UNITED SURGEONS, LLC - IN.govUnity Medical and Surgical Hospital, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements

UNITED SURGEONS, LLCD/B/A UNITY MEDICAL AND

SURGICAL HOSPITALMishawaka, Indiana

CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2013 and 2012


SURGICAL HOSPITALMishawaka, Indiana

CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2013 and 2012

CONTENTS

INDEPENDENT AUDITOR'S REPORT................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................1

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................3

CONSOLIDATED STATEMENTS OF OPERATIONS................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................4

CONSOLIDATED STATEMENTS OF MEMBERS' DEFICIT................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................5

CONSOLIDATED STATEMENTS OF CASH FLOWS................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................7

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Members ofUnited Surgeons, LLCd/b/a Unity Medical and Surgical HospitalMishawaka, Indiana

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of United Surgeons, LLC d/b/aUnity Medical and Surgical Hospital, which comprise the consolidated balance sheets as of December31, 2013 and 2012, and the related consolidated statements of operations, members' deficit, and cashflows for the years then ended, and the related notes to the consolidated financial statements.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with accounting principles generally accepted in the United States of America;this includes the design, implementation, and maintenance of internal control relevant to the preparationand fair presentation of consolidated financial statements that are free from material misstatement,whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on ouraudits. We conducted our audits in accordance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe consolidated financial statements. The procedures selected depend on the auditor’s judgment,including the assessment of the risks of material misstatement of the consolidated financial statements,whether due to fraud or error. In making those risk assessments, the auditor considers internal controlrelevant to the entity’s preparation and fair presentation of the consolidated financial statements in orderto design audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express nosuch opinion. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of significant accounting estimates made by management, as well as evaluating theoverall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour unqualified opinion for 2013 and qualified opinion for 2012.

(Continued)

1.

Unqualified Opinion for 2013

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of United Surgeons, LLC d/b/a Unity Medical and SurgicalHospital, as of December 31, 2013, and the results of its operations and its cash flows for the year thenended in accordance with accounting principles generally accepted in the United States of America.

Basis for Qualified Opinion for 2012

Prior to 2012, management did not provide assessments of goodwill and intangible assets for impairment.During 2012, however, management provided their goodwill and intangible asset impairment analysis andrecognized $1,667,108 of goodwill impairment loss and $197,100 of intangible asset impairment lossrecorded as amortization expense. We were unable to determine whether any of the 2012 impairmentlosses related to prior years, if any, and the impact on any adjustments that might have been necessarywith respect to goodwill and intangible asset impairment elements making up the consolidated statementsof operations and changes in members' deficit, and cash flows in 2012.

Qualified Opinion for 2012

In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion for2012 paragraph, the consolidated financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of United Surgeons, LLC d/b/a Unity Medical and SurgicalHospital, as of December 31, 2012, and the results of its operations and its cash flows for the year thenended in accordance with accounting principles generally accepted in the United States of America.

Crowe Horwath LLP

South Bend, IndianaJune 23, 2014

2.


SURGICAL HOSPITALCONSOLIDATED BALANCE SHEETS

December 31, 2013 and 2012

2013 2012ASSETSCurrent assets

Cash $ 1,992,907 $ 121,224Patient receivables, net 11,730,748 8,215,904Inventory 554,793 769,423Prepaid expenses and other assets 385,424 90,818Other receivables - 1,237,400Affiliates receivables 293,237 1,366,125

Total current assets 14,957,109 11,800,894

Property and equipment, net 17,837,909 20,238,284Goodwill, net 444,352 493,725Intangibles, net 1,333,334 2,000,000Deposits 24,824 23,215

19,640,419 22,755,224

Total assets $ 34,597,528 $ 34,556,118

LIABILITIES AND MEMBERS' DEFICITCurrent liabilities

Line of credit agreements $ 3,000,000 $ 8,200,000Current portion of long-term debt 3,251,819 4,787,835Current portion of capital lease obligations 558,574 524,844Accounts payable 253,767 6,841,142Accrued expenses 1,171,831 1,718,844Affiliate payables - 679,551Due to Parent 250,000 -Third party settlements 2,333,479 1,055,954Distributions payable 203,923 227,317Due to seller - 1,239,632

