The provisions contained in this Section 17 shall survive the termination and/or expiration of this Agreement. The parties indicate their acceptance of the foregoing arbitration requirement by initialing below: /s/ Robert M. Thornton, Jr. CEO /s/ Harry Alvis ------------------------------- ------------------------------- For SunLink Executive 18. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. Except as modified herein, any existing stock option agreement between Executive and SunLink shall remain in full force and effect. 20. Headings. The headings of Sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 21. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 22. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a. "Accrued Compensation" shall mean an amount which shall include all amounts earned or accrued through the Termination Date but not paid as of the Termination Date including (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of SunLink during the period ending on the Termination Date, and (iii) bonuses and incentive compensation. b. "Act" shall mean the Securities Act of 1933, as amended. c. "Base Amount" shall mean the greater of the Executive's annual base salary (i) at the rate in effect on the Termination Date or (ii) at the highest rate in effect at any time during the twelve (12) month period prior to the Change in Control, and shall include any amounts of his base salary that are deferred under the qualified and non-qualified employee benefit plans of SunLink or any other agreement or arrangement. 8 d. The termination of the Executive's employment shall be for "Cause" if it is a result of: (i) any act that (A) constitutes, on the part of the Executive, fraud, dishonesty, malfeasance of duty, or conduct inappropriate to the Executive's office, and (B) is likely to, or any reasonably be expected to, lead to material injury to SunLink or resulted or was intended to result in direct or indirect gain to or personal enrichment of the Executive; or (ii) the conviction of the Executive of a felony; or (iii) Executive's failure to perform his job duties to the satisfaction of the Board of Directors of SunLink or of SunLink Healthcare Corp., as determined by a two thirds majority vote; provided, however, that in the case of clause (iii) above, such conduct shall not constitute Cause unless SunLink shall have first given Executive written notice of such Cause and thirty (30) days to cure such Cause to the satisfaction of the Board of Directors of SunLink. e. "Change in Control" shall mean the occurrence during the Fixed Term or any Extended Term of any of the following events: (iv) An acquisition (other than directly from SunLink) of any voting securities of that company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 40% or more of the combined voting power of SunLink's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) SunLink or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by SunLink (a "subsidiary"), (2) the company or any subsidiary, or (3) any Person in connection with a "Non-Control Transaction" (as hereinafter defined). (v) The individuals who, as of the date of this Agreement, are members of the Board of SunLink (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by that company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such 9 individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (vi) Approval by stockholders of SunLink of: (A) (1) A merger, consolidation or reorganization involving SunLink, unless (x) the stockholders of SunLink, immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (y) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; (A transaction described in clauses (x) and (y) shall herein be referred to as a "Non-Control Transaction"). (vii) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive establishes that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control (a "Third Party") or (B) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, in each case within not more than six (6) months after such termination then for all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. 10 f. "Disability" shall mean, subject to applicable state and federal laws, a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with SunLink for a period of four (4) consecutive months, as determined by an independent physician selected with the approval of both SunLink and the Executive. g. "Notice of Termination" shall mean a written notice of termination from SunLink or the Executive which specifies an effective date of termination, indicates the specific termination provision in this Agreement relied upon, and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. h. "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the assets and business of SunLink (including this Agreement), whether by operation of law or otherwise. i. "Termination Date" shall mean, in the case of the Executive's death, his date of death, and in all other cases, the date specified in the Notice of Termination. j. "Trade Secrets" shall mean any information, including but not limited to technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, information on customers, or a list of actual or potential customers or suppliers, which: (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the 30th day of September, 2002 effective as of February 1, 2002. SUNLINK HEALTH SYSTEMS, INC. By: /s/ Robert M. Thornton, Jr. ------------------------------------- Robert M. Thornton, Jr. President HARRY R. ALVIS /s/ Harry R. Alvis L.S. ---------------------------------------- Executive 11 EX-10.2 4 g79084exv10w2.txt EX-10.2 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made by and between SUNLINK HEALTH SYSTEMS, INC., an Ohio corporation ("SunLink") and J. T. MORRIS, an individual resident of Georgia (the "Executive"), as of the 1st day of February, 2002 (the "Effective Date"). SunLink desires to employ the Executive and the Executive is willing to serve SunLink and its subsidiaries in an executive capacity on the terms and conditions herein provided. In consideration of the foregoing, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby amend and restate the Employment Agreement dated as of January 1, 2001 (the "2001 Agreement") between the Executive and SunLink's subsidiary, SunLink Healthcare Corp., to hereby read as follows and agree that as of the Effective Date: 1. Employment. SunLink shall employ the Executive, and the Executive shall serve, as Chief Financial Officer of SunLink and as President and Chief Financial Officer of SunLink Healthcare Corp., or in such other capacity at SunLink or its subsidiaries or affiliates as may from time to time be designated by SunLink's Board of Directors, upon the terms and conditions set forth herein. The Executive shall have such authority and responsibilities consistent with his position and which may be set forth in the bylaws of SunLink and/or designated to him by the Board of Directors from time to time. The Executive shall devote his full business time, attention, skill and efforts to the performance of his duties hereunder, except during periods of illness or periods of vacation and leaves of absence consistent with SunLink company policy. 2. Term. Unless earlier terminated as provided herein, the Executive's employment under this Agreement shall be for a term (the "Fixed Term") ending June 30, 2004. Unless at least 60 days written notice of non-renewal shall have been given to Executive by SunLink or by Executive to SunLink prior to the end of the Fixed Term that Executive's employment will not be continued beyond the Fixed Term, the Executive's term of employment under this Agreement shall be automatically renewed for an additional period of twelve months (the "Extended Term"). 3. Compensation and Benefits. a. SunLink shall pay the Executive a salary at a rate of (i) $212,000 per annum effective February 1, 2002 through August 31, 2002 and (ii) $226,000 per annum effective September 1, 2002 and thereafter, in each case in accordance with the salary payment practices of SunLink. The Board of Directors of SunLink shall review the Executive's salary at least annually and may increase the Executive's base salary if it determines in its sole discretion that an increase is appropriate. b. The Executive shall participate in a management incentive program and shall be eligible to receive bonus payments of up to sixty percent (60%) of Executive's annual base salary based upon criteria that the Executive Compensation Committee of the board of Directors of SunLink shall establish from time to time pursuant to that program. c. The compensation payable by SunLink to Executive hereunder shall be inclusive of compensation for all services rendered by Executive to SunLink, SunLink Healthcare Corp. and their respective subsidiaries and Executive shall have no separate right of compensation from SunLink or any such subsidiary other than the right to be indemnified as an officer of any such subsidiary under the corporate bylaws thereof and/or insured under any directors and officers liability insurance policies maintained by SunLink or such subsidiary. 4. Stock Options and Other Benefits. a. SunLink has granted or shall grant to Executive, five-year options to purchase a total of 110,000 shares of the common stock of SunLink. Such grant is or shall be effective as of the date of grant as determined by the Board of Directors of SunLink. The options granted or to be granted pursuant and subject to such stock option plan were approved by SunLink's shareholders at their 2001 annual meeting at an exercise price per share equal to the closing sale price of SunLink's common stock on the American Stock Exchange (or such other exchange or system where such Shares are listed) as of the date of grant. The options so granted shall vest 20% as of the date of grant and an additional 20% annually at the first, second, third and fourth anniversaries of the date of grant. b. In addition to participating in the option plan pursuant to Section 4(a), Executive shall during the term of Executive's employment be eligible to participate in any additional employee stock option plan or arrangement adopted by SunLink which includes senior SunLink officers and to receive additional grants of options under such plans in such numbers and at such exercise prices as the Board of Directors of SunLink shall determine in its discretion. c. The Executive shall participate in all retirement, welfare, deferred compensation, life and health insurance, and other benefit plans or programs (exclusive of those benefits referenced in Sections 4(e), 4(f), 4(g), and 4(h) of the 2001 Agreement) of SunLink now or hereafter applicable to a class of employees that includes senior executives of SunLink on such basis as the Board of Directors of SunLink shall from time to time determine; provided, however, that during which the Executive is subject to a Disability, and during the 90-day period of physical or mental infirmity leading up to the Executive's Disability, the amount of the Executive's compensation provided under this Section 4 shall be reduced by the sum of the amounts, if any, paid to the Executive for the same period under any disability benefit or pension plan of SunLink, SunLink or any subsidiary thereof. d. SunLink shall provide supplemental term life insurance coverage equal to $300,000. e. The Executive shall receive twenty (20) days paid vacation each year. Unused vacation may not be carried over to subsequent years. 2 5. Termination. a. The Executive's employment under this Agreement and his offices and positions with SunLink may be terminated prior to the end of the Fixed Term only as follows: (i) automatically upon the death of the Executive; (ii) by SunLink due to the Disability of the Executive upon ninety (90) days written notice and delivery of a Notice of Termination to the Executive; (iii) by SunLink for Cause upon delivery of a Notice of Termination to the Executive; (iv) by either party for any reason upon 90 days notice to the other party. Any termination of Executive's employment by SunLink shall also constitute the concurrent termination of such Executive's employment and offices with SunLink and any other subsidiary of SunLink. b. If the Executive's employment with SunLink shall be terminated during the Fixed Term or the Extended Term (i) by reason of the Executive's death, or (ii) by SunLink for Disability or Cause, SunLink shall pay to the Executive (or in the case of his death, the Executive's estate) within thirty days after the Termination Date a lump sum cash payment equal to the Accrued Compensation. c. If the Executive's employment with SunLink shall be early terminated by SunLink other than for (i) Disability, (ii) Cause or (iii) pursuant to Section 5(d) below, Executive shall (A) in the case of any such termination by SunLink during the Fixed Term, receive severance payments equal to the lesser of (x) twelve (12) months salary or (y) the salary for the remaining number of months in the Fixed Term, or (B) in the case of any such termination by SunLink during the Extended Term, receive severance payments equal to the lesser of (x) six (6) months salary or (y) the salary for the remaining number of months in the Extended Term, (minus, in each such case, applicable withholdings), paid in accordance with the normal payroll schedule of SunLink, a pro rata portion of any annual bonus for which goals have been proportionately met, and continuation of the benefits set forth in Sections 4(c), 4(d) and 4(e) for ninety (90) days following termination. If any such payment is not delivered, mailed by first class mail or sent by commercial courier service to Executive at the most recent address provided by 3 Executive within thirty (30) days after being due, the entire balance shall, at the option of the Executive, immediately be due and payable. d. If the Executive's employment is early terminated by Executive or by SunLink for any reason other than for Cause (exclusive of Cause referred to in clause (iii) of Section 22(d)) within one (1) year after a Change in Control, Executive shall, in lieu of any payment under Sections 5(b) or 5(c), (i) receive severance payments equal to eighteen (18) months base salary (minus applicable withholdings), paid in accordance with the normal payroll schedule of the company, (ii) receive Accrued Compensation, including without limitation, a pro rata portion of any annual bonus for which goals have been proportionately met, (iii) receive the balance of any other benefits set forth in sections 4(c), 4(d) and 4(e) for six (6) months following termination, and (iv) Executive's unvested stock options shall vest, and shall be exercisable pursuant to the terms of the applicable stock option plan and agreement. If any such payment is not delivered, mailed by first class mail or sent by commercial courier service to Executive at the most recent address provided by Executive within thirty (30) days after being due, the entire balance shall, at the option of Executive, immediately be due and payable. e. The severance pay and benefits provided for in this Section 5 shall be in lieu of any other severance or termination pay to which the Executive may otherwise be entitled under any Company severance or termination plan, program, practice or arrangement, but shall not be in lieu of any additional benefits to which Executive may be entitled under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). The Executive's entitlement to any other compensation or benefits shall be determined by the Board of Directors of SunLink or the Chief Executive Officer of SunLink in accordance with SunLink's employee benefit plans and other applicable programs, policies and practices then in effect. f. Clause (ii) of Section 5(a) shall not be effective or invoked by SunLink upon any Change in Control or within one (1) year thereafter. g. Any notice by SunLink to Executive or by Executive to SunLink of non-renewal given as contemplated by Section 2 shall not be deemed to be a termination of Executive's employment for the purposes of Section 5(b) or (c). 6. Indemnification. SunLink agrees to indemnify, save and hold Executive harmless from all losses, expenses, damages, liabilities, obligations, claims and costs of any kind (including reasonable attorneys' fees and other legal costs and expenses) that Executive may at any time suffer or incur by reason of any claims, actions or suits brought or threatened to be brought against Executive by any person or entity, as a result of or in connection with Executive's service as an officer, employee or director of SunLink or as an employee, officer or director of any of its subsidiaries, or any entity that in the future becomes a subsidiary or affiliate of SunLink, except that no indemnification shall be made if Executive's action or failure to act involved an act or omission undertaken in bad faith or with intent to cause injury to SunLink, SunLink or any of their subsidiaries or was undertaken with reckless disregard for the best interest of SunLink, SunLink or any of their subsidiaries. The provisions of this Section 6 shall survive termination of Executive's employment under this Agreement. 4 7. Trade Secrets. The Executive shall not, at any time, either during the term of his employment or after the Termination Date, use or disclose any Trade Secrets of SunLink, SunLink Healthcare Corp. or any of their subsidiaries, as defined herein, except in fulfillment of his duties as the Executive during his employment, for so long as the pertinent information or data remain Trade Secrets, whether or not the Trade Secrets are in written or tangible form. 8. Protection of Other Confidential Information. Executive recognizes the interest of SunLink, SunLink Healthcare Corp. or their subsidiaries in maintaining the confidential nature of their proprietary and other business and commercial information. In connection therewith, Executive covenants that during the term of Executive's employment under this Agreement, and for a period of twenty-four (24) months thereafter, Executive will not, directly or indirectly, except as necessary to perform Executive's duties for SunLink, publish, disclose or use any Confidential Information of SunLink. "Confidential Information" shall mean any internal, non-public information (other than Trade Secrets already addressed above) concerning SunLink's, SunLink Healthcare Corp. (or of any subsidiary of either thereof) financial position and results of operations (including revenues, assets, net income, etc.); pricing structure; annual and long-range business plans; product or service plans; marketing plans and methods; training, educational and administrative manuals; customer and supplier information and purchase histories; and employee lists. The provisions of Sections 7 and 8 shall be sufficient to protect Trade Secrets and Confidential Information of third parties provided to SunLink, SunLink Healthcare Corp. or any of their subsidiaries under an obligation of secrecy. 9. Return of Materials. Executive shall surrender to SunLink, promptly upon request and in any event upon termination of Executive's employment with SunLink, all media, documents, notebooks, computer programs, handbooks, data files, models, samples, price lists, drawings, customer lists, prospect data, or other material of any nature whatsoever (in tangible or electronic form) in Executive's possession or control, including all copies thereof, relating to SunLink, SunLink Healthcare Corp. or any of their subsidiaries, or their business, or their customers. Upon the request of SunLink, Executive shall certify in writing compliance with the foregoing requirement. 10. Non-Solicitation of Customers. During the term of this Agreement and for a period of twenty-four (24) months after termination of Executive's employment with SunLink for any reason, Executive shall not directly or indirectly, through one or more intermediaries or otherwise, solicit or attempt to solicit any Customers or to induce or encourage them to acquire or obtain from any individual or entity other than SunLink or its subsidiaries, any healthcare or other service or product competitive with or substitute for any Company service or product. For purposes of this Section, a "Customer" refers to any patient, person or group of persons with whom Executive had direct material contact with regard to the selling, delivery of healthcare services or products, including servicing such person's or group's account, during the period of twelve (12) months preceding termination of Executive's employment; and "services or products" refers to the healthcare services and/or products that SunLink and/or its subsidiaries performed, offered or provided within six (6) months of the date of termination of Executive's employment. 11. Non-Solicitation of Executives or Medical Staff. During the term of this Agreement and for a period of eighteen (18) months after termination of employment with SunLink 5 for any reason, Executive shall not, alone or in concert with others, solicit or induce any (i) employee of SunLink, or SunLink Healthcare Corp. or any of their subsidiaries, to leave the employ of SunLink, SunLink Healthcare Corp. or such subsidiary or recruit or attempt to recruit such person to accept employment with another business or (ii) medical staff member, physician or nursing, of SunLink or any subsidiary of SunLink to leave the medical staff of any hospital or healthcare facility owned or operated by SunLink or any subsidiary thereof or to serve on the staff of any other hospital or healthcare facility or recruit or attempt to recruit such person to serve on the staff of any other hospital or healthcare facility. 12. No Denigration. Executive will not at any time denigrate, ridicule or intentionally criticize SunLink, SunLink Healthcare Corp. or any of their subsidiaries or affiliates or any of their respective services, products, properties, employees, officers or directors, including without limitation, by way of news interviews, or the expression of personal views, opinions or judgments to the news media. 13. Successors; Binding Agreement. a. This Agreement shall be binding upon and shall inure to the benefit of SunLink, its Successors and Assigns. b. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 14. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other; provided, however, that all notices to SunLink shall be directed to the attention of the Chief Executive Officer of SunLink. All notices and communications shall be deemed to have been received on the date of delivered. 15. Modification and Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and SunLink. No waiver by any party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia without giving effect to the conflict of laws principles thereof. 17. Arbitration. Any controversy or claim against either party arising from, 6 out of or relating to this Agreement, the breach thereof (other than controversies or claims arising from, out of or relating to the provisions in Sections 7, 8, 9, 10, 11 and 12 above, which may be litigated in a court of competent jurisdiction), or the employment or termination thereof of Executive by SunLink which would give rise to a claim under federal, state or local law (including but not limited to claims based in tort or contract, claims for discrimination under state or federal law, and/or claims for violation of any federal, state or local law, statute or regulation) ("Claims") shall be submitted to an impartial mediator ("Mediator") selected jointly by the parties. Both parties shall attend a mediation conference and attempt to resolve any and all Claims. If they are not able to resolve all Claims, any unresolved Claims, including any dispute as to whether a matter constitutes a Claim which must be submitted to arbitration, shall be determined by final and binding arbitration in Atlanta, Georgia in accordance with the Model Employment Dispute Resolution Rules ("Rules") of the American Arbitration Association, by an experienced arbitrator licensed to practice law in the State of Georgia in accordance with the Rules. The arbitrator shall be selected by alternate striking from a list of six arbitrators, half of which shall be supplied by SunLink and half by Executive. The party not initiating the arbitration shall strike first. The process shall be repeated twice until an arbitrator is selected. If an arbitrator is still not selected, the Mediator shall provide a list of three names which will be alternately struck, with the party initiating the arbitration striking first, until a selection is made. A demand for arbitration shall be made within a reasonable time after the Claim has arisen. In no event shall the demand for arbitration be made after the date when institution of legal and/or equitable proceedings based on such Claim would be barred by the applicable statute of limitations. Each party to the arbitration will be entitled to be represented by counsel and will have the opportunity to take one deposition of an opposing party or witness before the arbitration hearing. By mutual agreement of the parties, additional depositions may be taken. The arbitrator shall have the authority to hear and grant a motion to dismiss and/or for summary judgment, applying the standards governing such motions under the Federal Rules of Civil Procedure. Each party shall have the right to subpoena witnesses and documents for the arbitration hearing. A court reporter shall record all arbitration proceedings. With respect to any Claim brought to arbitration hereunder, either party may be entitled to recover whatever damages would otherwise be available to that party in any legal proceeding based upon the federal and/or state law applicable to the matter and as specified by Section 16 except that no punitive, special or exemplary damages shall be awardable. The decision of the arbitrator may be entered and enforced in any court of competent jurisdiction by SunLink or Executive. Each party shall pay the fees of their respective attorneys, the expenses of their witnesses and any other expenses connected with presenting their Claim or defense (except as otherwise awarded by the arbitrator). Except as otherwise awarded by the arbitrator, other costs of the arbitration, including the fees of the Mediator, the arbitrator, the cost of any record or transcript of the arbitration, administrative fees, and other fees and costs, shall be borne equally by Executive and SunLink and paid promptly as incurred. Should Executive or SunLink pursue any dispute or matter covered by this Section by any method other than said arbitration, the responding party shall be entitled to recover from the other party all damages, costs, expenses, and attorneys' fees incurred as a result of such action. The provisions contained in this Section 17 shall survive the termination and/or expiration of this Agreement. 7 The parties indicate their acceptance of the foregoing arbitration requirement by initialing below: /s/ Robert M. Thornton, Jr. CEO J. T. Morris -------------------------------- ---------------------------- For SunLink Executive 18. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. Except as modified herein, any existing stock option agreement between Executive and SunLink shall remain in full force and effect. 20. Headings. The headings of Sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 21. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 22. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a. "Accrued Compensation" shall mean an amount which shall include all amounts earned or accrued through the Termination Date but not paid as of the Termination Date including (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of SunLink during the period ending on the Termination Date, and (iii) bonuses and incentive compensation. b. "Act" shall mean the Securities Act of 1933, as amended. c. "Base Amount" shall mean the greater of the Executive's annual base salary (i) at the rate in effect on the Termination Date or (ii) at the highest rate in effect at any time during the twelve (12) month period prior to the Change in Control, and shall include any amounts of his base salary that are deferred under the qualified and non-qualified employee benefit plans of SunLink or any other agreement or arrangement. d. The termination of the Executive's employment shall be for "Cause" if it is a result of: 8 (i) any act that (A) constitutes, on the part of the Executive, fraud, dishonesty, malfeasance of duty, or conduct inappropriate to the Executive's office, and (B) is likely to, or any reasonably be expected to, lead to material injury to SunLink or resulted or was intended to result in direct or indirect gain to or personal enrichment of the Executive; or (ii) the conviction of the Executive of a felony; or (iii) Executive's failure to perform his job duties to the satisfaction of the Board of Directors of SunLink or of SunLink Healthcare Corp., as determined by a two thirds majority vote; provided, however, that in the case of clause (iii) above, such conduct shall not constitute Cause unless SunLink shall have first given Executive written notice of such Cause and thirty (30) days to cure such Cause to the satisfaction of the Board of Directors of SunLink. e. "Change in Control" shall mean the occurrence during the Fixed Term or any Extended Term of any of the following events: (iv) An acquisition (other than directly from SunLink) of any voting securities of that company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 40% or more of the combined voting power of SunLink's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) SunLink or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by SunLink (a "subsidiary"), (2) the company or any subsidiary, or (3) any Person in connection with a "Non-Control Transaction" (as hereinafter defined). (v) The individuals who, as of the date of this Agreement, are members of the Board of SunLink (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by that company's stockholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or 9 (vi) Approval by stockholders of SunLink of: (A) (1) A merger, consolidation or reorganization involving SunLink, unless (x) the stockholders of SunLink, immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (y) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; (A transaction described in clauses (x) and (y) shall herein be referred to as a "Non-Control Transaction"). (vii) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive establishes that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control (a "Third Party") or (B) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, in each case within not more than six (6) months after such termination then for all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. f. "Disability" shall mean, subject to applicable state and federal laws, a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with SunLink for a period of four (4) consecutive months, as determined by an independent physician selected with the approval of both SunLink and the Executive. 10 g. "Notice of Termination" shall mean a written notice of termination from SunLink or the Executive which specifies an effective date of termination, indicates the specific termination provision in this Agreement relied upon, and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. h. "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the assets and business of SunLink (including this Agreement), whether by operation of law or otherwise. i. "Termination Date" shall mean, in the case of the Executive's death, his date of death, and in all other cases, the date specified in the Notice of Termination. j. "Trade Secrets" shall mean any information, including but not limited to technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, information on customers, or a list of actual or potential customers or suppliers, which: (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the 30th day of September, 2002 effective as of February 1, 2002. SUNLINK HEALTH SYSTEMS, INC. By: /s/ Robert M. Thornton, Jr. ------------------------------------ Robert M. Thornton, Jr. President J. T. MORRIS /s/ J. T. Morris L.S. ---------------------------------- Executive 11 EX-10.3 5 g79084exv10w3.txt EX-10.3 AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made by and between SUNLINK HEALTH SYSTEMS, INC., an Ohio corporation ("SunLink" or the "Company"), SunLink's wholly owned subsidiary SUNLINK HEALTHCARE CORP., a Delaware corporation ("SHC") and ROBERT M. THORNTON, JR., an individual resident of Georgia (the "Executive"), as of the 1st day of January, 2002 (the "Effective Date"). SunLink desires to continue to employ the Executive as its Chairman, Chief Executive Officer, and President and SunLink desires that Executive also serve as the Chairman and Chief Executive Officer of SHC. The Executive is willing to serve SunLink and SHC on the terms and conditions herein provided. In consideration of the foregoing, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby amend and restate the Employment Agreement dated as of January 1, 2001 among Executive, SunLink and SHC (the "2001 Agreement") and agree that as of the Effective Date: 1. Employment. SunLink and SHC shall continue to employ the Executive, and the Executive shall continue to serve as Chairman, Chief Executive Officer, and President of SunLink and Chairman and Chief Executive Officer of SHC, upon the terms and conditions set forth herein. Executive's principal office shall be located in the Atlanta, Georgia metropolitan area. The Executive shall have such authority and responsibilities consistent with his position and which may be set forth in the bylaws of SunLink or SHC, as the case may be, or assigned by their respective Boards of Directors from time to time. Executive shall also be nominated by SunLink for election as a member of the Board of Directors of SunLink and SunLink shall vote its SHC shares for election of Executive as a member of the Board of Directors of SHC. The Executive shall devote his full business time, attention, skill and efforts to the performance of his duties hereunder, except during periods of illness or periods of vacation and leaves of absence consistent with SunLink company policy. The Executive may devote reasonable periods of time to serve as a director or advisor to other organizations, to perform charitable and other community activities, and to manage his personal investments; provided, however, that such activities do not materially interfere with the performance of his duties hereunder and are not in conflict or competitive with, or adverse to, the interests of SunLink or SHC. 2. Term. Unless earlier terminated as provided herein, the Executive's employment under this Agreement shall be for a term (the "Fixed Term") of three (3) years ending December 31, 2004. Unless at least 180 days written notice of non-renewal shall have been given to Executive by the Company or to the Company by Executive prior to the end of the Fixed Term or any Extended Term that Executive's employment will not be continued beyond such Fixed Term or any Extended Term, as the case may be, the term of this Agreement shall be deemed automatically renewed for an additional period of eighteen months (an "Extended Term") commencing upon the end of the Fixed Term or then applicable Extended Term, as the case may be, and shall continue in force during each such Extended Term or until such time as either party shall give ninety (90) days written notice to the other party terminating this Agreement pursuant to Section 5 below. 3. Compensation and Benefits. a. SunLink shall pay the Executive a salary at a rate of not less than (i) $265,000 per annum, effective January 1, 2002 through August 31, 2002 and (ii) $270,000 per annum effective September 1, 2002 and thereafter, in each case in accordance with the salary payment practices of the Company. SunLink's Board of Directors shall review the Executive's salary at least annually and may increase the Executive's base salary if it determines in its sole discretion that an increase is appropriate. b. The Executive shall participate in a management incentive program and shall be eligible to receive bonus payments of up to sixty percent (60%) of Executive's annual base salary based upon criteria that the Executive Compensation Committee of the Board of Directors of SunLink in consultation with Executive shall establish from time to time pursuant to that program. c. The compensation payable by SunLink to Executive hereunder shall be inclusive of compensation for all services rendered by Executive to SunLink, SHC and their respective Subsidiaries and Executive shall have no separate right of compensation from SHC or any such Subsidiary other than the right to be indemnified as an officer of SHC or such Subsidiary under the corporate bylaws thereof and/or insured under any directors and officers liability insurance policies maintained by SunLink, SHC or such Subsidiary. 4. Stock Options and Other Benefits. a. SunLink has granted or shall grant to Executive, five-year options to purchase a total of 200,000 shares of the common stock of SunLink. Such grant was or shall be effective as of the date of grant as determined by the Board. The options were or shall be granted pursuant and subject to the stock option plan approved by SunLink's shareholders at their 2001 annual meeting at an exercise price per share equal to the closing sale price of SunLink's common stock on the American Stock Exchange as of the date of grant. The options so granted shall vest 20% as of the date of grant and an additional 20% annually at the first, second, third and fourth anniversaries of the date of grant. b. In addition to participating in the option plan pursuant to Section 4(a) and SunLink's preexisting option plan, Executive shall during the term of Executive's employment be eligible to participate in any additional stock option plan or arrangement adopted by SunLink which includes senior SunLink officers and to receive additional grants of options under such plans in such numbers and at such exercise prices as the Board shall determine in its discretion. c. The Executive shall participate in all retirement, welfare, deferred compensation, life and health insurance, and other benefit plans or programs (exclusive of those referenced in Sections 4(d), 4(f), 4(g), 4(h) and 4(i) of the 2001 Agreement) of SunLink now or hereafter applicable to the Executive or applicable to a class of employees that includes senior executives of SunLink; provided, however, that during any period during the Fixed Term or any 2 Extended Term that the Executive is subject to a Disability, and during the 180-day period of physical or mental infirmity leading up to the Executive's Disability, the amount of the Executive's compensation provided under this Section 4 shall be reduced by the sum of the amounts, if any, paid to the Executive for the same period under any disability benefit or pension plan of SunLink. d. SunLink shall provide supplemental term life insurance coverage equal to $300,000. e. The Executive shall receive twenty-five (25) days paid vacation each year. Unused vacation may not be carried over to subsequent years. 5. Termination. a. The Executive's employment under this Agreement and his offices and positions with SunLink may be terminated prior to the end of the Fixed Term or any Extended Term only as follows: (i) automatically upon the death of the Executive; (ii) by SunLink due to the Disability of the Executive upon ninety (90) days written notice and delivery of a Notice of Termination to the Executive; (iii) by SunLink for Cause upon delivery of a Notice of Termination to the Executive; (iv) by either party for any reason upon 90 days notice to the other party. Any termination of Executive's employment by SunLink shall also constitute the concurrent termination of such Executive's employment and offices with SHC and any other Subsidiary of SunLink. b. If the Executive's employment with SunLink shall be terminated during the Fixed Term or any Extended Term (i) by reason of the Executive's death, or (ii) by SunLink for Disability or Cause, SunLink shall pay to the Executive (or in the case of his death, the Executive's estate) within fifteen days after the Termination Date a lump sum cash payment equal to the Accrued Compensation. c. If the Executive's employment with SunLink shall be terminated by the Company other than for (i) Disability, (ii) Cause or (iii) pursuant to Section 5(d) below, Executive shall (A) in the case of any such termination by the Company during the Fixed Term, receive severance payments equal to the lesser of (x) eighteen (18) months salary or (y) the greater of the salary for the remaining number of months in the Fixed Term or twelve months, or 3 (B) in the case of any such termination by the Company during any Extended Term, receive severance payments equal to the lesser of (x) twelve (12) months salary or (y) the salary for the remaining number of months in the Extended Term, (minus, in each such case, applicable withholdings), paid in accordance with the normal payroll schedule of the Company, a pro rata portion of any annual bonus for which goals have been proportionately met, and continuation of the benefits set forth in Sections 4(c), 4(d) and 4(e) for ninety (90) days following termination. If any such payment is not delivered, mailed by first class mail or sent by commercial courier service to Executive at the most recent address provided by Executive within fifteen (15) business days after being due, the entire balance shall, at the option of the Executive, immediately be due and payable. d. If the Executive's employment is terminated by Executive or by SunLink for any reason other than for Cause (exclusive of Cause referred to in clause (iii) of Section 22(d)) within one (1) year after a Change in Control, Executive shall, in lieu of any payment under Sections 5(b) or 5(c), (i) receive severance payments equal to twenty-four (24) months base salary (minus applicable withholdings), paid in accordance with the normal payroll schedule of the company, (ii) receive Accrued Compensation, including without limitation, a pro rata portion of any annual bonus for which goals have been proportionately met, (iii) receive the balance of any other benefits set forth in sections 4(c), 4(d) and 4(e) for twelve (12) months following termination, and (iv) Executive's unvested stock options shall vest, and shall be exercisable pursuant to the terms of the applicable stock option plan and agreement. If any such payment is not delivered, mailed by first class mail or sent by commercial courier service to Executive at the most recent address provided by Executive within fifteen (15) business days after being due, the entire balance shall, at the option of Executive, immediately be due and payable. e. The severance pay and benefits provided for in this Section 5 shall be in lieu of any other severance or termination pay to which the Executive may otherwise be entitled under any Company severance or termination plan, program, practice or arrangement, but shall not be in lieu of any additional benefits to which Executive may be entitled under the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). The Executive's entitlement to any other compensation or benefits shall be determined in accordance with SunLink's employee benefit plans and other applicable programs, policies and practices then in effect. f. Clause (ii) of Section 5(a) shall not be effective or invoked by SunLink upon any Change in Control or within one (1) year thereafter. g. Any notice by the Company to Executive or by Executive to the Company of non-renewal given as contemplated by Section 2 shall not be deemed to be a termination of Executive's employment for the purposes of Section 5(b) or (c). 6. Indemnification. SunLink and SHC agree to indemnify, save and hold Executive harmless from all losses, expenses, damages, liabilities, obligations, claims and costs of any kind (including reasonable attorneys' fees and other legal costs and expenses) that Executive 4 may at any time suffer or incur by reason of any claims, actions or suits brought or threatened to be brought against Executive by any person or entity, as a result of or in connection with Executive's service as an officer, employee or director of SunLink or SHC or as an employee, officer or director of any of their Subsidiaries, or any entity that in the future becomes a Subsidiary or affiliate of SunLink or SHC, except that no indemnification shall be made if it is proved by clear and convincing evidence in a court of competent jurisdiction that Executive's action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to SunLink or SHC or was undertaken with reckless disregard for the best interest of SunLink or SHC. The provisions of this Section 6 shall survive termination of this Agreement. 7. Trade Secrets. The Executive shall not, at any time, either during the term of his employment or after the Termination Date, use or disclose any Trade Secrets of SunLink or SHC, as defined herein, except in fulfillment of his duties as the Executive during his employment, for so long as the pertinent information or data remain Trade Secrets, whether or not the Trade Secrets are in written or tangible form. 8. Protection of Other Confidential Information. Executive recognizes the interest of SunLink and SHC in maintaining the confidential nature of its proprietary and other business and commercial information. In connection therewith, Executive covenants that during the term of Executive's employment under this Agreement, and for a period of eighteen (18) months thereafter, Executive will not, directly or indirectly, except as necessary to perform Executive's duties for SunLink or SHC, publish, disclose or use any Confidential Information of SunLink or SHC. "Confidential Information" shall mean any internal, non-public information (other than Trade Secrets already addressed above) concerning SunLink's or SHC's financial position and results of operations (including revenues, assets, net income, etc.); pricing structure; annual and long-range business plans; product or service plans; marketing plans and methods; training, educational and administrative manuals; customer and supplier information and purchase histories; and employee lists. The provisions of Sections 7 and 8 shall be sufficient to protect Trade Secrets and Confidential Information of third parties provided to SunLink or SHC under an obligation of secrecy. 9. Return of Materials. Executive shall surrender to SunLink or SHC, promptly upon request and in any event upon termination of Executive's employment with SunLink or SHC, all media, documents, notebooks, computer programs, handbooks, data files, models, samples, price lists, drawings, customer lists, prospect data, or other material of any nature whatsoever (in tangible or electronic form) in Executive's possession or control, including all copies thereof, relating to SunLink and SHC, their business, or their customers. Upon the request of SunLink or SHC, Executive shall certify in writing compliance with the foregoing requirement. 10. Non-Solicitation of Customers. During the term of this Agreement and for a period of eighteen (18) months after termination of Executive's employment with SunLink or SHC for any reason, Executive shall not directly or indirectly, through one or more intermediaries or otherwise, solicit or attempt to solicit any Customers to induce or encourage them to acquire or obtain from any individual or entity other than SunLink or SHC, any product or service competitive with or substitute for any Company Product. For purposes of this Section, a "Customer" refers to any person or group of persons with whom Executive had direct material contact with regard to the 5 selling, delivery or support of Company Products, including servicing such person's or group's account, during the period of twelve (12) months preceding termination of Executive's employment; and "Company Products" refers to the products and services that SunLink or SHC offered or sold within six (6) months of the date of termination of Executive's employment 11. Non-Solicitation of Executives. During the term of this Agreement and for a period of eighteen (18) months after termination of employment with SunLink or SHC for any reason, Executive shall not, alone or in concert with others, solicit or induce any other SunLink or SHC employee to leave the employ of SunLink or SHC or recruit or attempt to recruit such person to accept employment with another business. Provided, however, that this restriction shall only apply to employees with whom Executive had direct material contact during the period of twelve (12) months preceding the termination of Executive's employment. 12. No Denigration. Executive will not at any time denigrate, ridicule or intentionally criticize the Company or any of its Subsidiaries or affiliates or any of their respective services, products, properties, employees, officers or directors, including without limitation, by way of news interviews, or the expression of personal views, opinions or judgments to the news media. 13. Successors; Binding Agreement. a. This Agreement shall be binding upon and shall inure to the benefit of SunLink and SHC, their Successors and Assigns and SunLink and SHC shall require any Successors and Assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that SunLink or SHC would be required to perform it if no such succession or assignment had taken place. b. Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 14. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other; provided, however, that all notices to SunLink or SHC shall be directed to the attention of the Board with a copy to the Secretary of the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof. 15. Modification and Waiver. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and SunLink. No waiver by any party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6 16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia without giving effect to the conflict of laws principles thereof. 17. Arbitration. Any controversy or claim against either party arising from, out of or relating to this Agreement, the breach thereof (other than controversies or claims arising from, out of or relating to the provisions in Sections 7, 8, 9, 10, 11 and 12 above, which may be litigated in a court of competent jurisdiction), or the employment or termination thereof of Executive by SunLink or SHC which would give rise to a claim under federal, state or local law (including but not limited to claims based in tort or contract, claims for discrimination under state or federal law, and/or claims for violation of any federal, state or local law, statute or regulation) ("Claims") shall be submitted to an impartial mediator ("Mediator") selected jointly by the parties. Both parties shall attend a mediation conference and attempt to resolve any and all Claims. If they are not able to resolve all Claims, any unresolved Claims, including any dispute as to whether a matter constitutes a Claim which must be submitted to arbitration, shall be determined by final and binding arbitration in Atlanta, Georgia in accordance with the Model Employment Dispute Resolution Rules ("Rules") of the American Arbitration Association, by an experienced employment arbitrator licensed to practice law in the State of Georgia in accordance with the Rules. The arbitrator shall be selected by alternate striking from a list of six arbitrators, half of which shall be supplied by SunLink or SHC and half by Executive. The party not initiating the arbitration shall strike first. The process shall be repeated twice until an arbitrator is selected. If an arbitrator is still not selected, the Mediator shall provide a list of three names which will be alternately struck, with the party initiating the arbitration striking first, until a selection is made. A demand for arbitration shall be made within a reasonable time after the Claim has arisen. In no event shall the demand for arbitration be made after the date when institution of legal and/or equitable proceedings based on such Claim would be barred by the applicable statute of limitations. Each party to the arbitration will be entitled to be represented by counsel and will have the opportunity to take one deposition of an opposing party or witness before the arbitration hearing. By mutual agreement of the parties, additional depositions may be taken. The arbitrator shall have the authority to hear and grant a motion to dismiss and/or for summary judgment, applying the standards governing such motions under the Federal Rules of Civil Procedure. Each party shall have the right to subpoena witnesses and documents for the arbitration hearing. A court reporter shall record all arbitration proceedings. With respect to any Claim brought to arbitration hereunder, either party may be entitled to recover whatever damages would otherwise be available to that party in any legal proceeding based upon the federal and/or state law applicable to the matter and as specified by Section 16. The decision of the arbitrator may be entered and enforced in any court of competent jurisdiction by either SunLink or SHC or Executive. Each party shall pay the fees of their respective attorneys, the expenses of their witnesses and any other expenses connected with presenting their Claim or defense (except as otherwise awarded by the arbitrator). Except as otherwise awarded by the arbitrator, other costs of the arbitration, including the fees of the Mediator, the arbitrator, the cost of any record or transcript of the arbitration, administrative fees, and other fees and costs, shall be borne by SunLink or SHC. Should Executive or SunLink or SHC pursue any dispute or matter covered by this Section by any method other than said arbitration, the responding party shall be entitled to recover from the other party all damages, costs, expenses, and attorneys' fees incurred as 7 a result of such action. The provisions contained in this Section 17 shall survive the termination and/or expiration of this Agreement. The parties indicate their acceptance of the foregoing arbitration requirement by initialing below: /s/ James J. Mulligan /s/ Maria E. Robinson /s/Robert M. Thornton, Jr. -------------------------------- ------------------------- -------------------------- For SunLink For SHC Executive

18. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 19. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof. Except as modified herein, any existing stock option agreement between Executive and SunLink shall remain in full force and effect. 20. Headings. The headings of Sections herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 21. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 22. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: a. "Accrued Compensation" shall mean an amount which shall include all amounts earned or accrued through the Termination Date but not paid as of the Termination Date including (i) base salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of SunLink or SHC during the period ending on the Termination Date, and (iii) bonuses and incentive compensation. b. "Act" shall mean the Securities Act of 1933, as amended. c. "Base Amount" shall mean the greater of the Executive's annual base salary (i) at the rate in effect on the Termination Date or (ii) at the highest rate in effect at any time during the twelve (12) month period prior to the Change in Control, and shall include all amounts of his base salary that are deferred under the qualified and non-qualified employee benefit plans of SunLink or any other agreement or arrangement. d. The termination of the Executive's employment shall be for "Cause" if it is a result of: 8 (i) any act that (A) constitutes, on the part of the Executive, fraud, dishonesty, malfeasance of duty, or conduct inappropriate to the Executive's office, and (B) is demonstrably likely to lead to material injury to SunLink or SHC or resulted or was intended to result in direct or indirect gain to or personal enrichment of the Executive; or (ii) the conviction of the Executive of a felony; or (iii) Executive's failure to perform his job duties to the satisfaction of the Board of Directors of SunLink, as determined by a two thirds majority vote; provided, however, that in the case of clause (i) above, such conduct shall not constitute Cause: (x) unless (A) there shall have been delivered to the Executive a written notice setting forth with specificity the reasons that the Board of Directors believes the Executive's conduct constitutes the criteria set forth in clause (i), (B) the Executive shall have been provided the opportunity to be heard in person by the Board of Directors (with the assistance of the Executive's counsel if the Executive so desires); or (y) if such conduct (A) was believed by the Executive in good faith to have been in or not opposed to the interests of the SunLink and SHC, and (B) was not intended to and did not result in the direct or indirect gain to or personal enrichment of the Executive. Provided further, in order for SunLink to terminate Executive's employment pursuant to clause (iii) above, SunLink must first give Executive written notice of such Cause and ninety (90) days to cure such Cause. e. "Change in Control" shall mean the occurrence during the Fixed Term or any Extended Term of any of the following events: (iv) An acquisition (other than directly from SunLink or SHC) of any voting securities of that company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 40% or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or 9 indirectly by the Company (a "Subsidiary"), (2) the company or any Subsidiary, or (3) any Person in connection with a "Non-Control Transaction" (as hereinafter defined). (v) The individuals who, as of the date of this Agreement, are members of the Board of SunLink or SHC (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by that company's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (vi) Approval by stockholders of SunLink or SHC of: (A) (1) A merger, consolidation or reorganization involving the Company, unless (x) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least two-thirds of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (y) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; (A transaction described in clauses (x) and (y) shall herein be referred to as a "Non-Control Transaction"). (vii) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the 10 Executive reasonably demonstrates that such termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control (a "Third Party") or (B) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, then for all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. f. "Disability" shall mean, subject to applicable state and federal laws, a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with SunLink for a period of four (4) consecutive months, as determined by an independent physician selected with the approval of both SunLink and the Executive. g. "Notice of Termination" shall mean a written notice of termination from SunLink or the Executive which specifies an effective date of termination, indicates the specific termination provision in this Agreement relied upon, and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. h. "Successors and Assigns" shall mean a corporation or other entity acquiring all or substantially all the assets and business of SunLink or SHC (including this Agreement), whether by operation of law or otherwise. i. "Termination Date" shall mean, in the case of the Executive's death, his date of death, and in all other cases, the date specified in the Notice of Termination. j. "Trade Secrets" shall mean any information, including but not limited to technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, information on customers, or a list of actual or potential customers or suppliers, which: (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 11 IN WITNESS WHEREOF, the parties have hereunto set their hands and seals the 30th day of September, 2002 effective as of January 1, 2002. SUNLINK HEALTH SYSTEMS, INC. By: /s/ James J. Mulligan --------------------------------- James J. Mulligan Secretary SUNLINK HEALTHCARE CORP. By: /s/ Maria E. Robinson --------------------------------- Maria E. Robinson Secretary ROBERT M. THORNTON, JR. /s/ Robert M. Thornton, Jr. L.S. --------------------------------- Executive 12 EX-10.4 6 g79084exv10w4.txt EX-10.4 LOAN AGREEMENT EXHIBIT 10.4 LOAN AGREEMENT among SUNLINK HEALTHCARE CORP., SOUTHERN HEALTH CORPORATION, AND SOUTHERN HEALTH CORPORATION OF JASPER, INC., collectively as Borrowers and SUNLINK HEALTH SYSTEMS, INC., as Guarantor and BANK OF NORTH GEORGIA, as Bank TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS.....................................................................................1 1.1 ADVANCE OR ADVANCES.............................................................................1 1.2 AGREEMENT.......................................................................................1 1.3 AGREEMENT DATE..................................................................................1 1.4 APPLICABLE LAW..................................................................................1 1.5 APPRAISAL.......................................................................................1 1.6 APPRAISED VALUE.................................................................................1 1.7 AUTHORIZED SIGNATORY............................................................................2 1.8 AVAILABLE INVENTORY LOAN COMMITMENT.............................................................2 1.9 BANK............................................................................................2 1.10 BASE RATE.......................................................................................2 1.11 BORROWERS.......................................................................................2 1.12 BUSINESS DAY....................................................................................2 1.13 CODE............................................................................................2 1.14 CONSTRUCTION COSTS..............................................................................2 1.15 CONSTRUCTION LOAN INTEREST ACCOUNT..............................................................2 1.16 CONVERSION DATE.................................................................................2 1.17 DEFAULT.........................................................................................2 1.18 DEFAULT RATE....................................................................................2 1.19 EAST CHURCH STREET PROPERTY.....................................................................2 1.20 ERISA...........................................................................................3 1.21 ERISA AFFILIATE.................................................................................3 1.22 EVENT OF DEFAULT................................................................................3 1.23 EXCESS AMOUNTS..................................................................................3 1.24 GAAP............................................................................................3 1.25 GUARANTOR.......................................................................................3 1.26 HOSPITAL........................................................................................3 1.27 IMPROVEMENTS....................................................................................3 1.28 LIEN............................................................................................3 1.29 LOAN............................................................................................3 1.30 LOAN COMMITMENT.................................................................................3 1.31 LOAN DOCUMENTS..................................................................................3 1.32 MATURITY DATE...................................................................................4 1.33 OBLIGATIONS.....................................................................................4 1.34 NOTE............................................................................................4 1.35 PERMITTED ENCUMBRANCES..........................................................................4 1.36 PERSON..........................................................................................4 1.37 PLANS AND SPECIFICATIONS........................................................................4 1.38 PROPERTY........................................................................................5 1.39 REPLACEMENT HOSPITAL............................................................................5 1.40 REPORTABLE EVENT................................................................................5 1.41 REQUEST FOR ADVANCE FROM LOAN...................................................................5 1.42 RETAINAGE.......................................................................................5 1.43 SECURITY INSTRUMENTS............................................................................5 1.44 TANGIBLE NET WORTH..............................................................................5 1.45 TITLE INSURANCE.................................................................................5
i 1.46 TOTAL LIABILITIES...............................................................................5 1.47 ZELL MILLER PARKWAY PROPERTY....................................................................5 ARTICLE 2 LOAN............................................................................................6 2.1 EXTENSION OF CREDIT.............................................................................6 2.2 MANNER OF BORROWING AND DISBURSEMENT UNDER LOAN.................................................7 2.3 INTEREST ON LOAN................................................................................7 2.4 FEES AND COMMISSIONS ON LOAN....................................................................8 2.5 LOAN NOTE ACCOUNT...............................................................................8 2.6 REPAYMENT OF LOAN NOTE AND RELEASES.............................................................8 2.7 MANNER OF PAYMENT...............................................................................9 2.8 APPLICATION OF PAYMENTS........................................................................10 ARTICLE 3 LOAN DISBURSEMENTS.............................................................................10 3.1 PRIOR TO THE FIRST ADVANCE.....................................................................10 3.2 SUBSEQUENT ADVANCES............................................................................15 ARTICLE 4 BORROWERS' AND GUARANTOR'S COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES...............16 4.1 PAYMENT........................................................................................16 4.2 PERFORMANCE....................................................................................16 4.3 FURTHER ASSURANCES.............................................................................16 4.4 ADDITIONAL INFORMATION.........................................................................16 4.5 QUARTERLY FINANCIAL STATEMENTS AND OTHER INFORMATION...........................................17 4.6 ANNUAL FINANCIAL STATEMENTS AND INFORMATION; CERTIFICATE OF NO DEFAULT.........................17 4.7 FINANCIAL AND OTHER COVENANTS..................................................................17 4.8 COMPLIANCE CERTIFICATES........................................................................17 4.9 THIRD PARTY INDEBTEDNESS.......................................................................17 4.10 INTERCOMPANY INDEBTEDNESS......................................................................18 4.11 KEY MAN INSURANCE..............................................................................18 4.12 OTHER FINANCIAL DOCUMENTATION..................................................................18 4.13 EXECUTION AND DELIVERY OF REQUIRED DOCUMENTATION...............................................18 4.14 PAYMENT OF CONTRACTORS.........................................................................18 4.15 INSPECTION AND APPRAISAL.......................................................................18 4.16 FEES AND EXPENSES..............................................................................19 4.17 HAZARDOUS SUBSTANCES...........................................................................19 4.18 TAXES..........................................................................................20 4.19 INSURANCE......................................................................................20 4.20 LITIGATION.....................................................................................20 4.21 REPORTABLE EVENT...............................................................................21 4.22 ACCOUNTS.......................................................................................21 4.23 INITIAL ACCOUNT................................................................................21 4.24 QUALIFICATION..................................................................................21 4.25 AUTHORITY, EXECUTION AND DELIVERY..............................................................21 4.26 CONSENTS AND APPROVALS.........................................................................22 4.27 FINANCIAL RECORDS..............................................................................22 4.28 PERMITS; CERTIFICATE OF NEED...................................................................23 4.29 GOVERNMENTAL BENEFIT PROGRAMS AND OTHER THIRD PARTY PAYORS.....................................24 4.30 FINANCIAL RELATIONSHIPS WITH HEALTH PROFESSIONALS..............................................25 4.31 JCAHO ACCREDITATION............................................................................25 4.32 COMPLIANCE WITH LEGAL REQUIREMENTS.............................................................26 4.33 CORRECTNESS OF REPRESENTATIONS.................................................................26 ARTICLE 5 DEFAULT AND REMEDIES...........................................................................27 5.1 DEFAULT........................................................................................27

ii 5.2 REMEDIES.......................................................................................29 5.3 WAIVERS........................................................................................30 5.4 CROSS-DEFAULT..................................................................................30 5.5 CROSS-COLLATERALIZATION........................................................................30 5.6 NO LIABILITY OF BANK...........................................................................31 ARTICLE 6 GENERAL CONDITIONS.............................................................................31 6.1 BENEFIT........................................................................................31 6.2 ASSIGNMENT.....................................................................................31 6.3 ADDITIONAL OBLIGATIONS AND AMENDMENTS..........................................................32 6.4 TERMS..........................................................................................32 6.5 GOVERNING LAW AND JURISDICTION.................................................................32 6.6 PUBLICITY......................................................................................33 6.7 ATTORNEYS' FEES................................................................................33 6.8 MANDATORY ARBITRATION..........................................................................33 6.9 INVALIDATION OF PROVISIONS.....................................................................34 6.10 EXECUTION IN COUNTERPARTS......................................................................34 6.11 CAPTIONS.......................................................................................34 6.12 NOTICES........................................................................................34 6.13 LOAN DOCUMENTATION/ELECTRONIC TRANSMISSION OF DATA.............................................35 6.14 BOOKS AND RECORDS..............................................................................36 6.15 PAYMENT OF TAXES...............................................................................36 6.16 PAYMENT OF TAXES...............................................................................36 6.17 TRANSFER OF PROPERTY AND RIGHTS................................................................36 6.18 FINAL AGREEMENT................................................................................36

iii EXHIBITS Schedule 1 - Environmental Reports, Notices and Documentation Exhibit A - Property Exhibit B - Request for Advance From Loan Exhibit C - List of Permits iv LOAN AGREEMENT THIS LOAN AGREEMENT dated and delivered as of the 30th day of September, 2002, is by and among (i) SUNLINK HEALTHCARE CORP., a corporation of the State of Delaware, SOUTHERN HEALTH CORPORATION, a corporation of the State of Georgia, and SOUTHERN HEALTH CORPORATION OF JASPER, INC., a corporation of the State of Georgia, collectively as Borrowers, (ii) SUNLINK HEALTH SYSTEMS, INC., an Ohio corporation, as Guarantor, and (iii) BANK OF NORTH GEORGIA, a state chartered bank, as Bank. IN CONSIDERATION of the sum of TEN AND NO/100 DOLLARS ($10.00) in hand paid by each party to the other and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the undersigned, the undersigned hereby covenant and agree as follows: ARTICLE 1 DEFINITIONS For the purposes of this Agreement, the words and phrases set forth below shall have the following meanings: 1.1 ADVANCE OR ADVANCES. Amounts advanced by Bank to Borrowers pursuant to Article 2 hereof. 1.2 AGREEMENT. This Loan Agreement between Borrowers and Bank dated as of the Agreement Date. 1.3 AGREEMENT DATE. September 30, 2002. 1.4 APPLICABLE LAW. With respect to any Person, all provisions of constitutions, statutes, rules, regulations, and orders of governmental bodies or regulatory agencies applicable to such Person, including, without limitation, all orders and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party or by which it is bound. 1.5 APPRAISAL. The appraisal or evaluation of the Zell Miller Parkway Property prepared by Valuation Counselors dated as of May 1, 2002 (as-is value) and dated as of May 1, 2003 (as-completed value), and addressed to Bank. 1.6 APPRAISED VALUE. The value for the Zell Miller Parkway Property in the amount of $14,700,000 as reflected by the Appraisal. 1.7 AUTHORIZED SIGNATORY. With respect to any Person, such personnel of such Person as may be duly authorized and designated in writing by the Person to execute documents, agreements, and instruments on behalf of the Person. 1.8 AVAILABLE LOAN COMMITMENT. As of any date of determination, an amount equal to the lesser of (a) $6,000,000.00 less the sum of (i) sum of all previous Advances and (ii) sum of all Retainage or (b) the Construction Costs less the sum of (i) $8,629,738.00, (ii) sum of all previous Advances and (iii) sum of all Retainage. 1.9 BANK. Bank of North Georgia, a state chartered bank. 1.10 BASE RATE. At any time, Base Rate shall mean the rate of interest at the applicable time provided in the Note prior to a Default. 1.11 BORROWERS. SunLink Healthcare Corp., a corporation of the State of Delaware, Southern Health Corporation, a corporation of the State of Georgia, and Southern Health Corporation of Jasper, Inc., a corporation of the State of Georgia, collectively. Any one of the Borrowers is a Borrower. 1.12 BUSINESS DAY. A day on which Bank is authorized or required to be open for the transaction of business in Alpharetta, Georgia. 1.13 CODE. The Internal Revenue Code of 1986, as amended. 1.14 CONSTRUCTION COSTS. All costs certified to Bank by Borrowers and actually incurred by Borrowers with respect to the construction of the Improvements as of the date of determination, excluding (i) costs for stored materials or materials not incorporated into the Improvements, and (ii) work not yet physically performed, all such Construction Costs being subject to the review and approval of USA Inspection Services, LLC, in connection with USA Inspection Services, LLC's establishment of the Construction Costs for which amounts are to be advanced hereunder pursuant to each Request for Advance from Loan (as hereinafter defined). 1.15 CONSTRUCTION LOAN INTEREST ACCOUNT. Account Number 3096245 in the name of Southern Health Corporation of Jasper, Inc., initially in the amount of $2,500.00, but, prior to the first Advance, said Account shall be in the amount of $300,000.00 to support the payment of interest payable under the Note in accordance with Section 2.7(c) hereof. 1.16 CONVERSION DATE. The Conversion Date as defined in the Note. 1.17 DEFAULT. Any of the events specified in Section 5.1 hereof, provided that any requirement for notice or lapse of time, or both, has been satisfied. 1.18 DEFAULT RATE. The Default Rate as defined in the Note. 1.19 EAST CHURCH STREET PROPERTY. The property described on EXHIBIT "A" hereto as the East Church Street Property. 