Total current liabilities 11,023,393 25,275,119

Long-term liabilitiesLong-term debt, net of current portion 14,462,148 5,599,397Capital lease obligations, net of current portion 17,495,039 17,992,206

Total long-term liabilities 31,957,187 23,591,603Total liabilities 42,980,580 48,866,722

Members' deficit (8,383,052) (14,310,604)

Total liabilities and members' deficit $ 34,597,528 $ 34,556,118

See accompanying notes to consolidated financial statements.

3.


SURGICAL HOSPITALCONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2013 and 2012

2013 2012Revenues

Patient service revenue $ 41,608,173 $ 21,072,137Physician practice 4,824,875 2,699,773Other 82,006 1,264,521

Total revenues 46,515,054 25,036,431

Operating expenses Contract services 14,043,084 14,107,782Bad debt expense 929,130 1,099,939Professional fees 853,890 512,271Management fees - 504,000Medical supplies 10,951,127 8,000,727Office expense 682,118 726,330Equipment rent 171,843 293,418Building rent 536,750 590,211Repairs and maintenance 405,339 356,868Utilities 374,514 400,962Insurance 287,488 212,029Property taxes 290,050 384,717Dues, licenses and subscriptions 97,892 36,835Travel, meals and conferences 74,908 130,810Depreciation and amortization expense 3,434,255 2,440,220Collection fees 1,484,046 228,933Human resource expense 32,689 170,985Education and training 178,903 111,622Miscellaneous expenses 36,366 3,572

Total operating expenses 34,864,392 30,312,231

Income (loss) from operations 11,650,662 (5,275,800)

Other income (expense) Interest expense (4,145,653) (3,795,469)Rental income 1,416 38,308Impairment of goodwill - (1,667,108)Loss on asset disposals - (111,047)Other income 2,719 1,602

Total other expense (4,141,518) (5,533,714)

Net income (loss) $ 7,509,144 $ (10,809,514)


4.


SURGICAL HOSPITALCONSOLIDATED STATEMENTS OF MEMBERS' DEFICIT


Balances, January 1, 2012 $ (3,174,748)

Net loss (10,809,514)

Due from Parent (Note 9) (325,342)

Distributions (1,000)

Balances, December 31, 2012 (14,310,604)

Net income 7,509,144

Due from Parent (Note 9) (665,223)

Forgiveness of related party receivables and payables (Note 9) (918,163)

Contributions 1,794

Balances, December 31, 2013 $ (8,383,052)


5.


SURGICAL HOSPITALCONSOLIDATED STATEMENTS OF CASH FLOWS


2013 2012Cash flows from operating activities

Net income (loss) $ 7,509,144 $ (10,809,514)Adjustments to reconcile net income (loss) to net cash

from operating activitiesDepreciation and amortization expense 3,434,255 2,440,220Bad debt expense 929,130 1,099,939Loss on disposal of assets - 111,047Impairment of goodwill - 1,667,108Excess of interest over capital lease payments 484,581 488,857Change in assets and liabilities

Patient receivables (4,443,974) (73,688)Third party settlements 1,277,525 2,833,729Affiliate receivables (120,961) (75,633)Other receivables 1,237,400 (1,237,400)Prepaid expenses and other assets (294,606) 162,451Inventory 214,630 (153,542)Deposits (1,609) (215)Accounts payable (6,587,375) 3,165,172Affiliate payables (403,865) 528,131Accrued expenses (547,013) 595,108

Net cash from operating activities 2,687,262 741,770

Cash flows from investing activitiesAcquisition of businesses, net of cash acquired - (2,068,775)Purchase of property and equipment (172,017) (481,769)

Net cash from investing activities (172,017) (2,550,544)

Cash flows from financing activitiesGross proceeds on line of credit agreements 3,300,000 1,754,332Proceeds from issuance of long-term debt 18,063,967 4,050,000Payments on long-term debt (19,237,232) (3,055,727)Payments on capital lease obligations (1,093,842) (735,217)Distributions (23,394) (1,000)Contributions 1,794 -Due to seller (1,239,632) -Due from Parent (415,223) (325,342)

Net cash from financing activities (643,562) 1,687,046

Net change in cash 1,871,683 (121,728)

Cash at beginning of year 121,224 242,952

Cash at end of year $ 1,992,907 $ 121,224

Supplemental disclosures of cash flow informationCash paid during the year for interest $ 4,147,993 $ 3,792,313

Supplemental disclosures of non-cash flow activityAssets acquired under capital lease agreements $ 145,824 $ 3,650,111Due to seller on acquisition - 1,239,632Forgiveness of related party receivables and payables 918,163 -Due from Parent accrued distribution 250,000 -


6.


SURGICAL HOSPITALNOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization: United Surgeons, LLC d/b/a Unity Medical and Surgical Hospital, LLC ("UMASH"), asubsidiary of Physician’s ASC Management, LLC (“PAM” or "Parent"), operates a 29 bed outpatient /inpatient surgical hospital located in Mishawaka, Indiana.

Basis of Consolidation: The accompanying consolidated financial statements include the accounts ofUMASH and their wholly owned subsidiaries (collectively “the Company”), and have been prepared inconformity with accounting principles generally accepted in the United States of America. All materialintercompany accounts and transactions have been eliminated in consolidation.

Industry: The Company derives a significant portion of its revenue from third-party payer programs. Thereceipt of future revenues by the Company is subject to, among other factors, federal and state policiesaffecting the health care industry, economic conditions that may include an inability to control expenses inperiods of inflation, increased competition, market pressures on premium rates and other conditionswhich are impossible to predict.

Use of Estimates: The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and reported amounts of revenues and expensesduring the reporting period. Estimates associated with the allowances for contractual adjustments anduncollectible patient accounts, third party settlements, and medical malpractice are particularlysusceptible to material change in the near term.

Total patient accounts receivable concentrations by payer at December 31 are as follows:

2013 2012

Medicare %29.4 %40.2Blue Cross 24.8 37.0Commercial, self pay and other 45.8 22.8

%100.0 %100.0

The Company does not perform credit evaluations of its payers, but does inquire of patients regardingtheir access to insurance and ability to pay. The Company does not require collateral from its patients,third-party payers or others.

Cash: The Company maintains cash balances with financial institutions which, at times, may exceedfederally insured limits.

Patients Receivables and Allowances: Patient receivables represent charges to patients, primarily onopen account. The Company does not accrue interest on any of its patient receivables. Adjustments topatient accounts are made in amounts estimated to maintain an adequate allowance to cover contractualallowances and anticipated losses. Patient receivables represent estimated net realizable amounts frompatients, third-party payers and others. Estimated contractual adjustments, based on existing contractualrelationships, are recorded at the time charges are posted and are adjusted to reflect actual contractualadjustments as claims are settled.

(Continued)

7.




NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Management periodically reviews patient receivables and records an allowance for uncollectible accountsbased on current circumstances. Allowance estimates are based on historical experience and otherrelevant factors. Accounts are charged against the allowance when all attempts to collect the receivablehave failed. Patient receivables are shown net of allowances of $7,000,000 and $24,008,075 on theconsolidated balance sheets at December 31, 2013 and 2012, respectively.

Settlements: Settlements under cost reimbursement agreements with third-party payers are estimatedand recorded in the period in which the related services are rendered and are adjusted in future periodsas final settlements are determined. Final determination of amounts earned under the Medicare andMedicaid programs often occur in subsequent years because of audits by the programs, rights of appeal,and the application of numerous technical provisions. An estimated Medicare and Medicaid settlementpayable of $2,333,479 and $1,055,954 is recorded at December 31, 2013 and 2012, respectively, in thirdparty settlements on the consolidated balance sheets.