2 1.20 ERISA. The Employee Retirement Income Security Act of 1974, as in effect on the Agreement Date and as such Act may be amended thereafter from time to time. 1.21 ERISA AFFILIATE. (a) Any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as is any Borrower, (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with any Borrower, (c) any other corporation, partnership or other organization which is a member of an affiliated service group (within the meaning of Code Section 414(m)) with any Borrower, or (d) any other entity required to be aggregated with any Borrower pursuant to regulations under Code Section 414(o). 1.22 EVENT OF DEFAULT. Any event specified in Section 5.1 hereof which with any passage of time or giving of notice (or both) would constitute a Default. 1.23 EXCESS AMOUNTS. An amount paid prior to the Maturity Date in repayment of the Note which, if applied to the repayment of the Note, would cause the outstanding principal balance of the Note to be less than Ten Dollars ($10.00). This term shall not include any amount of the payment which reduces the outstanding principal amount under the Note to Ten Dollars ($10.00). 1.24 GAAP. As in effect as of the Agreement Date, generally accepted accounting principles consistently applied. 1.25 GUARANTOR. SunLink Health Systems, Inc., a corporation of the State of Ohio. 1.26 HOSPITAL. The hospital known as Mountainside Medical Center located on the East Church Street Property. 1.27 IMPROVEMENTS. The approximately 69,700 square foot hospital and related improvements to be built on the Zell Miller Parkway Property in accordance with the Plans and Specifications. 1.28 LIEN. With respect to any property, any mortgage, lien, pledge, assignment, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment, or other encumbrance of any kind in the nature of any of the foregoing in respect of such property, whether or not choate, vested, or perfected. 1.29 LOAN. Amounts to be advanced by Bank pursuant to the terms of this Agreement and evidenced by the Note. 1.30 LOAN COMMITMENT. Letter to Mr. Robert M. Thornton, Jr., Chief Executive Officer of SunLink Healthcare Corp., from Bank dated July 24, 2002. 1.31 LOAN DOCUMENTS. This Agreement, the Note, the Security Instruments, the Guaranty, the Environmental Indemnity Agreement and any and all other documents evidencing or securing the Note as the same may be amended, substituted, replaced, extended or renewed from time to time. 3 1.32 MATURITY DATE. The Maturity Date provided in the Note, or such earlier date as payment of the Loan shall be due (whether by acceleration or otherwise). 1.33 OBLIGATIONS. (a) All payment and performance obligations of Borrowers and all other obligors to Bank under this Agreement and the other Loan Documents, as they may be amended from time to time, or as a result of making the Loan, and (b) the obligation to pay an amount equal to the amount of any and all damages which Bank may suffer by reason of a breach by Borrowers or any other obligor of any obligation, covenant, or undertaking with respect to this Agreement or any other Loan Document. 1.34 NOTE. The Note executed and delivered by Borrower to Bank dated as of September 30, 2002, in the amount of SIX MILLION DOLLARS ($6,000,000). 1.35 PERMITTED ENCUMBRANCES. (i) Liens for taxes or other governmental charges either not yet delinquent or with respect to which the payment thereof is being contested diligently and in good faith by adequate procedures subject to the conditions set forth in Article 19 of the Security Deed (as hereinafter defined); (ii) encumbrances created by or relating to any legal proceeding which at the time is being contested by Borrowers diligently and in good faith by adequate procedures provided that any judgment resulting from, or damage award sought in, any such legal proceeding does not give rise to a Default under Section 5.1 (h) hereof; (iii) liens and encumbrances not arising in connection with indebtedness for money borrowed that do not in the aggregate materially impair the use or value of the Properties in the conduct of Borrowers' business provided that the same do not give rise to a Default under Section 5.1 (m) hereof; (iv) encumbrances (including capitalized leases) in respect of personal property assets acquired which exist at the time of acquisition of such assets or which are incurred to finance all or part of the cost of such assets provided such encumbrances cover only the assets so acquired and provided that the same do not violate the covenants set forth in Section 4.9 hereof; (v) leases or other occupancy agreements entered into by Borrowers in the ordinary course of business provided that the same do not violate the covenants set forth in Article 4.9 hereof or the representations and warranties set forth in Article 4.30 hereof; (vi) easements or amendments to existing easements entered into in connection with the construction and operation of the Replacement Hospital on the Zell Miller Parkway Property, which easements (other than utility easements) shall be subject to the approval and consent of Bank, which approval and consent shall not be unreasonably withheld, delayed or conditioned; and (vii) encumbrances existing on the Agreement Date which are reflected in the mortgagee title insurance policy to be provided to Bank by Borrowers pursuant to Section 3.1(e) hereof. 1.36 PERSON. An individual, corporation, partnership, limited liability company, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. 1.37 PLANS AND SPECIFICATIONS. The Plans and Specifications identified as Replacement Facility for Mountainside Medical Center, Jasper, Georgia, CON #047-98, 4 prepared by Johnson Johnson Crabtree Architects, PC, dated October 26, 2001, Project No. 01338.00, as the same may be amended or modified from time to time. 1.38 PROPERTY. The Zell Miller Parkway Property and the East Church Street Property, collectively. 1.39 REPLACEMENT HOSPITAL. The Improvements to be constructed on the Zell Miller Parkway Property in accordance with the Plans and Specifications. 1.40 REPORTABLE EVENT. A Reportable Event shall have the meaning set forth in Section 4043(b) of ERISA. 1.41 REQUEST FOR ADVANCE FROM LOAN. A certificate signed by an Authorized Signatory of Borrowers requesting an Advance hereunder which certificate shall be denominated a "Request for Advance from Loan," and shall be submitted on the standard AIA draw request form. Each Request for Advance from Loan shall, among other things, (a) specify the date of the requested Advance, which shall be a Business Day, (b) specify the amount of the requested Advance, (c) certify that there shall not exist, on the date of the requested Advance and after giving effect thereto, a Default or an Event of Default, and (d) certify that all conditions precedent to the making of the requested Advance have been satisfied. 1.42 RETAINAGE. 10% of the portion of the Construction Costs for which each Advance is made by Bank. 1.43 SECURITY INSTRUMENTS. (i) The Deed to Secure Debt and Security Agreement (and amendments thereto or modifications thereof) executed pursuant to this Agreement by Southern Health Corporation of Jasper, Inc. and delivered to Bank perfecting a security interest in the Property and other real and personal property more particularly described therein and securing the Loan ("SECURITY DEED"), (ii) the assignment of the Construction Loan Interest Account and (iii) all other security instruments and amendments and modifications thereto securing the indebtedness evidenced by the Note. 1.44 TANGIBLE NET WORTH. Stockholder's equity less all "intangible assets" as defined under GAAP. 1.45 TITLE INSURANCE. The mortgagee title insurance policy issued by Chicago Title Insurance Company pursuant to Section 3.1(d). 1.46 TOTAL LIABILITIES. All items required by GAAP to be set forth as "liabilities" other than physician guarantees entered into in the ordinary course of business and in compliance with all applicable laws. 1.47 ZELL MILLER PARKWAY PROPERTY The property described on EXHIBIT "A" hereto as the Zell Miller Parkway Property. 5 Each definition of an agreement in this Article 1 shall include such agreement as modified, amended, or supplemented from time to time with the prior written consent of Bank, and except where the context otherwise requires, definitions imparting the singular shall include the plural and vice versa. Except where otherwise specifically restricted, reference to a party to a Loan Document includes that party and its successors and assigns. All terms used herein which are defined in Article 10 of the Uniform Commercial Code in effect in the State of Georgia on the date hereof and which are not otherwise defined herein shall have the same meanings herein as set forth therein. All accounting terms used herein without definition shall be used as defined under GAAP. ARTICLE 2 LOAN 2.1 EXTENSION OF CREDIT. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties made in this Agreement and the other Loan Documents, Bank agrees to extend credit to Borrowers in an aggregate principal amount not to exceed $6,000,000 as provided herein. All extensions of credit under this Agreement shall be evidenced by the Note and secured by the Security Instruments. (a) Loan. Subject to the terms, conditions and limitations set forth in this Agreement and provided that there is no existing Default or Event of Default, Bank agrees to lend to Borrowers, prior to the Conversion Date, up to $6,000,000. Bank shall have no obligation prior to the Conversion Date to make any Advance if the sum of the following exceeds $6,000,000: (i) the requested Advance plus the Retainage thereon, (ii) the estimated or projected cost as established by USA Inspection Services, Inc., acting reasonably and in good faith (subject to the approval of Bank, such approval not to be unreasonably withheld or delayed) for completion of the Improvements in accordance with Plans and Specifications, (iii) the sum of all previous Retainage, and (iv) the outstanding principal balance of the Note. On the Conversion Date and provided there is no Default or Event of Default and Borrowers are entitled to receive the Retainage as provided in Section 2.2(c), Bank shall advance to Borrowers, on receipt of the Borrowers' final Request for Advance from Loan, the balance of the Loan, including any Retainage. (b) Use of Loan Proceeds. Borrowers agree that the proceeds of the Loan received by Borrowers shall be used only for the costs actually incurred for the construction of the Improvements. (c) Excess Costs. Borrowers shall be responsible for paying from funds other than the Loan the costs of construction of Improvements in excess of the amounts to be advanced by Bank pursuant to the terms of this Agreement. 6 2.2 MANNER OF BORROWING AND DISBURSEMENT UNDER LOAN . (a) Advances. Provided the Available Loan Commitment is sufficient to permit an Advance to be made under the terms of this Agreement plus the Retainage to be withheld for such Advance as herein provided and Borrowers have delivered to Bank an irrevocable written notice for Advance under the Loan in the form of a Request for Advance from Loan, Bank shall make the Advance to Borrowers after Bank has received a written report from USA Inspection Services, LLC which establishes the Construction Costs for which the Advance is to be made. In the event Bank needs additional information to establish Available Loan Commitment sufficient to permit a requested Advance to be made, such Advance will be made within a reasonable time after such Available Loan Commitment is established and the referenced written report in respect of such Advance from USA Inspection Services, LLC has been received by Bank. The final Advance as provided in Section 2.1(a) above shall be made on the Conversion Date or as soon thereafter as Bank has received all documents Bank reasonably deems necessary to support the final Advance and Bank has received a written report for the final Advance from USA Inspection Services, LLC, which establishes the Construction Costs for such Advance. Bank will use commercially reasonable efforts to disburse each Advance hereunder within a reasonable period of time after Borrowers request such Advance. (b) Disbursement. On the date of an Advance hereunder, Bank shall, subject to the satisfaction of the conditions set forth in this Agreement, disburse the amount in immediately available funds by crediting the amount made available to the operating account in Bank established by Borrowers. Only one Advance shall be made in any calendar month. (c) Retainage. The Bank shall retain an amount equal to the Retainage on each Advance except for the final Advance. No interest shall accrue on any such Retainage until disbursed to Borrower. The Retainage shall not be disbursed until the Bank has received satisfactory evidence that the Improvements have been completed in accordance with the Plans and Specifications, all permits and licenses for the operation of the Replacement Hospital on the Zell Miller Parkway Property have been issued, all items to be delivered under Section 3.2 have been delivered, certification of USA Inspection Services, LLC has been delivered to Bank certifying that the Improvements have been completed in accordance with the Plans and Specifications and no Default or Event of Default has occurred and not been cured. 2.3 INTEREST ON LOAN. (a) Generally. Interest shall be due and payable as provided in the Note. Bank is hereby authorized to withdraw from the Construction Loan Interest Account such amount as may be necessary to pay the Bank all accrued interest due and payable on the Note. (b) Upon Default. Upon the occurrence and during the continuance of a Default, Bank shall have the option (but shall not be required to give prior notice thereof to Borrowers) to accelerate the maturity of the Note, to exercise any other rights or remedies hereunder in connection with the exercise of this right, and, upon any such acceleration, to declare the interest on the outstanding principal balance of the Note to be at the Default Rate from and after the date of such Default and for so long as the same shall be continuing uncured. 7 2.4 FEES AND COMMISSIONS ON LOAN. (a) Origination Fee. An initial origination fee in the amount of $60,000 has been earned by Bank and shall be payable as follows: (i) The sum of $15,000 was paid by Borrowers to Bank on July 24, 2002; and (ii) The sum of $45,000 is due and payable by Borrowers to Bank on the Agreement Date. (b) Permanent Loan Fee. A permanent origination loan fee shall be deemed earned by Bank on the Conversion Date in the amount of $30,000 and shall be due and payable by Borrowers to Bank on the Conversion Date. (c) Origination Fees Not Interest. The initial origination fee and the permanent origination fee are in addition to and not in lieu of any interest and other fees payable by the Borrowers and shall be deemed fully earned on the date such are due and payable. 2.5 LOAN NOTE ACCOUNT. (a) Payment. The Loan shall be repayable in accordance with the terms and provisions set forth herein and in the Note. (b) Bank Records. Bank shall maintain in accordance with its usual practice records of account evidencing the Advances under the Note with respect to the Loan. In any legal action or proceeding in respect of this Agreement, the entries made in such record shall, absent manifest error, be prima facie evidence of the existence and amounts of the Advances with respect to the Loan. Failure of Bank to maintain any such record shall not excuse Borrowers from the obligation to pay the Note. 2.6 REPAYMENT OF LOAN NOTE AND RELEASES. (a) Release of East Church Street Property. The East Church Street Property shall be released from the lien of the Security Instruments upon the satisfaction of all four of the following conditions: (i) the Improvements and all punch list items have been completed and certified as to completion by USA Inspection Services, LLC to Bank, such certification to be subject to the review and approval of Bank; (ii) the day-to-day operations of the Hospital have been entirely transferred from the East Church Street Property to the Zell Miller Parkway Property and the Replacement Hospital is 8 fully operational as a general acute care hospital; such transfer to be certified in writing by Borrowers to Bank. (iii) the Replacement Hospital, located on the Zell Miller Parkway Property, has a proven generation of cash flow to service all of the debt of Southern Health Corporation of Jasper, Inc. of at least 1.40 times, as measured by EBITDA/Annual Debt Service each month for six (6) consecutive months, as supported by financial materials provide by Borrowers to Bank; and (iv) there is no Default or Event of Default that has not been cured. (b) Limitation on Repayment of Note. The Note may be prepaid in whole or in part at any time and from time to time with twenty-one (21) days' prior written notice by Borrowers to Bank. In the event the indebtedness evidenced by the Note is paid in full (exclusive of any payment pursuant to Section 2.6(c) hereof), Bank shall have no further obligations to make any Advances to Borrowers under the Note or otherwise with respect to the Loan or pursuant to this Agreement. After the installments of principal and interest commence under the Note, a partial prepayment shall not reduce the monthly installments provided for in the Note. The written notice shall be given as provided in this Agreement. (c) Loan Reduction. In the event the Bank, acting reasonably and in good faith, determines at any time that, based on the written report or opinion of USA Inspection Services, LLC, the cost to complete the Improvements is greater than the then Available Loan Commitment, Borrowers agree to make a prepayment on the Note to the extent of such excess. 2.7 MANNER OF PAYMENT. (a) Payments. Each payment (including any prepayment) by Borrowers on account of the principal of or interest under the Note, fees, and any other amount owed to Bank under this Agreement, the Note, or the other Loan Documents shall be made to an account designated by Bank, for the account of Bank, in lawful money of the United States of America in immediately available funds and shall be applied by Bank on the date received by Bank in accordance with the terms of Section 2.8 hereof. Any payment received after 2:00 p.m. shall be applied as of the next business day. (b) Application of Payment. If any payment under this Agreement or any of the Note shall be specified to be made upon a day which is not a Business Day, it shall be made on the immediately following day which is a Business Day. (c) Construction Loan Interest Account. Borrowers have established the Construction Loan Interest Account for the purpose of paying interest on the Note and as additional collateral for the indebtedness evidenced by the Note. Borrowers hereby authorize Bank to withdraw from the Construction Loan Interest Account the necessary funds to pay to 9 Bank all interest due and payable under the Note. Upon the balance in the Construction Loan Interest Account being reduced to less than $100,000.00 at any time after the first Advance, Borrowers covenant and agree to deposit in the Construction Loan Interest Account within three (3) days after notice a sufficient amount so that the account has after the deposit a balance of not less than $200,000.00. Upon a Default, Bank shall be entitled to apply all funds then in the Construction Loan Interest Account to any indebtedness evidenced by the Note or secured by the Security Instruments. (d) No Right of Set-Off or Counterclaim. Borrowers agree to pay principal, interest, fees, and all other amounts due hereunder or under the Note without set-off or counterclaim or any deduction whatsoever. 2.8 APPLICATION OF PAYMENTS. Unless otherwise specifically provided in this Agreement or the other Loan Documents, payments made to Bank, or otherwise received by Bank (from realization on collateral for the Obligations or otherwise), shall be applied in the following order: First, to the reasonable out-of-pocket costs and expenses, if any, incurred by Bank, commencing upon the event giving rise to Default and during its continuance, in the collection of such amounts under this Agreement or any of the other Loan Documents, including, without limitation, any reasonable out-of-pocket costs incurred in connection with the sale or disposition of any collateral for the Obligations; Second, to any fees and commissions then due and payable by Borrowers to Bank, under this Agreement or any Loan Document, including, without limitation, late charges provided for in the Note and Default Rate interest (as defined in the Note); Third, to any accrued and unpaid interest which may have accrued on the Note; Fourth, to any unpaid principal of the Note; Fifth, to any other Obligations not otherwise referred to in this Section 2.8 until all such Obligations are paid in full; and Sixth, upon satisfaction in full of all Obligations, to Borrower or as otherwise required by law. ARTICLE 3 LOAN DISBURSEMENTS 3.1 PRIOR TO THE FIRST ADVANCE. Prior to requesting the first Advance, Borrowers shall execute and deliver all of the following items to Bank in form and substance reasonably satisfactory to Bank. Bank shall have no obligation to make the first Advance until all of these items have been provided to, executed and delivered to Bank and approved by Bank, such approval not to be unreasonably withheld or delayed. (a) Note. A Note by Borrowers payable to the order of Bank. (b) Security Instruments. Security Instruments which shall be a first lien on all property and collateral described therein. (c) Environmental Inspection and Indemnity Agreement. Bank shall have received Phase I environmental reports on the Property at the cost of the Borrowers, such reports to be addressed to Bank and conducted by engineers acceptable to Bank stating that the Property 10 is free of all Hazardous Substances. An environmental indemnity agreement by Borrowers and Guarantor in favor of Bank whereby Borrowers and Guarantor indemnify Bank against any and all environmental matters with respect to the Property ("ENVIRONMENTAL INDEMNITY AGREEMENT"). (d) Guaranty. The Contract of Guaranty by Guarantor in favor of Bank in which Guarantor guarantees the payment and performance of the Obligations ("GUARANTY"). (e) Title Insurance. A standard mortgagee policy for Bank as to the Property from a company approved by Bank (including any reinsurance agreements, endorsements and special coverages required by Bank), in form and substance acceptable to Bank, providing coverage in the aggregate amount of $6,000,000 and containing no title exceptions other than the Permitted Encumbrances. In the event that the title agent providing the mortgagee policy cannot deliver a final title policy or policies prior to the first disbursement under the Note, Bank will accept a marked mortgagee title insurance commitment or commitments provided that such commitment or commitments are replaced by a final mortgagee policy or policies that conform to the above requirements within a reasonable time thereafter. Bank may, in its discretion, accept a title insurance commitment or interim construction binder in lieu of a title insurance policy hereunder provided that such title insurance commitment or interim construction binder is replaced by a final mortgagee policy or policies that conform to the above requirements within a reasonable time thereafter. Borrowers shall be responsible for all costs of title insurance including, without limitation, all out-of-pocket costs of the title agent and title insurance company, the title exam fee, the title insurance premium and the cost of issuance of all title insurance endorsements. (f) Plans and Specifications. Borrowers shall provide to Bank three (3) sets of completed Plans and Specifications, such Plans and Specifications having been approved by Bank prior to the Agreement Date. (g) Construction Budget. Borrowers shall provide to Bank three (3) copies of the construction budget. The construction budget (including all cost overruns) shall have been approved by the Georgia Department of Community Health and shall demonstrate that the total cost of construction of the Improvements does not exceed $15,500,000 (which includes all cost overruns). The construction budget shall have been approved by Bank, and the construction budget shall have been approved in writing by USA Inspection Services, LLC, no such approval to be unreasonably withheld or delayed. The cost of the review and approval of the initial construction budget by USA Inspection Services, LLC is $1,500, which cost Borrowers represent unto Bank that Borrowers have paid in full. Borrowers will pay prior to the first Advance hereunder any additional fee charged by USA Inspection Services, LLC to review and approve the construction budget reflecting all cost overruns. (h) Construction Contract. Borrowers have provided to Bank a copy of the AIA construction contract for the Improvements with Brasfield & Gorrie, LLC, general contractor, and a copy of the architect's contract for the Improvements with Johnson Johnson Crabtree, P.C., architect, both certified as accurate and complete by an officer of Borrowers. The Construction Contract and the Architect's Contract shall be assigned as additional collateral to 11 the Bank for the Loan, which assignment is acknowledged and approved by the aforesaid contractor, architect and Bank. (i) Permits. Borrowers shall provide to Bank satisfactory evidence of all certificates of need and implementation requirements, operating permits and licenses, of the Hospital, and zoning compliance, building permit, land disturbance permit, and sewer allocation, if any, relating to the development of the Zell Miller Parkway Property contemplated by this