Inventory: Inventory consists primarily of medical and pharmaceutical supplies and is stated at the lowerof cost (first-in, first-out) or market value.

Property and Equipment: Property and equipment are stated at cost. Depreciation of property andequipment is provided using the straight-line method over the estimated useful lives of the assets andincludes depreciation on assets leased under capital lease arrangements. When properties are retired orotherwise disposed of, the appropriate accounts are relieved of cost and accumulated depreciation, andany resulting gain or loss is recognized.

Estimated lives used in computing depreciation are as follows:

Building 24 yearsSoftware, computer and medical equipment 3 - 7 yearsFurniture, fixtures and office equipment 3 - 7 yearsLeasehold improvements Lesser of life of lease or

economic useful life

On an on-going basis, long-lived assets, such as property and equipment, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amount of an asset may not berecoverable. If the carrying amount of an asset exceeds its estimated discounted future cash flows, animpairment charge is recognized by the amount by which the carrying amount of the asset exceeds thefair value of the asset. As of December 31, 2013 and 2012, no such impairment existed.

Goodwill: Goodwill represents the excess of the purchase price over the fair value of the net assets ofbusinesses acquired in a business combination.

In January 2014, the Financial Accounting Standards Board (FASB) issued guidance that providesprivate companies with an alternative for the subsequent measurement of goodwill. Under thisalternative, goodwill is amortized and is only tested for impairment when a triggering event occurs thatindicates the fair value may be below the carrying amount. Entities that adopt the alternative are requiredto make a policy decision to test goodwill for impairment either at the entity level or at the reporting unitlevel. Early adoption is allowed and the alternative must be applied to all existing and future goodwill.

(Continued)

8.





The Company adopted this goodwill accounting alternative and applied its provisions prospectivelybeginning January 1, 2013, and elected to test goodwill for impairment at the reporting unit level. Theeffects of adopting this standard resulted in recording goodwill amortization expense of $49,373 for theyear ended December 31, 2013 and accumulated goodwill amortization of $49,373 as of December 31,2013. Future goodwill amortization expense is estimated to be $49,373 each year from 2014 through2023.

Prior to January 1, 2013, goodwill was not amortized, but was tested for impairment at least annually ormore frequently if events and circumstances indicated a possibility of impairment. Impairment wasrecorded when a reporting unit’s carrying value of goodwill exceeded its implied fair value. As previouslydisclosed, the Company adopted the goodwill accounting alternative with prospective applicationbeginning January 1, 2013. Under this alternative accounting method, goodwill will be amortized over tenyears. In addition, goodwill impairment testing is performed at the reporting unit level only when atriggering event indicates that the carrying value of the reporting unit may exceed its estimated fair value.

During 2012, management identified goodwill impairment and recorded a goodwill impairment loss in theamount of $1,667,108 (see Notes 7 and 8). Management believes no goodwill was impaired atDecember 31, 2011, however, management did not provide a goodwill impairment analysis. We wereunable to determine whether any of the 2012 impairment losses related to 2011, if any.

Intangible Assets: These assets are amortized on a straight-line basis over their period of expectedbenefits. On December 31, 2012, the Company entered into a business acquisition and identified a non-compete agreement in the amount of $2,000,000. The Company recorded amortization expense of$666,666 in 2013 and the non-compete is presented net of accumulated amortization of $666,666 atDecember 31, 2013, on the consolidated balance sheets. Future non-compete amortization expense isestimated to be $666,666 each year in 2014 and 2015.

During 2012, management identified intangible asset impairment related to certain customerrelationships, trade name and non-compete agreements and expensed the remaining unamortized assetamounts of $197,100 as amortization expense on the consolidated statement of operations.Management believes no intangible asset impairment existed at December 31, 2011, however,management did not provide an impairment analysis. We were unable to determine whether any of the2012 impairment losses related to 2011, if any.

Revenue Recognition: Revenue is recorded when medical services are rendered. Management fee andcontracted service revenues are recorded as services are rendered. Provisions for estimated third-partypayer settlements and adjustments are made in the period the related services are rendered andadjusted in future periods as final settlements are determined.

(Continued)

9.





Other Revenue: The American Recovery and Reinvestment Act of 2009 included provisions forimplementing health information technology under the Health Information Technology for Economic andClinical Health Act (HITECH). These provisions were designed to increase the use of electronic healthrecords (EHR) technology and establish the requirements for a Medicare and Medicaid incentivepayments program beginning in 2011 for eligible hospitals and providers that adopt and meaningfully usecertified EHR technology. Eligibility for annual Medicare incentive payments is dependent on providersdemonstrating meaningful use of EHR technology in each period over a four-year period. Initial Medicaidincentive payments are available to providers that adopt, implement, or upgrade certified EHRtechnology; but providers must demonstrate meaningful use of such technology in subsequent years toqualify for additional incentive payments. Medicaid EHR incentive payments are fully funded by thefederal government and administered by the states; however, the states are not required to offer EHRincentive payments to providers.

Using the grant accounting method of revenue recognition, the Company recognized $1,237,400 ofrevenue for HITECH incentives from Medicare during the year ended December 31, 2012. The Companyhas demonstrated meaningful use of certified EHR technology or has completed attestations to theiradoption or implementation of certified EHR technology. Such revenue is included within other on theconsolidated statements of operations in 2012.

The Company did not receive, nor does the Company expect to receive, revenues for HITECH incentivesfrom Medicare for the year ended December 31, 2013.

Medical Malpractice: The Indiana Medical Malpractice Act limits the maximum recovery for professionalliability to $750,000 per occurrence, $250,000 of which would be paid through the Company’s malpracticeinsurance coverage, and the balance would be paid by the State of Indiana Patient Compensation Fund.The Company maintains professional liability insurance coverage on a claims-incurred basis. Premiumsare expensed in the period to which they relate.

Fair Value of Financial Instruments: The Company's carrying amount for its financial instruments, whichinclude cash, patient accounts receivable, accounts payable, and long-term debt approximates fair value.

Income Taxes: A tax position is recognized as a benefit only if it is "more likely than not" that the taxposition would be sustained in a tax examination, with a tax examination being presumed to occur. Theamount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized onexamination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.

The Company recognizes interest and penalties related to unrecognized tax benefits in interest andincome tax expense, respectively. The Company has no amounts accrued for interest or penalties as ofDecember 31, 2013 and 2012. Due to its pass-through status, the Company is not subject to U.S. federalincome tax or state income tax. The Company is no longer subject to examination by U.S. federal andState of Indiana taxing authorities for years before January 1, 2010. The Company does not expect thetotal amount of unrecognized tax benefits to significantly change in the next 12 months.

Reclassifications: Certain prior year amounts have been reclassified to conform with the current yearpresentation. These reclassifications had no effect on net income or members' deficit.

(Continued)

10.




NOTE 2 - BUSINESS ACQUISITIONS

To pursue the strategy of increasing market presence by expanding their service base, the Companyentered into the following business acquisitions:

On February 1, 2012, pursuant to an Asset Purchase Agreement, UMASH acquired certain assets ofMcClure Investments, LLC. The purchase price was $190,000. The excess of the purchase price overthe fair value of the net identifiable tangible and intangible assets was allocated to goodwill. Thefollowing table presents the allocation of the purchase price based on fair value:

Property and equipment $ 59,000Inventory 28,000Goodwill 103,000

$ 190,000

The purchased goodwill primarily represents the acquired business intangible assets that do not qualifyfor separate recognition, it's market position and the expectation of future earnings growth.