Agreement. (j) Certificate of Need. Evidence satisfactory to the Bank of the issuance and transfer of the certificate of need for the operation of the Replacement Hospital on the Zell Miller Parkway Property, together with a copy of the certificate of need, and evidence satisfactory to Bank and its counsel that Borrower has received (1) a determination letter from the Georgia Department of Community Health that the cost overruns on the Replacement Hospital project (Project No. GA 047-98) do not require the filing by Borrower of a new certificate of need application for the Replacement Hospital project (Project No. GA 047-98), (2) a certificate of need from the Georgia Department of Community Health for the cost overruns on the Replacement Hospital project (Project No. GA 047-98), or (3) a new certificate of need from the Georgia Department of Community Health for the relocation and replacement of the Hospital from the East Church Street Property to the Zell Miller Parkway Property for a budget not to exceed $15,500,000. (k) Certification. Bank has received an equity and draw inspection certificate completed by USA Inspection Services, LLC at Borrowers' expense verifying that the amount requested by the Borrowers is in compliance with the terms of this Agreement. (l) Review of Cost Estimates. Bank has engaged USA Inspection Services, LLC, at the expense of Borrowers to be paid prior to the first Advance, to conduct a review of the cost estimates for the Improvements and the Plans and Specifications. Prior to the first Advance, Bank must receive and approve the report from USA Inspection Services, LLC. (m) Lien Waivers. Bank has received an unconditional lien waiver from Brasfield & Gorrie, LLC, or any successor general contractor. (n) Flood Hazard. Certifications satisfactory to Bank that no portion of the Property is located within a flood hazard area. (o) Insurance. Certificate(s) of insurance required pursuant to Section 4.19 hereof and satisfactory evidence of premium payments. (p) Authority Documents of Borrowers and Guarantor. Articles of Incorporation of Borrowers and of Guarantor certified by the office of the Secretary of State in which each Borrower and in which Guarantor is incorporated; Bylaws of each Borrower and of Guarantor certified by an officer of each such Borrower and of Guarantor; Certificate of Existence of each Borrower and of Guarantor issued by the state in which the applicable Borrower or Guarantor is incorporated; Incumbency Certificate of each Borrower and of 12 Guarantor reflecting the Authorized Signatories; Corporate Resolutions of each Borrower and of Guarantor certified by an officer of the applicable Borrower and of Guarantor and authorizing the applicable Borrower to enter into this Agreement and execute all related documents and Loan Documents applicable to the Note, and in the case of Guarantor, authorizing Guarantor to enter into the Guaranty; and, if required, resolutions of any Borrower's stockholders certified by an officer of the applicable Borrower and authorizing the applicable Borrower to enter into this Agreement and execute all related documents and Loan Documents applicable to the Note. (q) Attorney's Opinion. The written opinions of each Borrower's counsel and of Guarantor's counsel to Bank in form and content acceptable to Bank and which address the following matters: (i) Existence, Due Authorization and Execution. Borrower is duly organized and existing as a corporation and is in good standing under the laws of the state of incorporation or formation and qualified to do business under the laws of the State of Georgia. Guarantor is duly organized and existing as a corporation and is in good standing under the laws of the state of incorporation or formation and qualified to do business under the laws of the State of Georgia; (ii) Enforceability. The Loan Documents are enforceable against Borrower in accordance with their terms subject to customary exceptions and limitations. The Guaranty is enforceable against Guarantor in accordance with its terms subject to customary exceptions and limitations; and (iii) Miscellaneous. As to such other matters as Bank may reasonably request. (r) Taxpayer Identification Number. Each Borrower's federal taxpayer identification numbers. (s) Request for Advance from Loan. The Request for Advance from Loan that Borrowers are required to deliver pursuant to Section 2.2 hereof. (t) Payments. Borrowers shall pay the cost of all services of USA Inspection Services, LLC for which Bank has engaged them for the purposes provided in this Agreement. (u) Investment. Evidence reasonably satisfactory to Bank that Borrowers have invested in the cost of the Zell Miller Parkway Property and the construction of the Improvements in an amount not less than $8,629,738 (exclusive of any hold back) and that the cost to finish the Improvements is not greater than the Loan Amount. (v) Appraisal. An appraisal of the Zell Miller Parkway Property, assuming the Improvements are completed, by Valuation Counselors indicating a value of not less than 13 $12,000,000. Borrowers shall pay the cost of such appraisal. The current appraisal of the East Church Street Property shall also be addressed to the Bank at the cost of Borrowers. (w) Record Search. A search and certification is received by Bank that there is no UCC lien, judgment lien, bankruptcy or pending litigation affecting any collateral securing the Loan or any of the Borrowers. (x) Surveys. Current foundation survey of the Zell Miller Parkway Property and as-built survey of the East Church Street Property. The Borrowers shall pay the cost of the surveys and all modifications thereto reasonably required by the Bank. (y) Evidence of Zoning. Evidence in the form of a letter from the City of Jasper that the zoning classification of the Properties continues to be C2 and that a hospital and medical office building continue to be included within the permitted uses under the C2 zoning classification. (z) Evidence of Utilities. Evidence in the form of a letter from the City of Jasper that water and sewer can be made available at the Zell Miller Parkway Property. (aa) Leases. Copies of all leases and occupancy agreements affecting the Properties together with a written certification from Borrowers attached thereto that all such leases and occupancy agreements are true, accurate and complete copies and that they have not been amended or modified except as attached to such certification. (bb) Certified Rent Roll. A rent roll containing the following with respect to each tenant of the Hospital and Replacement Hospital (i) the tenant's name, (ii) the address of the leased premises, (iii) the date of the lease; (iv) the scheduled expiration date of the lease; (v) information relating to any option to extend under the lease, (vi) the number of square feet in the leased premises, (vii) the base rental amount per month and per year; (viii) the security deposit, if any, and (ix) a statement as to any default or claimed setoff against rent existing under said lease as of the date of the rent roll. The rent roll shall be certified as true, accurate and complete by the President and CEO of Southern Health Corporation of Jasper, Inc. (cc) Construction Loan Interest Account. Borrowers' depositing into the Construction Loan Interest Account a sufficient amount so that the account has after the deposit a balance of not less than $300,000.00. (dd) Evidence satisfactory to the Bank that Borrowers and the Zell Miller Parkway Property, or any condition, use or activity on the Zell Miller Parkway Property, is in compliance with each and every requirement of the Federal Water Pollution Control Act, 33 U.S.C. ss. 1251 et seq., the Georgia Water Quality Control Act, O.C.G.A. ss. 12-5-20 et seq., the Georgia Erosion and Sedimentation Act of 1975, O.C.G.A. ss. 12-7-1 et seq., and any permits, authorizations, rules and regulations promulgated pursuant to these Acts. Borrowers hereby agree that Bank may retain a qualified environmental consulting firm to confirm and verify independently such compliance at Borrowers' sole expense. 14 (ee) Evidence satisfactory to the Bank that Borrowers have fully resolved all matters addressed in the September 5, 2002 letter to Borrowers from the Georgia Department of Natural Resources, including without limitation, the violations cited in the "Expedited Enforcement Compliance Order and Settlement Agreement" attached thereto, such letter identified as Item 3 on SCHEDULE 1 attached hereto. Borrowers represent and warrant to Bank that Borrowers have delivered to Bank a true, accurate and complete copy of such letter, attached order and related notices or writings. (ff) Due Diligence/Other Documents. Completion of due diligence by Bank and its counsel to Bank's and its counsel's satisfaction, and the receipt of other documents, information, materials or items that Bank may reasonably require, including, without limitation, that certain estoppel certificate from R. Gary Copeland with respect to the "DEVELOPMENT PARCEL" as defined in that certain Declaration of Covenants and Restrictions recorded in Deed Book 421, page 577, Pickens County, Georgia Records. 3.2 SUBSEQUENT ADVANCES. Prior to requesting subsequent Advances (subsequent to the first Advance), Borrowers shall execute and deliver to Bank the following items. Bank shall have no obligation to make further Advances until the following items requested by Bank have been properly executed and delivered to Bank and approved by Bank. (a) Title Insurance Endorsement. If requested by Bank, an endorsement to the Title Insurance to cover the Advance, reflecting no change in the aggregate dollar amount of coverage or the exceptions previously accepted and approved by Bank except that all taxes due and payable have been paid. In the event that the title agent providing the endorsement to the Title Insurance cannot deliver a final title endorsement prior to such subsequent disbursement, Bank will accept a representation and covenant from issuer of the Title Insurance that such title endorsement will be issued upon the recording of the applicable documentation. (b) Request for Advance from Loan. The Request for Advance from Loan that Borrowers are required to deliver pursuant to Section 2.2 hereof. (c) Certification. Prior to each Advance, Bank shall request, at Borrowers' expense, an equity and draw inspection certificate to be completed by USA Inspection Services, LLC at a cost to Borrower of $500 which certificate approves the requested Advance. The aforesaid cost shall be paid by Borrowers before each Advance. Each Advance shall be subject to the approval by Bank of the applicable certificate and as a condition of each Advance verification that the amount requested by the Borrowers is in compliance with the terms of this Agreement to which Borrowers are entitled. (d) Lien Waiver. Bank has received an unconditional lien waiver from Brasfield & Gorrie, LLC, or any successor general contractor. (e) Other Documents. Other documents or items that Bank may reasonably require. 15 BORROWERS' AND GUARANTOR'S COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES Borrowers and where applicable, Guarantor, make the following covenants, agreements, representations and warranties to Bank: 4.1 PAYMENT. Borrowers shall pay when due all sums owing under this Agreement, the Note, the Security Instruments and the other Loan Documents. 4.2 PERFORMANCE. Borrowers shall perform all their obligations under this Agreement, the Note, the Security Instruments and the other Loan Documents. Borrowers covenant and agree to use commercially reasonable efforts to cause the Improvements to be completed on or before eighteen (18) months from the Agreement Date. Guarantor shall perform all its obligations under this Agreement and the Guaranty. 4.3 FURTHER ASSURANCES. On demand of Bank, Borrowers shall do any act, or execute any additional documents reasonably required by Bank to further evidence or secure the indebtedness evidenced by the Note or to confirm that the liens of the Security Instruments are first liens or to comply with this Agreement, including, but not limited to, executing and delivering new or replacement notes and/or security instruments and agreements supplementing, extending or otherwise modifying the Note, this Agreement, the Security Instruments, and certificates as to the amount of the indebtedness evidenced by the Note from time to time. 4.4 ADDITIONAL INFORMATION. On demand of Bank, Borrowers shall deliver to Bank any additional documents or information with respect to the Improvements that Bank may reasonably request and that are in the possession of, or have been prepared on behalf of, any one of the Borrowers or Guarantor, including, without limitation, surveys. Bank shall not disclose without the prior written consent of Borrowers (other than to Bank's employees, auditors or counsel or holders of a participation in the Note) any information with respect to Borrowers or Guarantor which is furnished to Bank under this Agreement or the Loan Documents or in connection with the transactions contemplated hereby or thereby which is designated by any Borrower or Guarantor as confidential, provided that Bank may disclose any such information (other than medical records created by Borrowers or their affiliates which are subject to protection under the Health Insurance Portability and Accountability Act of 1996, none of which shall be disclosed by Bank except to the extent such disclosure is permitted by law) (i) as has become generally available to the public through no fault of Bank, its employees, auditors or counsel or other holder of a participation in the Note, (ii) as may be required or appropriate in any report, statement or testimony submitted to any state or federal regulatory body having jurisdiction over Bank, (iii) as may be required in response to any summons or subpoena or in connection with any litigation, (iv) to the extent required to protect Bank's rights or interests in the Note or collateral or in order to comply with any law, order, regulation or ruling applicable to Bank, or (v) to any prospective transferee to whom Bank would be permitted under the Loan Documents to convey a participation or transfer its interest therein. 16 4.5 QUARTERLY FINANCIAL STATEMENTS AND OTHER INFORMATION. Within sixty (60) calendar days after the last day of each quarter in each fiscal year of each of the Borrowers, except the last quarter in each such fiscal year of each of the Borrowers, Borrowers shall cause to be delivered to Bank quarterly financial statements for each of the Borrowers certified by the chief financial officer of each applicable Borrower. 4.6 ANNUAL FINANCIAL STATEMENTS. Within ninety (90) calendar days after the end of each fiscal year of each Borrower and of Guarantor, Borrowers shall cause to be delivered to Bank the audited consolidated financial statements of Guarantor and its subsidiaries (including the Borrowers) issued by Deloitte & Touche, LLP or such other accounting firm of recognized national or regional standing as may be engaged by Borrowers. 4.7 FINANCIAL COVENANTS. Until the Note is paid in full and all obligations secured by the Security Instruments are satisfied, Borrowers shall cause compliance with the following financial covenants: (a) Leverage Ratio. Borrowers represent and warrant unto Bank that Southern Health Corporation of Jasper, Inc. had a Leverage Ratio, as hereinafter defined, on June 30, 2002, and shall have on the last day of each fiscal year of Southern Health Corporation of Jasper, Inc. thereafter until the Note is paid in full a Leverage Ratio of 1.50:1.00 or less. (b) Debt Service Coverage. Borrowers covenant and agree unto Bank that Southern Health Corporation of Jasper, Inc. has on the Agreement Date and shall maintain thereafter until the Note is paid in full, a minimum amount debt service coverage of 1.50x as defined by EBITDA/Total Debt Service. (c) Definitions. The following definitions shall be applicable for Section 5.8(a): "Leverage Ratio" means the ratio of Total Liabilities to Tangible Net Worth for Southern Health Corporation of Jasper, Inc. as of the last day of each fiscal year. 4.8 COMPLIANCE CERTIFICATES. Within sixty (60) calendar days from the end of each fiscal quarter except for the fiscal year end, in which event within ninety (90) calendar days from the fiscal year end of Southern Health Corporation of Jasper, Inc., Borrowers shall provide to Bank a certificate signed by the chief financial officer or the controller of Southern Health Corporation of Jasper, Inc. setting forth such calculations required to establish whether Southern Health Corporation of Jasper, Inc. is in compliance with Section 4.7 herein. 4.9 THIRD PARTY INDEBTEDNESS. Borrowers covenant and agree that prior to the Note being paid in full, no additional indebtedness, direct or indirect, including through guaranty obligations (exclusive of physician guarantees entered into in the ordinary course of business and in compliance with all applicable laws), may be incurred which exceeds $100,000 and which is secured by (i) any real or personal property described in the Security Instruments (exclusive of purchase money indebtedness on after-acquired property which does not exceed the fair market value of the property at the time of its acquisition), or (ii) the capital stock of Southern Health Corporation of Jasper, Inc., without the prior, written consent of the Bank. 17 4.10 INTERCOMPANY INDEBTEDNESS. Borrowers and Guarantor covenant and agree that except as hereinafter provided, all intercompany indebtedness among Borrowers and Guarantor is subordinate to the indebtedness evidenced by the Note or secured by the Secured Indebtedness, and to evidence such subordination each of the Borrowers and Guarantor hereby subordinate all present and future indebtedness among Borrowers and Guarantor to the obligations and all security held by the Bank for the Obligations. The foregoing subordination shall not include current charges for services rendered by SunLink Health Systems, Inc., to Borrowers. Further, Borrowers agree that if there is a Default or Event of Default, Southern Health Corporation of Jasper, Inc. shall not loan additional money to or incur additional intercompany indebtedness from the other Borrowers other than current charges for services rendered until such time as there is no Default or Event of Default. 4.11 KEY MAN INSURANCE. Borrowers covenant and agree to provide to Bank within one hundred eighty (180) days after the Agreement Date evidence of Key Man Life Insurance on the chief executive officer of SunLink Healthcare Corp. in the amount of $1,500,000 by a company acceptable to Bank, with Southern Healthcare Corporation of Jasper, Inc. being named as beneficiary, which insurance has been assigned to the Bank as additional collateral for the Loan together with evidence of the payment of the premium for one (1) year in advance. Borrowers covenant and agree to pay the premium for such insurance on or before thirty (30) days before such payments become delinquent and submit within such time to Bank evidence of such payment. Such insurance shall remain in full force and effect through ten (10) years after the Conversion Date and thereafter until any Default and Event of Default has been eliminated. In the event of the failure to make any premium payments required to keep such insurance in full force and effect, Bank shall be authorized to make such payments and all amounts so paid shall be secured by the Security Instruments. 4.12 OTHER FINANCIAL DOCUMENTATION. Borrowers shall provide to Bank such other financial information as Bank may reasonably request from time to time to clarify or amplify the information required to be furnished to Bank under this Agreement. 4.13 EXECUTION AND DELIVERY OF REQUIRED DOCUMENTATION. Borrowers shall, in a timely manner, deliver to Bank all documents and information that Borrowers are required to execute and deliver hereunder. 4.14 PAYMENT OF CONTRACTORS. Borrowers shall pay in a timely manner any and all contractors and subcontractors who conduct work in or on the Improvements, subject to the right of Borrowers to contest any amount in dispute, so long as the contesting of such amount is pursued diligently and in good faith and no lien is filed which is senior to the Security Instruments. 4.15 INSPECTION AND APPRAISAL. Borrowers shall permit Bank and its authorized agents to enter upon the Property during normal working hours and as often as it desires, for the purpose of inspecting or appraising the Improvements. 18 4.16 FEES AND EXPENSES. Borrowers shall pay when due the reasonable out-of-pocket expenses, costs and fees incurred by Bank associated with the closing or administration prior to the Conversion Date of the Loan or incurred by Borrowers in order to meet the requirements of this Agreement, including (without limitation) commitment and renewal fees, recording fees and title insurance, survey charges, builder's risk and other insurance premiums, property taxes, intangible taxes, and legal fees incurred by Bank in connection with the making of the Loan. 4.17 HAZARDOUS SUBSTANCES. Except as set forth in the environmental reports and documentation identified on SCHEDULE 1 attached hereto and incorporated herein by this reference, Borrowers, jointly and severally, hereby warrant and represent to, and covenant with, Bank to the best knowledge and belief of Borrowers, without regard to whether Bank has or hereafter obtains any knowledge or report of the environmental condition of the Property as follows: that during the period of Borrowers' or any one of Borrowers' ownership of the Property, the Property has not been and is not now being used in violation of any federal, state or local environmental law, ordinance or regulation, that no proceedings have been commenced, or notice(s) received, concerning any alleged violation of any such environmental law, ordinance or regulation, and that the Property is free of hazardous or toxic substances and wastes, contaminants, oil, radioactive or other materials the removal of which is required or the maintenance of which is restricted, prohibited or penalized by any federal, state or local agency, authority or governmental unit. Borrowers covenant that they shall neither permit any such materials to be brought on to the Property, nor shall they acquire real property to be added to the collateral for the Loan upon which any such materials exist, except to the extent disclosed to Bank in environmental assessments or other writings; and if such materials are so brought or found located thereon, such materials shall be immediately removed, with proper disposal, to the extent required by applicable environmental laws, ordinances and regulations, and all required environmental cleanup procedures shall be diligently undertaken pursuant to all such laws, ordinances and regulations. Borrowers further represent and warrant to, and covenant with, Bank that Borrowers will promptly transmit to Bank copies of any citations, orders, notices or other material governmental or other communications received with respect to any hazardous materials, substances, wastes or other environmentally regulated substances affecting the Property. Notwithstanding the foregoing, there shall not be a default of this provision should Borrowers store or use the aforesaid materials, provided that: such materials are necessary for the construction, operation, maintenance and repair of hospitals and medical office buildings and are stored or used in normal quantities for such purposes and provided that such materials are being held, stored and used in compliance with all applicable laws, regulations, ordinances and requirements. The indemnity set forth below shall always apply to such materials, and it shall continue to be the responsibility of Borrowers to take all remedial actions required under and in accordance with this Agreement in the event of any unlawful release of any such materials. 4.18 TAXES. Borrowers shall take all necessary measures to insure that the Zell Miller Parkway Property and the East Street Church Property are, or will be, separately assessed for tax purposes (or satisfactorily insured by the title insurer as a separate parcel for tax purposes) and will upon the request of Bank provide Bank with information as to tax parcel identification numbers, tax rates, estimated tax values and the identities of the taxing authorities. 