On December 31, 2012, pursuant to a Unit Purchase Agreement, UMASH acquired the businessoperations of i-Spine, LLC. The purchase price was $3,239,632 and was funded through $2,000,000 oflender proceeds with the remaining balance of $1,239,632 due to seller at December 31, 2012. Theremaining balance has a fixed interest rate of 6.00%. This amount was repaid in full during November2013. The excess of the purchase price over the fair value of the net identifiable tangible and intangibleassets was allocated to goodwill. The following table presents the allocation of the purchase price basedon fair value:

Cash $ 121,225Accounts receivable 652,600Prepaid assets 10,120Property and equipment 1,090Goodwill 493,725Non-compete agreement 2,000,000Accounts payable and accrued payable (39,128)

Total purchase allocation $ 3,239,632

The Company determined the fair value of the non-compete agreement by applying an income basedapproach which included discounting future estimated cash flows.

The Company incurred acquisition costs of $25,000 which were expensed as professional fees on theconsolidated statements of operations in 2012.

The purchased goodwill primarily represents the acquired business intangible assets that do not qualifyfor separate recognition, its market position and the expectation of future earnings growth.

(Continued)

11.




NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

2013 2012

Building $ 14,379,799 $ 14,379,799Software, computer and medical equipment 12,048,140 11,783,521Furniture, fixtures and office equipment 1,587,356 1,543,997Leasehold improvements 800,339 790,475

28,815,634 28,497,792Accumulated depreciation (10,977,725) (8,259,508)

$ 17,837,909 $ 20,238,284

Depreciation expense was $2,718,216 and $2,243,120 in 2013 and 2012, respectively.

NOTE 4 - LINE OF CREDIT AGREEMENT

The Company maintained a due on demand line of credit with Lake City Bank with available credit of$7,000,000. The line of credit had principal outstanding of $7,000,000 at December 31, 2012. Interestwas at 4.00% at December 31, 2012.

On December 27, 2012, the Company obtained a due on demand line of credit with Lake City Bank withavailable credit of $1,500,000. The line of credit had principal outstanding of $1,200,000 at December31, 2012. Interest was 4.00% at December 31, 2012.

On December 27, 2013, the Company and Lake City Bank entered into a Loan Restructuring Agreement.Under this agreement, the lines of credit were restructured into a new line of credit with available credit of$3,000,000. The remaining balances outstanding on the lines of credit were incorporated into a new notepayable with Lake City Bank (see Note 5). The line of credit had principal outstanding of $3,000,000 atDecember 31, 2013. Interest was 4.25% at December 31, 2013. The line of credit expires annually inDecember. The Company expects the line of credit to be renewed under similar terms and conditions inDecember 2014.

This agreement is secured by all assets of the Company and the personal guarantees of certainmembers. The line of credit is subject to certain financial and non-financial covenants (see Note 5).

(Continued)

12.




NOTE 5 - LONG-TERM DEBT

On December 27, 2013, the Company and Lake City Bank entered into a Loan Restructuring Agreement.Under this agreement certain amounts outstanding under the lines of credit (see Note 4) along with theoutstanding notes payable were restructured into a new note payable.

Long-term debt consists of the following at December 31:2013 2012

Lake City Bank – note payable in monthlyinstallments of $328,564 including interest at4.25%, maturing in December 2018. $ 17,713,967 $ -

Lake City Bank – note payable in monthlyinstallments of $177,022 including interest at6.00%, maturing in October 2015. - 5,811,704

Lake City Bank – note payable in monthlyinstallments of $37,820 including interest at5.50%, maturing in December 2016. - 1,687,995

Lake City Bank – note payable due in fullincluding interest at 4.00%, maturing in March2013. In March 2013 the note was extendedthrough October 2013. - 2,000,000

Lake City Bank – note payable due in fullincluding interest at 4.00%, maturing in October2013. - 500,000

Lake City Bank – note payable in monthlyinstallments of $5,049 including interest at 5.75%,maturing in December 2017. - 350,000

Omnicare – note payable in monthly installmentsof $2,250 including interest at 6.00%, maturing inJune 2014. This note was repaid in full in 2013. - 37,533

17,713,967 10,387,232Current portion of long-term debt (3,251,819) (4,787,835)

Long-term debt, net of current portion $ 14,462,148 $ 5,599,397

The Lake City Bank Loan Restructuring Agreement is secured by all assets of the Company. Certainmembers also guarantee 56% of the outstanding balance of the note payable with Lake City Bank. TheCompany makes payments for an irrevocable life insurance policy on a member for which Lake City Bankis the beneficiary, of up to $5,000,000, in accordance with the terms of the Loan RestructuringAgreement.

The Company is required to maintain certain financial and non-financial covenants with Lake City Bank.As of December 31, 2013, the Company was not in compliance. The Company obtained the appropriatewaivers in 2014 curing covenant non-compliance.

(Continued)

13.




NOTE 5 - LONG-TERM DEBT (Continued)

Principal maturities of outstanding debt at December 31, 2013, over the next five years are as follows:

2014 $ 3,251,8192015 3,386,0412016 3,534,8622017 3,690,2252018 3,851,020

NOTE 6 - LEASES

The Company entered into non-cancelable operating leases for medical and office equipment and spacethrough December 2018. Rent expense for equipment and space in 2013 and 2012 was $708,593 and$883,629, respectively.

Future payments under operating leases with initial non-cancelable terms of one year or more consistedof the following:

2014 $ 370,0442015 276,7012016 115,8512017 22,4332018 13,200

$ 798,229

The Company has a capital lease with Unity Realty, LLC (“UR”), a party related through commonownership, for the building, and also maintains capital leases for certain medical and office equipmentwith unrelated various parties. Following is a summary of the capital leases at December 31:

2013 2012

Building $ 14,379,799 $ 14,379,799Software, computer and medical equipment 3,218,966 4,119,631Furniture, fixtures and office equipment 11,036 11,036

17,609,801 18,510,466Accumulated depreciation (4,649,608) (3,386,619)

$ 12,960,193 $ 15,123,847

(Continued)

14.




NOTE 6 - LEASES (Continued)

Future minimum payments on the capital leases are as follows:

2014 $ 3,679,0252015 3,529,4622016 2,638,3712017 2,699,3522018 2,766,727Thereafter 61,282,128

76,595,065Amount representing interest (58,541,452)Present value of net minimum lease

payments (including current portion of$558,574) $ 18,053,613

Interest expense in excess of capital lease payments of $484,581 and $488,604, relative to the UR lease,was recognized on the consolidated statements of operations as interest expense for 2013 and 2012.

NOTE 7 - FAIR VALUE MEASUREMENTS

The Company applies fair value techniques to value potential impairment losses related to goodwill on anon-recurring basis. Fair value is defined as the price that would be received by the Company for anasset, or paid by the Company to transfer a liability (as exit price), in an orderly transaction betweenmarket participants on the measurement date in the Company's principal or most advantageous marketfor the asset or liability. The fair value hierarchy requires the Company to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value. Unobservable inputs areinputs that reflect the Company's own assumptions based on market data and on assumptions thatmarket participants would use in pricing the asset or liability developed based on the best informationavailable in the circumstances. The hierarchy places the highest priority on unadjusted quoted marketprices in active markets for identical assets or liabilities (Level 1 measurements) and gives the lowestpriority to unobservable inputs (Level 3 measurements). The three levels of inputs within the fair valuehierarchy are defined as follows:

Level 1 Inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets that theentity has the ability to access as of the measurement date.

Level 2 Inputs: Significant other observable inputs other than Level 1 prices such as quoted prices forsimilar assets or liabilities; quoted prices in markets that are not active; or other inputs that areobservable or can be corroborated by observable market data.

Level 3 Inputs: Significant unobservable inputs that reflect a reporting entity's own assumptions aboutthe assumptions that market participants would use in pricing an asset or liability.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels ofthe fair value hierarchy. The lowest level of significant input determines the placement of the entire fairvalue measurement in the hierarchy.

(Continued)

15.




NOTE 7 - FAIR VALUE MEASUREMENTS (Continued)

During 2012, the Company used the combination of a discounted cash flow model and a market multipleanalysis method to determine the current fair value of goodwill. The discounted cash flow model wasprepared using management’s future revenue and expense projections based on the Company’s currentoperating plan. As such, a number of significant assumptions and estimates are involved in theforecasted revenue growth, price changes, gross profits, operating expenses and operating cash flows.