19 4.19 INSURANCE. During the construction of the Improvements, Borrowers shall maintain and provide satisfactory evidence to Bank of builders' risk completed value insurance for the benefit of Bank and in amounts and with an insurance company or companies satisfactory to Bank. Borrowers shall keep the improvements located on the East Church Street Property and, upon completion, the Improvements insured for the benefit of Bank (a) against loss or damage by fire, lightening, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicles and smoke and other such hazards as Bank may from time to time reasonably require (b) in amounts approved by Bank, not to be required to exceed 100% of the full insurable value of the Improvements and (c) with loss payable to Bank, pursuant to the New York Standard or other mortgagee clause satisfactory to Bank. All insurance herein provided for shall be in form and with companies approved by Bank, such approval not to be unreasonably withheld or delayed, and, regardless of the types or amounts of insurance required and approved by Bank, Borrowers shall assign to Bank, as collateral and further security for the repayment of the Loan, all policies of insurance which insure against any loss or damage to the improvements located on the East Church Street Property or the Improvements. If Bank, by reason of such insurance, receives any money for loss or damage at a time when a Default or Event of Default exists hereunder, such amount may, at the option of Bank, be retained and applied by Bank, toward the repayment of the Note, or be paid over, wholly or in part, to Borrowers for the repair or replacement of the improvements located on the East Church Street Property or the Improvements, as the case may be, or any part thereof, or for any other purpose or object satisfactory to Bank, but Bank shall not be obligated to see to the proper application of any amount paid over to Borrowers. If Bank, by reason of such insurance, receives any money for loss or damage at a time when a Default shall not exist hereunder, such amount shall be paid over to Borrowers for the repair or replacement of the improvements located on the East Church Street Property or the Improvements, as the case may be, or any part thereof, or for any other purpose or object satisfactory to Bank, but Bank shall not be obligated to see to proper application of any amount paid over to Borrowers. Borrowers shall also maintain general liability insurance, workman's compensation insurance, automobile insurance for all vehicles owned by any Borrower and other insurance with such coverage and in such amounts as shall be customary for hospital companies similarly situated with Borrowers to maintain. Such insurance shall list Bank as a certificate holder (except as to worker's compensation, automobile and medical malpractice insurance) and provide for thirty (30) days written notice to Bank prior to the cancellation, expiration or termination thereof. Borrowers shall deliver to Bank certificates of the aforesaid insurance. In the event of a foreclosure under one or more of the Security Instruments, the purchaser shall, to the extent of any amounts then owing and unpaid on the Loan, succeed to all the rights of Borrowers, including any right to unearned premiums, in and to all policies of insurance assigned to Bank with respect to the applicable Property pursuant to the terms of this Agreement. 4.20 LITIGATION. Borrowers warrant and represent to Bank that as of the Agreement Date, none of the Borrowers is a party to any litigation, suit, action, arbitration, grievance, proceeding or investigation (collectively, "ACTIONS"), nor are any such Actions threatened against any Borrower, in any such case which would materially adversely affect such Borrower's ability to perform its obligations under this Agreement and the Loan Documents. 20 4.21 REPORTABLE EVENT. Promptly after any Borrower receives notice or otherwise becomes aware thereof, such Borrower shall notify Bank of the occurrence of any Reportable Event with respect to any Plan (as defined in ERISA) as to which the Pension Benefit Guaranty Corporation has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) calendar days of the occurrence of such event, provided that such Borrower shall give Bank notice of any failure to meet the minimum funding standards of Section 412 of the Code or Section 302 of ERISA, regardless of the issuance of any waivers in accordance with Section 412(d) of the Code. 4.22 ACCOUNTS. Until the Note is paid in full and all obligations secured by the Security Instruments are paid in full each Borrower covenants and agrees to maintain its primary operating accounts, investment accounts and cash management accounts with the Bank. Each Borrower also covenants and agrees with Bank to provide to Bank the opportunity to bid on the merchant card servicing business of all current and future hospitals in which Guarantor has a legal or beneficial interest. 4.23 INITIAL ACCOUNT. Borrowers have deposited on the Agreement Date with Bank in the Construction Loan Interest Account the sum of $2,500.00. Upon the Construction Loan Interest Account being reduced to $100,000.00 after the first Advance, Borrowers consent and agree to deposit in the Construction Loan Interest Account a sufficient amount so that the balance in such account is not less than $200,000.00. On the Conversion Date, all funds in such account after the payment of all accrued and unpaid interest on the Note shall be delivered to Borrowers and the account closed and the security interest on such account satisfied. 4.24 QUALIFICATION. The Borrowers represent and warrant that Southern Health Corporation of Jasper, Inc. has the power and authority to own and operate the Hospital offering all of the services offered by the Hospital as of the Agreement Date, to conduct the business of the Hospital, and to own, lease and use its assets. Further, each Borrower represents and warrants that it has the power and authority to own, lease, use and operate its respective assets and to conduct its respective business or businesses. 4.25 AUTHORITY, EXECUTION AND DELIVERY. (a) Each Borrower has the power and authority to enter into this Agreement, the other Loan Documents and all other agreements contemplated herein and therein and to execute and deliver all certificates, instruments and other documents for consummation of the loan transaction contemplated in this Agreement and the other Loan Documents to which it is a party and to consummate the transactions contemplated thereby. The execution, delivery, and performance of this Agreement and the other Loan Documents by each Borrower has been authorized and approved by all necessary action on the part of such Borrower and any other affiliated person or entity whose approval is required therefor, and each of the Loan Documents is the legal, valid, and binding obligation of each Borrower enforceable against each Borrower in accordance with its terms, except as enforceability may be limited by applicable equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and by the exercise of judicial discretion in accordance with general equitable principles. 21 (b) Neither the execution nor delivery of this Agreement or any of the other Loan Documents by Borrowers, nor the consummation or performance by Borrowers of any of the transactions contemplated hereby will, directly or indirectly (with or without notice or lapse of time or both): (i) violate any Borrower's Articles or Certificate, as applicable, of Incorporation or Bylaws; (ii) violate or contravene any existing federal, state, local, municipal or other administrative constitution, law, statute, ordinance, regulation, principle of common law, or any award, decision, injunction, judgment, order, ruling, subpoena or verdict entered, issued, made or rendered by any court, administrative agency, department, official, or other tribunal or other governmental body or agency, to which, in any such case, any of the Borrowers is subject or by which the Hospital or any of the assets or business of the Hospital are bound; (iii) contravene or result in a violation of any of the terms or requirements of any permit, license, certificate of need, accreditation, waiver, certificate, and governmental authorization that is held by any Borrower relating to and material to the use or operation of the Hospital or the business or assets of the Hospital; (iv) result in a material breach of, or constitute a default under any indenture, mortgage, lease, agreement, or other instrument to which any of the Borrowers is a party or by which the Hospital or any of its assets are bound; or (v) result in the imposition or creation of any lien upon any of the property or collateral under the Security Instruments in favor of any other than Bank. 4.26 CONSENTS AND APPROVALS. Except as otherwise expressly contemplated hereby, no consent, order, approval, authorization, filing with or action by any third party or governmental body or agency is required in connection with the execution and delivery by Borrowers of the Agreement and the other Loan Documents or the consummation by Borrowers of the loan transactions contemplated herein. 4.27 FINANCIAL RECORDS. Any and all financial statements delivered by any and all of the Borrowers pursuant to this Agreement or the other Loan Documents (collectively, the "FINANCIAL STATEMENTS"): (i) are in accordance with the books and records of Borrowers, (ii) present fairly in accordance with GAAP, in all material respects the financial condition of Borrowers and the Hospital and the business and operations of Borrowers and the Hospital as of the respective dates indicated and the results of operations for such periods, (iii) have been 22 prepared in accordance with GAAP, consistently applied throughout the periods involved (with the exception of the absence of footnotes for unaudited statements and subject to normal audit adjustments), (iv) reflect reserves reasonably believed adequate by management of Borrowers for all known liabilities and reasonably anticipated losses with respect to the Hospital and the other property and collateral under the Security Instruments, (v) do not contain any untrue statement of a material fact relating to their respective businesses and assets or the Hospital, and (vi) do not contain any items of special or nonrecurring income, or other income not earned in the ordinary course of business relating to their respective businesses or assets or the Hospital, except as set forth in the notes, if any, to the Financial Statements. 4.28 PERMITS; CERTIFICATE OF NEED. (a) EXHIBIT "C" attached hereto and made a part hereof contains a complete and accurate list of each permit, license, certificate of need, accreditation, waiver, certificate, and governmental authorization held by Borrowers that relates to the Hospital, or the business or assets of the Hospital (the "PERMITS"). To the best knowledge and belief of Borrowers, the Permits collectively constitute all of the Permits required under applicable law for the ownership and use of the Hospital and it assets, and the operation of business of the Hospital. Each Permit listed or required to be listed in EXHIBIT "C" is valid and in full force and effect. To the best knowledge and belief of Borrowers, the Hospital and the assets and the business of the Hospital are and at all times have been, in compliance with all of the terms and requirements of each Permit identified or required to be identified in EXHIBIT "C" except for any noncompliance which has been remedied by Borrowers and would not have a material adverse effect upon the business, assets or operation of the Hospital. Each Permit has been duly obtained and (i) is not subject to any pending or to Borrowers' knowledge, threatened administrative or judicial proceeding to revoke, cancel, or declare such Permit invalid in any respect, and (ii) no event has occurred which constitutes, or with due notice or lapse or time or both would constitute, a material default by Borrowers under, or a violation of, any Permit. Borrowers have received no notice of and have no knowledge of any alleged violation of the terms of issuance of any Permit. (b) The Hospital, and the assets and the business of the Hospital operate under a valid certificate of need or exemption from certificate of need review and are otherwise in compliance with the certificate of need laws. All representations made in connection with obtaining a certificate of need or an exemption from or a waiver of certificate of need review for any expenditure, service or project relating to the Hospital, and the assets or the business of the Hospital (specifically including the certificate of need approval held by Borrowers for the relocation of the Hospital (Project No. GA 047-98) to the Zell Miller Parkway Property) were and are accurate and consistent with the basis for the granting of the certificate of need or the determination that certificate of need review was not required. Borrowers have taken no action and to Borrowers' best knowledge and belief no action has been taken by any previous owner of the Hospital that has or is likely to subject Borrowers, the Hospital, the assets or the business of the Hospital or any of their services or equipment to certificate of need review or to penalties or enforcement action under the certificate of need law. The certificate of need approval held by Borrowers for the relocation of the Hospital (Project No. GA 047-98) is in good standing, and may be implemented according to its terms without further certificate of need review, and Borrowers have taken all action required to be taken in a timely manner to implement and 23 preserve the good standing of such certificate of need. Any appeal of the certificate of need approval held by Borrowers for the relocation of the Hospital (Project No. GA 047-98) has been dismissed with prejudice under terms that will not subject the Hospital to any restrictions, costs, expenses, liabilities or damages. 4.29 GOVERNMENTAL BENEFIT PROGRAMS AND OTHER THIRD PARTY PAYORS. (a) The Hospital is duly certified to participate in, and has provider agreements for participation in the Medicare and Medicaid programs. The Hospital is in material compliance with all of the terms, conditions and provisions of such contracts, as well as state and federal laws related thereto. (b) All cost reports for the Hospital required to be filed by Borrowers under the Medicare, Medicaid or other programs or any other applicable governmental or private provider regulations have been, or by the respective due date will be, prepared and filed in accordance with applicable laws, rules and regulations, and Borrowers have paid or made provisions to pay all Notices of Program Reimbursement received from the Medicare and Medicaid programs, tentative settlements and other adjustments for the Hospital for periods ended prior to the Agreement Date. With respect to any cost reports for the Hospital which remain to be filed or settled: (i) each will be timely filed by Borrowers, (ii) to Borrowers' best knowledge and belief, each is or will be complete and accurate in all material respects for the periods indicated, and (iii) all liabilities associated with such filings have been or will be paid in full by Borrowers. All liabilities and contractual adjustments of the Hospital under any third party payor or reimbursement programs have been properly reflected and reserved in a manner believed adequate by management of Borrowers in the Financial Statements. (c) To the best of Borrowers' knowledge and belief, Borrowers have not claimed or received reimbursements from the Medicare program, the Medicaid program, TRICARE/CHAMPUS, or any other governmental health benefit program in connection with the operation of the Hospital materially in excess of the amounts permitted by law, except as and to the extent that liability for such overpayment has already been satisfied in full. To the best of Borrowers' knowledge and belief, Borrowers have not claimed or received reimbursements from any private insurer, health maintenance organization, employer, or other payor in connection with the operation of the Hospital materially in excess of the amounts permitted by the applicable benefit plan or any applicable contract of Borrowers with any such payor, except as to the extent that liability for such overpayment has already been satisfied in full. (d) No notice of overpayment, false claims, civil money penalties, or any offsets against future reimbursement has been received by Borrowers in connection with the operation of the Hospital nor to Borrowers' knowledge is there any basis therefor. There are no pending appeals, adjustments, challenges, audits, litigation, notices of intent to reopen or open cost reports in connection with the operation of the Hospital with respect to the Medicare, Medicaid, or other federal or state governmental health care programs. Borrowers have received no notice of pending, threatened or possible decertification or other loss of participation in Medicare, Medicaid or any other governmental health program. Other than regularly scheduled reviews, no validation review, complaint review, peer review or program integrity review related 24 to the Hospital has been conducted, scheduled, demanded or requested by any entity, commission, board or agency in connection with Medicare, Medicaid or other governmental health benefit program, and to Borrowers' knowledge, no such reviews are threatened against or affecting the Hospital. (e) Borrowers have received no notice of any violation of federal or state fraud and abuse or self-referral laws, or any investigation or claim of such violation on the part of Borrowers in connection with the operation of the Hospital, nor to Borrowers' best knowledge and belief have any such laws been violated in connection with the operation of the Hospital. To Borrowers' best knowledge and belief, no Borrower nor any manager, director, governing body member, officer or employee of any Borrower, nor any other Person acting on behalf of any Borrower, acting alone or together, has engaged in any activities which are prohibited under the federal false claims and false statements statutes (31 U.S.C. ss. 3729, 18 U.S.C. ss. 287, 18 U.S.C. ss. 1001), the federal health care fraud statute (18 U.S.C. ss. 1387), or related state or local statutes and regulations. To Borrowers' best knowledge and belief, all claims for reimbursement presented to Medicare, Medicaid, or other governmental programs by Borrowers in connection with the operation of the Hospital have been accurate and in compliance with all applicable statutes, rules and regulations in all material respects. (f) Neither Borrowers, nor the Hospital, nor to Borrowers' best knowledge and belief any member of the governing body, officer, employee or agent of Borrowers or of the Hospital, nor any member of the medical staff of the Hospital, (i) is or has been suspended, excluded, or otherwise terminated from participation in Medicare, Medicaid, CHAMPUS/TRICARE, or any other federal or state governmental health benefit program; (ii) has been convicted in a court of competent jurisdiction for any offense or has been adjudicated to have liability for a civil monetary penalty which, in either case, would allow or require the exclusion of Borrowers from participating in federal healthcare programs or the Medicaid program. 4.30 FINANCIAL RELATIONSHIPS WITH HEALTH PROFESSIONALS. To the best knowledge and belief of Borrowers the Hospital and the business of the Hospital are and have been conducted and operated by Borrowers in compliance with, and Borrowers' contracts and financial arrangements with physicians and other referral sources (including ownership interests and compensation relationships between the Hospital and physicians as defined in 42 U.S.C. ss. 1395nn and regulations adopted pursuant thereto) are in compliance with, the federal statutes regarding kickbacks and health professional self-referrals in connection with federal and state health care programs, 42 U.S.C. ss. 1320a-7b, 42 U.S.C. ss. 1395nn and 42 U.S.C. ss. 1396b, and the regulations promulgated pursuant to such statutes, 42 U.S.C. ss. 1320a-7a(b) regarding payments to induce reduction or limitation of services, and similar state and local statutes and regulations, including without limitation the Georgia Patient Self-Referral Act (O.C.G.A. ss. 43-1B-1 et seq.). 4.31 JCAHO ACCREDITATION. The Hospital is duly accredited for operation of its beds and services by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). No Borrower has received notice with respect to any threatened, pending or possible revocation, early termination, suspension or limitation of JCAHO accreditation for the Hospital, nor, to Borrowers' best knowledge and belief, are there any grounds for such action. 25 4.32 COMPLIANCE WITH LEGAL REQUIREMENTS. (a) To Borrowers' best knowledge and belief, the Hospital and the business of the Borrowers have been constructed, used, operated and conducted in compliance with all constitutions, laws, statutes, rules, regulations, orders, and ordinances, of any governmental body or agency exercising any authority or jurisdiction with respect to Borrowers, the Hospital, or the business of Borrowers, including without limitation, those relating to governmental program reimbursement, licensure of the Hospital and the property, plant and equipment used therein, certificate of need, and employee health and safety, except for any noncompliance which would not have a material adverse effect upon the operation of the Hospital or Borrowers. (b) To Borrowers' best knowledge and belief, no event has occurred or circumstance exists that (with or without notice or lapse of time or both) (i) would constitute or result in a violation of, or a failure on the part of any Borrower or the Hospital to comply with, any constitutions, laws, statutes, rules, regulations, orders, ordinances, and policies of any governmental body or agency applicable to the Borrowers, the Hospital, the business of the Hospital, or any of the other property or collateral or property described in the Security Instruments, except for any noncompliance which would not have a material adverse effect upon the Hospital or Borrowers, or (ii) would give rise to any obligation on the part of Borrowers or the Hospital to undertake, or to bear all or any portion of the cost of, any material remedial action of any nature. (c) Borrowers have not received, and Borrowers have no knowledge of, any notice or other communication (whether oral or written) from any governmental body or agency regarding (i) any actual, alleged, possible, or potential violation of, or failure to comply with, any federal, state, local, municipal or other administrative order, constitution, law ordinance, regulation, or statute, with respect to the Hospital, Borrowers, or the business of the Hospital except to the extent that such violation or noncompliance would not have a material adverse effect upon the Hospital, Borrowers, or the business of the Hospital, or (ii) any actual, alleged, or potential obligation on the part of Borrowers or the Hospital to undertake, or to bear all or any portion of the cost of, any remedial action of any nature. Without limiting the generality of the foregoing, Borrowers have not received notice of any, and to Borrowers' knowledge there exists no, violation of any zoning, land use, building code or other similar laws, regulations or ordinances (including without limitation the Americans with Disabilities Act, and ordinances and regulations applicable thereto), and there do not exist any variances, conditional use permits, waivers or exemptions relating to the Property or the Improvements with respect to such matters, except to the extent that any such violation would not have a material adverse effect upon the Hospital, Borrowers, or the business of the Hospital. 4.33 CORRECTNESS OF REPRESENTATIONS. No representation or warranty of Borrowers in this Agreement or any schedule, exhibit, certificate or agreement attached hereto or furnished pursuant hereto or in any of the other Loan Documents, contains, or on the date of any subsequent Advance hereunder will contain, any untrue statement of material fact; and all such statements, representations, warranties, exhibits, certificates, schedules and other Loan 26 Documents shall be true and complete in all material respects on and as of the date of any subsequent Advance hereunder as though made on that date. ARTICLE 5 DEFAULT AND REMEDIES 5.1 DEFAULT. The occurrence of each of the following events shall constitute a Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule, or regulation of any governmental or non-governmental body: (a) Any representation or warranty made by Borrowers under this Agreement shall prove incorrect or misleading in any material respect when made or deemed to have been made; (b) Borrowers shall default in the payment of any principal or interest due and payable under the Note for more than ten (10) days after such payment is due and payable; (c) Borrowers shall default in the payment of any other monetary amounts due and payable to Bank hereunder or under the Loan Documents for more than ten (10) days after Borrowers receive written demand for payment from the Bank specifying the nature of and amount so payable; (d) Borrowers shall default in the performance or observance of any other agreement or covenant contained in this Agreement not specifically referred to elsewhere in this Section 5.1, and such event of default shall not be cured to Bank's satisfaction within a period of thirty (30) calendar days from the date Borrowers receive notice from Bank with respect thereto; (e) There shall occur any Event of Default or Default of Borrowers in the performance or observance of any agreement or covenant or breach of any representation or warranty contained in any of the Loan Documents (other than this Agreement or as otherwise provided in this Section 5.1), which shall not be cured within the applicable grace or cure period, if any, provided for in such Loan Document or thirty (30) calendar days after the date Borrowers receive notice from Bank with respect thereto if no cure period is provided in such Loan Document; (f) There shall be entered a decree or order for relief in respect to any Borrower, as debtor, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator, or similar official to any Borrower, or of any substantial part of any Borrower's respective properties, or ordering the winding-up or liquidation of the affairs of any Borrower, or an involuntary petition shall be filed against any Borrower and a temporary stay entered, and (i) such petition and stay shall not be diligently 27 contested, or (ii) any such petition and stay shall continue undismissed for a period of sixty (60) consecutive calendar days; (g) Any Borrower, as debtor, shall file a petition, answer, or consent seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or any Borrower, as debtor, shall consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment or taking of possession of a receiver, liquidator, assignee, trustee, custodian, sequestrator, or other similar official to such Borrower or of any substantial part of such Borrower's respective properties, or any Borrower shall fail generally to pay its respective debts as they become due, or any Borrower shall take any corporate action to authorize any such action; (h) A final judgment shall be entered by any court against any Borrower for the payment of money which exceeds $3,000,000 which judgment is not covered by insurance or a warrant of attachment or execution or similar process shall be issued or levied against property of any Borrower which, together with all other such property of such Borrower subject to other such process, exceeds in value $3,000,000 in the aggregate, and if, within thirty (30) calendar days after the entry, issue, or levy thereof, such judgment, warrant, or process shall not have been paid or discharged or bonded or stayed pending appeal, or if, after the expiration of any such stay, such judgment, warrant, or process shall not have been reversed, dismissed, paid or discharged; (i) (1) There shall be at any time any "accumulated funding deficiency," as defined in ERISA or in Section 412 of the Code, with respect to any Plan; or (2) a trustee shall be appointed by a United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan; or (3) any of Borrower and their ERISA Affiliates shall incur any liability to the Pension Benefit Guaranty Corporation in connection with the termination of any Plan; or (4) any Plan or trust created under any Plan of any of Borrower and their ERISA Affiliates shall engage in a non-exempt "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) which would subject any of Borrower or any ERISA Affiliate to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code; and by reason of any or all of the events described in clauses (1) through (4), as applicable, such Borrower shall have waived (and/or is likely to incur) and/or incurred liability in excess of $1,000,000.00 in the aggregate; (j) Any Loan Document, or any portion thereof (the striking of which would negatively impact the repayment of the Note or the Bank's realization on the collateral by the exercise of its remedies under the loan Documents), shall at any time and for any reason be declared by a court of competent jurisdiction in a suit with respect to such Loan Document to be null and void, or a proceeding shall be commenced by any governmental authority involving a legitimate dispute, having jurisdiction over Borrowers or Guarantor, seeking to establish the invalidity or unenforceability thereof (exclusive of questions of interpretation or customary exceptions to the enforceability of any provisions thereof), or any Borrower or Guarantor, shall 28 deny that it has any liability or obligation for the payment of principal or interest purported to be created under any Loan Document; (k) There shall occur any sale, lease, conveyance, assignment, pledge, encumbrance, or transfer of all or any part of the Property or any interest therein, voluntarily or involuntarily, whether by operation of law or otherwise, except (i) in accordance with the terms of this Agreement, and (ii) for execution of contracts with prospective purchasers which contracts will require the release of a portion of the Property from the lien of a Security Instrument at the closing of the transaction contemplated by such contract; and (iii) for Permitted Encumbrances; (l) Except in the normal course of Borrowers' construction of the Improvements, without the prior written consent of Bank, not to be unreasonably withheld or delayed, Borrowers shall not grant any easement (other than for utilities) or dedication, file any plat, condominium declaration, or restriction or otherwise encumber all or any portion of the Property, or seek or permit any zoning reclassification or variance, unless such action is expressly permitted by the Loan Documents or results in Permitted Encumbrances or does not affect the Property; (m) A Default or Event of Default occurs under any lien, security interest or assignment covering the Property or any part thereof which results in acceleration of the obligations secured thereby (whether or not Bank has consented, and without hereby implying Bank's consent, to any such lien, security interest or assignment not created pursuant to the Loan Documents), and the holder of any such lien, security interest or assignment institutes foreclosure or other proceedings for the enforcement of its remedies thereunder; provided that Borrowers may bond over such lien within twenty (20) days of notice that foreclosure proceedings have been instituted by the lienholder; or (n) (1) Failure by Borrowers to implement the construction of the Replacement Hospital on the Zell Miller Parkway Property in accordance with certificate of need approval held by Borrowers for the relocation of the Hospital to the Zell Miller Parkway Property, and in accordance with any determination letters issued by the Georgia Department of Community Health in connection therewith, (2) failure of Borrowers to file for and obtain a new certificate of need for the cost overruns associated with the relocation of the Replacement Hospital to the Zell Miller Parkway Property, or, if necessary, a new certificate of need for the relocation of the Hospital from the East Church Street Property to the Zell Miller Parkway Property, and (3) if the certificate of need currently held by Borrowers for the relocation of the Replacement Hospital to the Zell Miller Parkway Property becomes invalid for any reason. 5.2 REMEDIES. If a Default shall have occurred and shall be continuing: (a) With the exception of a Default specified in Sections 5.1(e), (f) or (g) hereof, Bank shall have the right to (i) declare the Note, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon the Note, all such interest and all such amounts shall become and be forthwith due 29 and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower and/or (ii) terminate the Loan Commitment. (b) Upon the occurrence of a Default under Sections 5.1(e), (f) or (g) hereof, the Loan Commitment shall automatically terminate and such principal, interest (including without limitation, interest which would have accrued but for the commencement of a case or proceeding under the federal bankruptcy laws), and other amounts payable under this Agreement or the Note shall thereupon and concurrently therewith become due and payable, all without any action by Bank, all without presentment, demand, protest or other notice of any kind, all of which are expressly waived, anything in this Agreement or in the Note to the contrary notwithstanding. (c) Bank may exercise all of the post-default rights granted to it and to them under the Loan Documents or under Applicable Law. (d) The rights and remedies of Bank hereunder shall be cumulative, and not exclusive. 5.3 WAIVERS. Neither a waiver of any Default or Event of Default hereunder nor any representation by Bank as to the nonoccurrence or nonexistence thereof shall be implied from any delay or omission by Bank to notify Borrowers thereof or to take action on account of such Default or Event of Default, and no express waiver shall affect any Default or Event of Default other than the matter specified in the waiver and it shall be operative only for the time and to the extent therein stated. Waivers of any covenants, terms or conditions contained herein must be in writing and shall not be construed as a waiver of any subsequent breach of the same covenant, term or condition. Bank's consent or approval to or of any act by Borrowers requiring further consent or approval shall not be deemed to waive or render unnecessary the consent or approval to or of any subsequent or similar act. Bank's exercise of any right or remedy or hereunder shall not in any way constitute a cure or waiver of a Default or an Event of Default, or invalidate any act done pursuant to any notice of the occurrence of a Default or an Event of Default, or prejudice Bank in the exercise of any of its rights hereunder or under the Note, the Security Instruments or any other Loan Documents. 5.4 CROSS-DEFAULT. The Note, Security Instruments and other Loan Documents are "cross defaulted" such that (a) the occurrence of an Event of Default under any one of the Loan Documents shall constitute an Event of Default under this Agreement and all of the Loan Documents and (b) the occurrence of a Default under any one of the Loan Documents shall constitute a Default under this Agreement and all of the other Loan Documents. 5.5 CROSS-COLLATERALIZATION. All Security Instruments and all other Loan Documents, save the Guaranty and the Environmental Indemnity Agreement, are "cross-collateralized" such that all of the Security Instruments shall secure all of the obligations of Borrowers under the Note and the other Loan Documents (save the Guaranty and the Environmental Indemnity Agreement). 30 5.6 NO LIABILITY OF BANK. Bank shall not be liable to any party for (i) the development of or construction of the Improvements, (ii) the failure to develop or construct the Improvements in accordance with the Plans and Specifications, (iii) the payment of any expense incurred in connection with the development of or construction of the Improvements, (iv) the performance or nonperformance of any other obligation of Borrowers or (v) Bank's exercise of any remedy available to it under the Loan Documents after the occurrence and during the continuance of a Default. In addition, Bank shall not be liable to Borrowers or any third party for the failure of Bank or its authorized agents to discover or to reject materials or workmanship during the course of Bank's inspections of the Improvements. ARTICLE 6 GENERAL CONDITIONS 6.1 BENEFIT. This Agreement is made and entered into for the sole protection and benefit of Bank, Borrowers, and Bank's successors and assigns, and no other person or persons shall have any right of action hereon or rights to the Loan proceeds at any time. Bank shall not (a) owe any duty whatsoever to any claimant for labor performed or material furnished in connection with the construction of the Improvements on the Property, or (b) owe any duty to apply any undisbursed portion of the Loan to the payment of any claim, or (c) owe any duty to exercise any right or power of Bank hereunder or arising from any Default by Borrowers. 6.2 ASSIGNMENT. The terms hereof shall be binding upon and inure to the benefit of the heirs, successors, assigns, and personal representatives of the parties hereto; provided, however, that Borrowers shall not assign the Loan Commitment or this Agreement or any of its rights, interests, duties or obligations under the Loan Commitment or this Agreement or any Loan proceeds or other monies to be advanced hereunder in whole or in part and any such assignment (whether voluntary or by operation law) shall be void and render automatically terminated any obligation of Bank hereunder to advance any further monies pursuant to this Agreement or any other Loan Document. Bank may assign its rights and obligations under this Agreement, the Note, the Security Instruments and any other Loan Documents, in whole or in part, to any other bank or financial institution with a combined capital and surplus equivalent to at least that of Bank, provided that all of the provisions hereof shall continue in full force and effect and, in the event of such assignment, Bank shall thereafter be relieved of all liability hereunder with respect to actions or omissions of Bank occurring thereafter, but only to the extent of the interest so assigned and any Loan disbursements made by any assignee(s) shall be deemed made in pursuance and not in modification hereof and shall be evidenced by the applicable Note and secured by the applicable Security Instrument and any other Loan Documents. Notwithstanding the foregoing, without the prior written consent of Borrowers, Bank shall not have the right to assign any portion of its interest, rights or obligations hereunder to any other Person unless the assignee shall assume all of the obligations of the assigning Bank under this Agreement, to the extent of the interest so assigned. no assignment shall be made to any other hospital, company or entity providing healthcare services to the public. Notwithstanding anything in this Section 6.2 to the contrary, Bank may enter into participation agreements with any other Person, so long as such agreement does not confer any rights under 31 this Agreement or any of the other Loan Documents to any purchaser thereof, or relieve Bank from any of its obligations under this Agreement (it being understood that all actions hereunder shall be conducted as if no such participation had been granted). 6.3 ADDITIONAL OBLIGATIONS AND AMENDMENTS. Bank shall be under no obligation to extend any loan to Borrowers other than as specifically set forth in this Agreement. This Agreement shall not be amended except by a written instrument signed by all parties hereto which instrument contains a specific reference to this Agreement. 6.4 TERMS. Whenever the context and construction require, all words used in the singular number herein shall be deemed to have been used in the plural, and vice versa, and the masculine gender shall include the feminine and neuter and the neuter shall include the masculine and feminine. 6.5 GOVERNING LAW AND JURISDICTION. This Agreement shall be construed in accordance with the laws of the State of Georgia, and such laws shall govern the interpretation, construction and enforcement hereof. For the purposes of any legal action or proceeding brought by Bank with respect to this Agreement or the Loan Documents, Borrowers and Guarantor hereby irrevocably submit to the jurisdiction and venue of the Superior Court of Fulton County, Georgia, and hereby irrevocably designates and appoints Mr. Robert M. Thornton, Jr., 900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339, as their authorized agent for service of process in the State of Georgia. Borrowers and Guarantor also hereby submit to the non-exclusive jurisdiction and venue of the United States District Court for the Northern District of Georgia for any action, suit or proceeding arising out of or relating to this Agreement or the Loan Documents. Bank shall for all purposes be entitled to treat such designee of Borrowers and Guarantor as the authorized agent to receive for or on their respective behalf service of writs or summons or other legal process in Georgia; delivery of such service to such authorized agent shall be deemed to be made when delivered or mailed by certified mail addressed to such authorized agent, with a copy to Borrowers and to Guarantor at the address of Borrowers' and the address of Guarantor, as the case may be, last known to Bank, sent by overnight delivery service. In the event that, for any reason, such agent or its successor shall no longer serve as agent of Borrowers and Guarantors to receive service of process in the State of Georgia, Borrowers and guarantor shall jointly establish a successor so to serve, and shall advise Bank thereof, so that at all times Borrowers and Guarantor will maintain an agent to receive service of process in the State of Georgia on their respective behalf with respect to this Agreement and the Loan Documents. In the event that, for any reason, service of legal process cannot be made in the manner described above, such service may be made in such other manner permitted by law. Borrowers and Guarantor hereby irrevocably waive any objection they each might now or hereafter be entitled to make with respect to the venue of any suit, action or proceeding arising out of or relating to this Agreement and the Loan Documents which is brought in the Superior Court of Fulton County, Georgia or, at the election of Bank, in the United States District Court for the Northern District of Georgia, and Borrowers and Guarantor hereby irrevocably waive any right to claim that any such suit, action or proceeding brought in any such court has been brought in an incorrect forum. 32 6.6 PUBLICITY. Bank shall have the right to incorporate the name of Bank into signage placed upon the Property during construction. Bank shall have the right to secure printed publicity through newspaper and other media concerning the Property and Hospital and source of financing. All such publicity shall be submitted to Borrowers prior to its dissemination, and all such publicity shall be subject to the prior written approval of Borrowers, such approval not to be unreasonably withheld or delayed. 6.7 ATTORNEYS' FEES. Borrowers shall pay on demand all reasonable attorneys' fees and expenses and other costs and expenses actually incurred by Bank in the enforcement of or preservation of Bank's rights under this Agreement and the other Loan Documents in any such case after the occurrence and during the continuance of a Default. To the full extent permitted by applicable law, Borrowers agree to pay interest on any fees, costs or expenses due to Bank under this Section 6.7 which are not paid when due at the Default Rate. In the event that any Loan Document contains a provision regarding enforcement or preservation of rights which is different from this Section 6.7, this Section 6.7 shall control. 6.8 MANDATORY ARBITRATION. Any controversy or claim between or among the parties hereto arising out of or relating to this Agreement, the Loan Documents or any related instruments including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or, if not applicable, the applicable state law), the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of Endispute, Inc., doing business as J.A.M.S./Endispute ("J.A.M.S."), as amended from time to time, and the "SPECIAL RULES" set forth below. In the event of any inconsistency, the Special Rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Agreement may bring an action, including a summary judgment or expedited proceeding, to compel arbitration of any controversy or claim to which this provision applies in any court having jurisdiction over such action. (a) Special Rules. The arbitration shall be conducted in the City of Atlanta, Georgia and administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within ninety (90) calendar days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional sixty (60) calendar days. (b) Reservation of Rights. Nothing in this Agreement shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Agreement; or (ii) be a waiver by Bank of the protection afforded to it or them by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of Bank after the occurrence and during the continuance of a Default (A) to exercise self help remedies such as (but not limited to) setoff, or (B) to foreclose against the Property, or (C) to obtain from a court provisional or ancillary remedies such as injunctive relief or the appointment of a receiver. After the occurrence and during the continuance of a Default, Bank may exercise such self help remedies (including, without limitation, remedies under Section 5.2 hereof), foreclose upon the Property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Loan Agreement. At 33 the option of Bank, foreclosure under a Security Instrument may be accomplished by any of the following: the exercise of the power of sale under a Security Instrument, or by judicial sale under a Security Instrument or by judicial foreclosure. Neither the exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action to arbitrate the merits of the controversy or claim occasioning resort to such remedies. No provision in this Agreement or any Loan Documents regarding submission to jurisdiction and/or venue in any court is intended or shall be construed to be in derogation of the provisions in this Agreement. 6.9 INVALIDATION OF PROVISIONS. In the event that any one or more of the provisions of this Agreement is deemed invalid by a court having jurisdiction over this Agreement or other similar authority, the remaining provisions of this Agreement shall not be rendered invalid or unenforceable, and in lieu of any invalid or unenforceable provision, there shall be automatically substituted a valid and enforceable provision as similar in terms to such invalid or unenforceable provision as may be possible. 6.10 EXECUTION IN COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same instrument. 6.11 CAPTIONS. The captions herein are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Agreement or the intent of any provision hereof. 6.12 NOTICES. All notices, requests, consents, demands and other communications required or which any party desires to give hereunder or under any other Loan Document shall, unless otherwise specifically provided in such other Loan Document, be deemed sufficiently given or furnished if (a) in writing and delivered by personal delivery, by courier, or by registered or certified United States mail, postage prepaid, addressed to the party to whom directed at the addresses specified below (unless changed by similar notice in writing given by the particular party whose address is to be changed), (b) by facsimile to the facsimile number specified below with confirmation thereof in writing by sender pursuant to subsection (a) above, or (d) by oral communication with confirmation thereof in writing by the notifying party pursuant to subsection (a) above delivered within three (3) Business Days after such oral communication. Any such notice or communication shall be deemed to have been given and to be effective either at the time of personal delivery or, in the case of courier or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or, in the case of facsimile, upon receipt or, in the case of oral communication, upon the effectiveness of written confirmation as hereinabove provided. Notwithstanding the foregoing, no notice of change of address shall be effective except upon receipt. This Section shall not be construed in any way to affect or impair any waiver of notice or demand provided in any Loan Document or to require giving of notice or demand to or upon any person in any situation or for any reason. BORROWERS AND GUARANTOR: 34 c/o SunLink Healthcare Corp. 900 Circle 75 Parkway Suite 1300 Atlanta, Georgia 30339 Attn.: Mr. Robert M. Thornton, Jr. Facsimile No.: (770) 933-7000 Telephone No. (770) 933-7010 With a copy to: Smith, Gambrell & Russell, LLP Suite 3100, Promenade II 1230 Peachtree Street, N.E. Atlanta, Georgia 30309-3592 Attn.: Sharon C. Duvall, Esquire Facsimile No.: (404) 685-6839 Telephone No. (404) 815-3539 BANK: Bank of North Georgia 8025 Westside Parkway Alpharetta, Georgia 30004 Attn.: Mr. Allen Barker Facsimile No.: (770) 754-9956 Telephone No.: (770) 343-6420 With copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree St. N.E. Sixteenth Floor Atlanta, Georgia 30303 Attn: William J. Thompson, Esquire Facsimile No.: (404) 572-6999 Telephone No.: (404) 572-6617 6.13 LOAN DOCUMENTATION/ELECTRONIC TRANSMISSION OF DATA. Loan Documents and other documents, certificates, insurance policies, surveys and survey certifications, and other items required under this Agreement or under any other Loan Documents, to be executed and/or delivered to the Bank, shall be in form and content satisfactory to the Bank, acting reasonably and in good faith. Borrowers and Bank agree certain loan related data (including confidential information, documents, applications and reports) may be transmitted electronically, including over the Internet. This data may be transmitted to, received from or circulated among 35 Borrowers, Guarantor or Bank and the agents and representatives of Borrowers, Guarantor and Bank, and Borrowers and Bank acknowledge and agree that (a) there are risks associated with the use of electronic transmission and that neither Borrowers, Guarantor nor Bank, controls the method of transmittal or service providers, (b) neither Borrowers, Guarantor nor Bank has no obligation or responsibility whatsoever and assumes no duty or obligation for the security, receipt or third party interception of such transmissions and (c) Borrowers, Guarantor and Bank release and will release each other from any claim, damage or loss, including those arising in whole or part from any of the parties' strict liability or sole, comparative or contributory negligence, which are related to the electronic transmittal of data, subject, however, in all cases to the parties' obligations, if any, under mandatory provisions of applicable law, including, without limitation, the Health Insurance Portability and Accountability Act of 1996. 6.14 BOOKS AND RECORDS. Subject to the confidentiality provisions hereof, Bank shall be provided access, upon reasonable prior written notice and without expense to Borrowers, to the business premises, all collateral securing the Loan and, on a confidential basis, to all of the books and records of each of Borrowers during normal working hours. 6.15 PAYMENT OF TAXES. Borrowers covenant and agree unto Bank to pay or cause to be paid all uncontested (as determined in good faith) taxes assessed or levied on each of the Borrowers and all collateral securing the Loan on a timely basis and before the taxes become delinquent and comply with all federal, state and local laws, rules and regulations applying to each of the Borrowers and any collateral securing the Loan. 6.16 LOAN COMMITMENT. The terms and conditions of the Loan Commitment shall survive the closing of the Loan, delivery of the Loan Documents and all Advances. 6.17 TRANSFER OF PROPERTY AND RIGHTS. Borrowers covenant and agree that without the written consent of Bank (i) Southern Health Corporation of Jasper, Inc. shall not sell, transfer or convey all or any part of its interest in the East Church Street Property (except simultaneously with the release of the East Church Street Property), Zell Miller Parkway Property or any other property or collateral securing the indebtedness evidenced by the Note (except for inventory, equipment and other non-real property traded in, sold or otherwise disposed of in the ordinary course of business and with respect to which the proceeds of such trade-in, sale or disposition are reinvested by Southern Health Corporation of Jasper, Inc. in its business within 180 days after such trade-in, sale or other disposition and except for Permitted Encumbrances) and (ii) SunLink Healthcare Corp. shall not sell, transfer or convey any of its ownership interest in any of the other Borrowers. 6.18 FINAL AGREEMENT. THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. BORROWERS REPRESENT UNTO BANK THAT BORROWERS HAVE COMPLIED, AND WHERE APPLICABLE WILL COMPLY, WITH ALL OF THE TERMS AND CONDITIONS UNDER THIS AGREEMENT. 36 IN WITNESS WHEREOF, Borrowers, Guarantor and Bank have caused this Agreement to be executed by their duly authorized officers and their seals affixed hereto as of the day and year set forth above. BORROWERS: SUNLINK HEALTHCARE CORP., a Delaware corporation By: /s/ J. T. Morris -------------------------------------- Printed Name: J. T. Morris Title: President [CORPORATE SEAL] SOUTHERN HEALTH CORPORATION, a Georgia corporation By: /s/ J. T. Morris -------------------------------------- Printed Name: J. T. Morris Title: President [CORPORATE SEAL] SOUTHERN HEALTH CORPORATION OF JASPER, INC., a Georgia corporation By: /s/ Earl Whiteley -------------------------------------- Printed Name: Earl Whiteley Title: CEO [CORPORATE SEAL] 37 GUARANTOR: SUNLINK HEALTH SYSTEMS, INC., an Ohio corporation By: /s/ Robert M. Thornton, Jr. -------------------------------------- Printed Name: Robert M. Thornton, Jr. Title: CEO [CORPORATE SEAL] BANK: BANK OF NORTH GEORGIA, a state chartered bank By: /s/ Allen Barker -------------------------------------- Printed Name: Allen Barker Its: SVP [BANK SEAL] 38 SCHEDULE 1 1. Report of Phase I Environmental Site Assessment Update, Jasper Hospital, Highway 515, Pickens County, Georgia, prepared by Geotechnical Consultants, Inc., dated September 25, 2002, and being PGC Project No. 102364. 2. Phase I Environmental Site Assessment, Mountainside Medical Center, 1266 East Church Street, Jasper, Georgia, prepared by Environmental Corporation of America, dated September 25, 2002, and being ECA Project #C-760-1, as supplemented by letter dated September 26, 2002. 3. Letter dated September 5, 2002, from James A. Sommerville, Manager, Mountain District Office, Georgia Department of Natural Resources, to Earl Whiteley-CEO, Mountainside Medical Center, outlining certain violations of General Permit No. GAR 100000 entitled "Authorization to Discharge Under the National Pollutant Discharge Elimination System Storm Water Discharges Associated with Construction Activity." 39 EXHIBIT A ZELL MILLER PARKWAY PROPERTY EAST CHURCH STREET PROPERTY EXHIBIT B REQUEST FOR ADVANCE FROM LOAN (AFTER INITIAL FUNDING) On _________________________, the undersigned ("Borrowers"), request an Advance from Loan No. _______ of $___________ to be made to Account for __________________ at Bank of North Georgia ("Bank"). Borrowers certify and attest to Bank that since the date of the last Advance, and as of the date of this Advance: (i) there has not been nor does there exist any adverse material change in the business, assets, liabilities, financial condition, results of operations or business prospects of Borrowers; (j) the representations and warranties contained in the Loan Documents are true and correct as of the date hereof; (k) there exists no Event of Default or Default, as such terms are defined in that certain Loan Agreement by and among Borrowers and Bank dated as of September 30, 2002 ("Loan Agreement"), prior to or subsequent to this Advance; (l) Borrowers are in compliance with the financial covenants, representations and warranties contained in the Loan Agreement; (m) the construction of the Improvements is progressing in a satisfactory manner; and (n) all conditions precedent to Borrowers' right to receive the requested Advance have been met in accordance with the terms and conditions of the Loan Agreement. BORROWERS: SUNLINK HEALTHCARE CORP. By: -------------------------------------- Printed Name: ---------------------------- Its: ------------------------------------- - --------------------------- [CORPORATE SEAL] Date SOUTHERN HEALTH CORPORATION By: -------------------------------------- Printed Name: ---------------------------- Its: ------------------------------------- - --------------------------- [CORPORATE SEAL] Date SOUTHERN HEALTH CORPORATION OF JASPER, INC. By: -------------------------------------- Printed Name: ---------------------------- Its: ------------------------------------- - --------------------------- [CORPORATE SEAL] Date EX-10.5 7 g79084exv10w5.txt EX-10.5 CONTRACT OF GUARANTY EXHIBIT 10.5 CONTRACT OF GUARANTY BANK OF NORTH GEORGIA Atlanta, Georgia September 30, 2002 For and in consideration of the sum of $1.00 in hand paid by Bank (as that term is hereinafter defined) to SUNLINK HEALTH SYSTEMS, INC., a corporation of the State of Ohio (the "UNDERSIGNED"), the sufficiency and receipt of which are hereby acknowledged by Undersigned, and in consideration of any loan or other financial accommodation heretofore, contemporaneously, or hereafter at any time made or granted to SUNLINK HEALTHCARE CORP., SOUTHERN HEALTH CORPORATION, and SOUTHERN HEALTH CORPORATION OF JASPER, INC., jointly or severally, (herein collectively called "BORROWER") by BANK OF NORTH GEORGIA, a state chartered bank, (herein, together with its successors and assigns, called "BANK"), and for other good and valuable consideration, Undersigned agrees that: Undersigned hereby unconditionally guarantees the full and prompt payment when due, whether by acceleration or otherwise, and at all times hereafter, of: (a) the indebtedness evidenced by that certain Note of even date, in the principal amount of Six Million Dollars ($6,000,000), plus the interest specified therein, executed by Borrower, payable to the order of Bank (herein called the "NOTE"); (b) any and all extensions, renewals, or modifications of said Note, and all out-of-pocket expenses including without limitation reasonable attorneys' fees and expenses, incurred in the collection thereof, the enforcement of rights under any security therefor and the enforcement hereof, in any such case, after and during the continuance of any default in payment thereof; (c) any indebtedness resulting from advances made on Borrower's behalf by Bank under the Loan Documents to protect or preserve the priority and security of its lien; and (d) all other charges and expenses, including, without limitation, late charges and the payment of all costs, expenses, charges and other expenditures required to be made by Borrower, or which Borrower agrees to make, under the terms and provisions of any Loan Documents (as that term is hereinafter defined). All such items (a), (b), (c) and (d) are herein called the "LIABILITIES". Undersigned further unconditionally guarantees the faithful, prompt and complete compliance by Borrower with all terms, conditions, covenants, agreements and undertakings of Borrower (herein collectively called the "OBLIGATIONS") under the Note, under all deeds to secure debt and security agreements securing payment of the Liabilities (collectively called the "SECURITY Deed"), and under all other agreements, documents and instruments executed by Borrower or any one of them in favor of Bank in connection with the Liabilities (the Note, Security Deed and all such other agreements, documents and instruments evidencing or securing the Liabilities or Obligations being herein collectively called the "LOAN DOCUMENTS"). In the event (a) Borrower fails to perform the Obligations or pay the Liabilities or (b) Borrower pays the Liabilities and, thereafter, Bank is required to refund all or any part of such payment(s) to Borrower or any other party of entity, Undersigned shall, upon the written demand of Bank, promptly and with due diligence pay all Liabilities and perform and satisfy for the benefit of Bank all Obligations. Undersigned expressly represents and acknowledges that the making of the loan evidenced by the Note and other financial accommodations by Bank to Borrower are and will be of direct interest, benefit and advantage to Undersigned. The undertakings of Undersigned hereunder are independent of the Liabilities and Obligations of Borrower, and a separate action or actions for payment, damages or performance may be brought and prosecuted against Undersigned whether or not an action is brought against Borrower or the security for the Obligations, and whether or not Borrower be joined in any such action or actions, and whether or not notice be given or demand be made upon Borrower. Any amount received by Bank from whatever source and applied by it toward the payment of the Liabilities shall be applied in such order of application as Bank may from time to time elect. If a claim is ever made upon Bank for repayment or recovery of any amount or amounts received by Bank in payment of any of the Liabilities or Obligations and Bank repays all or part of said amount by reason of (a) any judgment, decree or order of any court or administrative body having jurisdiction over Bank of any of its property, or (b) any settlement or compromise of any such claim effected by Bank with any such claimant (including Borrower), then in such event Undersigned agrees that any such judgment, decree, order, settlement or compromise shall be binding upon Undersigned, notwithstanding any revocation hereof or the cancellation of the Note or any other instrument evidencing any of the Liabilities or Obligations, and Undersigned shall be and remain obligated to Bank hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by Bank. If Bank shall settle or compromise any such claim in excess of $250,000.00 without approval of the undersigned, which approval shall not be unreasonably withheld or delayed, the Undersigned shall be released from liability hereunder in respect of the amount of any such settlement or compromise. Bank may, from time to time, without notice to Undersigned, and without affecting, diminishing or releasing the liability of Undersigned, (a) retain or obtain and perfect by possession a security interest in any property to secure any of the Liabilities or any Obligations hereunder, (b) retain or obtain the primary or secondary liability of any party or parties, in addition to Undersigned, with respect to any of the Liabilities or Obligations, (c) extend or renew for any period (whether or not longer than the original period and on more than one occasion), alter or exchange any of the Liabilities or Obligations or decrease the indebtedness of Borrower, (d) release or compromise any undertaking of Undersigned hereunder or any undertaking of any other party or parties primarily or secondarily liable on any of the Liabilities or Obligations, (e) release its security interest, if any, in all or any property securing any of the Liabilities or any Obligations hereunder and permit any substitution or exchange for any such property (but shall not be obligated to obtain any substitution or exchange), (f) resort to Undersigned for payment of any of the Liabilities, or any portion thereof, and the performance of the Obligations or any of them, whether or not Bank shall have resorted to any property securing any of the undertakings hereunder or shall have proceeded against Undersigned or any other party primarily or secondarily liable on any of the Liabilities or Obligations, and (g) alter, extend, change, modify, -2- release or cancel any covenant, agreement or provision contained in any or all of the Loan Documents. Undersigned hereby expressly waives: (a) notice of the acceptance of this Guaranty, (b) notice of the existence or creation of any of the Loan Documents or all or any of the Liabilities or Obligations, (c) presentment, demand, notice of dishonor, protest, and all other notice whatever, (d) all diligence on the part of Bank in collection or protection of, or realization upon, any security for any of the Liabilities or Obligations or in enforcing any remedy available to it under any of the Loan Documents, and (e) the provisions of Section 10-7-24 of the Official Code of Georgia Annotated. Bank may, without notice of any kind, sell, assign or transfer all or any of the Liabilities and Obligations, and in such event each and every immediate and successive assignee, transferee, or holder of all or any of the Liabilities and Obligations, shall have the right to enforce this Guaranty, by suit or otherwise, for the benefit of such assignee, transferee or holder, as fully as if such assignee, transferee or holder were herein by name specifically given such rights, powers and benefits. No such sale, assignment or transfer shall be made to any other hospital, company or entity providing healthcare services to the public. Bank shall have an unimpaired right, prior and superior to that of any such assignee, transferee or holder, to enforce this Guaranty for the benefit of Bank, as to so much of the Liabilities and Obligations as it has not sold, assigned or transferred. Bank shall have the right to deliver, under and subject to the confidentiality provisions hereof and of the Loan Documents, to any prospective assignee or transferee of the Liabilities and obligations all information and material in Bank's files concerning Undersigned, including financial statements of the Undersigned. Undersigned and Bank agree certain loan related data (including, without limitation, confidential information, documents, applications and reports) may be transmitted electronically, including over the Internet. This data may be transmitted to, received from or circulated among Borrower, Undersigned and Bank and among officers, employees, agents and representatives of Borrower, Undersigned and permitted (pursuant to the preceding paragraph) assignees or transferees of the Bank or Borrower. Both Undersigned and Bank acknowledge and agree that (a) there are risks associated with the use of electronic transmission and that neither Bank nor Undersigned controls the method of transmittal or service providers, (b) neither Bank nor Undersigned has any obligation or responsibility whatsoever and assumes no duty or obligation to the other for the security, receipt or third party interception of such transmissions and (c) each of Undersigned and Bank will release the other from any claim, damage or loss, including those arising in whole or part from either party's strict liability or sole, comparative or contributory negligence, which are related to the electronic transmittal of data, subject, however, in all cases to the parties' obligations, if any, under mandatory provisions of applicable law, including, without limitation, the Health Insurance Portability and Accountability Act of 1996. No delay or failure on the part of Bank in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by Bank of any right or remedy herein shall preclude other or further exercise thereof or the exercise of any other right or remedy whether contained herein or in the Note, or any of the other Loan Documents. No action of Bank permitted hereunder shall in any way impair or affect this Guaranty. No right or power of -3- Borrower or anyone else to assert any claim or defense as to the invalidity or unenforceability of any of the Loan Documents or of the Liabilities or Obligations shall impair or affect the undertakings of Undersigned hereunder. Undersigned agrees that it shall have no right of subrogation, reimbursement or indemnity whatsoever and no right of recourse to or with respect to any assets or property of Borrower or to any collateral for the Liabilities and Obligations except as provided in the immediately following sentence and then only until payment in full to Bank of the Liabilities and Obligations. Upon and to the extent of payment hereunder by Guarantor of any of the Liabilities or performance by Guarantor of any of the Obligations, Guarantor shall be subrogated, on a basis subject to and subordinate to the rights of Bank until Bank shall be paid in full all amounts owing to it under the Loan Documents, to all rights of Bank under the Loan Documents, including without limitation, in and to all collateral held by Bank for payment or performance of the Liabilities and Obligations. It is fully understood that until (a) all of the Obligations then due are performed and (b) all of the Liabilities are paid, and not subject to refund or disgorgement, Undersigned's undertakings hereunder shall not be released or altered, in whole or in part, by any action, occurrence or thing which might, but for this provision of this Guaranty, be deemed a permanent or temporary, legal or equitable discharge or stay with respect to a surety or guarantor, or by reason of any waiver, extension, modification, forbearance or delay or other act or omission of Bank or its failure to proceed promptly or otherwise, or by reason of any action taken or omitted by Bank, whether or not such action or failure to act varies or increases the risk of, or affects the rights or remedies of, Undersigned, or by reason of any further dealings among Borrower, Bank and any other guarantor, surety or other party, and Undersigned hereby expressly waives and surrenders any defense to the performance of the undertakings of Undersigned hereunder based upon any of the foregoing acts, omissions, occurrences, things, agreements or waivers or any of them; it being the purpose and intent of the parties hereto that the covenants, agreements and all undertakings hereunder are absolute, unconditional and irrevocable under any and all circumstances. If, for any reason whatsoever, Borrower is now or hereafter becomes indebted to Undersigned, such indebtedness and interest thereon and all liens, security interests and rights now or hereafter existing with respect to the property of Borrower securing the same shall (exclusive of charges for services rendered), at all times, be subordinate in all respects to the Liabilities, Obligations and to all liens, security interests and rights now or hereafter existing to secure the Obligations and Liabilities. Prior to the occurrence of a default or event of default under the Note or the occurrence of an event permitting the Bank to declare the total unpaid balance of the Note to be due and payable, the Undersigned is entitled to enforce or receive payment, directly or indirectly, of any and all such indebtedness of Borrower to Undersigned. The Undersigned covenants and agrees unto Bank to deliver annual audited consolidated financial statements of the Undersigned and its subsidiaries, including Borrower, within ninety (90) days after the end of each fiscal year of Undersigned. Undersigned represents and warrants unto Bank that, to Undersigned's best knowledge and belief, no event or fact has occurred which would result in a material adverse change in its consolidated financial condition as reflected in the last financial statements delivered to Bank. -4- This is a continuing guaranty and shall remain in full force and effect as to Undersigned. Any notice, demand, request or other communication required or permitted hereunder shall be in writing, and shall be deemed to have been duly given or made if either delivered personally to the addressee or mailed by certified or registered mail addressed to the last known address of the addressee. This Guaranty shall inure to the benefit of Bank, its successors and assigns, and shall bind Undersigned and the heirs, legal representatives, successors and assigns of Undersigned. This Guaranty does not supersede any other guaranty, or any other agreement, executed and delivered by Undersigned in favor of Bank. The books and records of Bank showing the account between it and Borrower shall be admissible in any action or proceeding, shall be binding upon Undersigned for the purpose of establishing the items therein set forth, and shall constitute prima facie proof thereof. As additional consideration to Bank, Undersigned hereby agrees to provide the opportunity to Bank to bid on the merchant card servicing business of all of the current and future hospitals in which Undersigned has a legal or beneficial interest. This Guaranty shall be construed in accordance with the laws of the State of Georgia, and such laws shall govern the interpretation, construction and enforcement hereof. Undersigned hereby irrevocably submits generally and unconditionally for Undersigned and in respect of Undersigned's property to the nonexclusive jurisdiction and venue of the Superior Court of Fulton County, Georgia and the United States District Court for the Northern District of Georgia, over any suit, action or proceeding arising out of or relating to this Guaranty, or the Obligations of the Liabilities. Undersigned hereby irrevocably waives, to the fullest extent permitted by law, any objection that Undersigned may now or hereafter have to the laying of venue in any such court and any claim that any such court is an inconvenient forum. Undersigned hereby agrees and consents that, in addition to any methods of service of process provided for under applicable law, all service of process in any such suit, action or proceeding may be made by certified or registered mail, return receipt requested, directed to Undersigned at 900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339, unless written notice of a subsequent address is received by Bank from Undersigned. Nothing herein shall affect the right of Bank to serve process in any manner permitted by law or limit the right of Bank to bring proceedings against Undersigned in any other court or jurisdiction. Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Guaranty. With respect to any interest demanded from Undersigned based upon the Loan Documents, such interest shall be limited to the lesser of the rate specified in the Loan Documents or the highest applicable rate deemed proper by law. -5- Any controversy or claim between or among the parties hereto including but not limited to those arising out of or relating to this Guaranty or any related agreements or instruments, including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of Endispute, Inc., doing business as J.A.M.S./Endispute ("J.A.M.S."), as amended from time to time, and the "Special Rules" set forth below. In the event of any inconsistency, the Special Rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Guaranty may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this agreement applies in any court having jurisdiction over such action. The arbitration shall be conducted in the City of Atlanta, Georgia and administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within ninety (90) days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional sixty (60) days. Nothing in this Guaranty shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in this Guaranty; or (ii) be a waiver by Bank of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the right of Bank (A) to exercise self help remedies such as (but not limited to) setoff, or (B) to foreclose against any real or personal property collateral, or (C) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief or the appointment of a receiver. Bank may exercise such self help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to this Guaranty. At Bank's option, foreclosure under a deed to secure debt or mortgage may be accomplished by any of the following: the exercise of a power of sale under the deed to secure debt or mortgage, or by judicial sale under the deed to secure debt or mortgage, or by judicial foreclosure. Neither the exercise of self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. No provision in the Loan Documents regarding submission to jurisdiction and/or venue in any court is intended or shall be construed to be in derogation of the provisions in any Loan Document for arbitration of any controversy or claim. -6- IN WITNESS WHEREOF, Undersigned has caused this Contract of Guaranty to be executed by its duly authorized officer and its seal affixed hereto as of the day and year first above written, this 30th day of September, 2002. SUNLINK HEALTH SYSTEMS, INC. By: /s/ Robert M. Thornton, Jr. -------------------------------------- Printed Name: Robert M. Thornton, Jr. Title: CEO Attest: ---------------------------------- Printed Name: Title: [CORPORATE SEAL] -7- EX-99.1 8 g79084exv99w1.txt EX-99.1 SECTION 906 CERTIFICATION OF THE CEO EXHIBIT 99.1 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 period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Robert M. Thornton, Jr., President and Chief Executive Officer of the Company, does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; 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. President and Chief Executive Officer November 12, 2002 EX-99.2 9 g79084exv99w2.txt EX-99.2 SECTION 906 CERTIFICATION OF THE CFO EXHIBIT 99.2 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 period ended September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Joseph T. Morris, Chief Financial Officer of the Company, does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; 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/ J. T. Morris ----------------------- Joseph T. Morris Chief Financial Officer November 12, 2002 -----END PRIVACY-ENHANCED MESSAGE-----

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PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX-10.1 AMENDED & RESTATED EMPLOYMENT AGREEMENT
EX-10.2 AMENDED & RESTATED EMPLOYMENT AGREEMENT
EX-10.3 AMENDED & RESTATED EMPLOYMENT AGREEMENT
EX-10.4 LOAN AGREEMENT
EX-10.5 CONTRACT OF GUARANTY
EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
EX-99.2 SECTION 906 CERTIFICATION OF THE CFO


		Date: November 12, 2002

		/s/ Robert M. Thornton, Jr.

		Robert M. Thornton, Jr. President and Chief Executive Officer


		Date: November 12, 2002

		/s/ Joseph T. Morris

		Joseph T. Morris Chief Financial Officer