Significant inputs and management assumptions were used in the fair value techniques associated withvaluing potential impairment losses related to the Company's goodwill in 2012 (see Note 8). As such,significant fair value inputs generally cannot be verified and involve significant management judgments(Level 3 inputs).

During 2013, the Company did not identify any trigging events that requirement goodwill to be tested forimpairment.

NOTE 8 - GOODWILL

The Company recognized $0 and $1,667,108 of impairment loss in 2013 and 2012, respectively.Management indicated the impairment loss resulted from a decline in operating results. The changes inthe carrying amount of goodwill is as follows:

Balance at January 1, 2012 $ 1,564,108Acquired 596,725Impairment (1,667,108)Balance as of December 31, 2012 493,725Accumulated amortization (49,373)

Balance as of December 31, 2013 $ 444,352

NOTE 9 - RELATED PARTY TRANSACTIONS

Medical Director Agreements: The Company entered into medical director agreements ("MDA") withindividuals who are members of PAM. The MDAs automatically renew for one year periods unlessterminated according to the terms of the MDAs. The agreement was terminated prior to 2012. Noexpenses were recorded during 2012. The Company signed a new agreement in 2013 whichautomatically renews for a one year period unless terminated according to the terms of the MDA. TheCompany incurred $220,000 of expenses for medical directory service fees in 2013.

Management Agreement: The Company entered into a management agreement with PAM through May2016 for provision of development, administrative and management services, as described in themanagement agreement. The Company pays PAM $672,000 annually, increasing by 5.00% per year (theincrease has been waived by PAM since inception of the agreement). The management agreement wasterminated in December 2012. Management fees for 2012 were $504,000.

(Continued)

16.




NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

Lease Agreement: The Company entered into a net lease for the building with UR, a related partythrough common ownership (see Note 6). The term of the lease is for 300 months beginning in October2009. The UR lease is guaranteed by the members of PAM in direct proportion to their membership inPAM.

In the normal course of business, the Company incurs expenses on behalf of affiliated entities, orprovides services to related parties, and recognizes a receivable in affiliate receivables.

Related Party Settlement Agreements: Effective December 20, 2013, and in conjunction with LoanRestructuring Agreement with Lake City Bank, the Company entered into certain settlement agreementand general releases with members of PAM and the Company. These agreements also impacted certainrelated party ownership and relationships.

As part of the related party ownership and relationship changes, related party receivables due to theCompany and related party payables owed to other related parties were forgiven. The Company doesnot have any continuing performance or obligations with these related parties. As the forgiveness, orextinguishment, of these related party transactions occurred in conjunction with ownership changes atPAM and with members of the Company, the Company recognized $918,163, representing the netamount of forgiven related party amounts, as a capital transaction in member’s deficit.

The following is the composition of affiliate receivables forgiven:

Related parties through common ownership:Physician's Hospital, LLC d/b/a RiverCrest Specialty Hospital $ 160,626Doctors Hospital - Grand Forks, LLC 214,998Northern Indiana Rehab Hospital, LLC d/b/a Doctor's Hospital &

Neuromuscular Center 645,402Physician's Hospital System 41,309

Related party through common control:Knox Winamac Community Health Center, Inc. 131,514

Total affiliate receivables forgiven $ 1,193,849

Following is the composition of affiliate payables forgiven:

Related parties through common ownership:Doctors Behavioral Hospital, LLC d/b/a Doctors Neuropsychiatric

Hospital $ (26,165)Physician's Management/Employee Leasing Company, LLC (249,521)

Total affiliate payables forgiven $ (275,686)

(Continued)

17.




NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)

Affiliate Receivables: Following is the composition of affiliate receivables at December 31:

2013 2012

Related parties through common ownership:Physician's Hospital, LLC d/b/a RiverCrest Specialty

Hospital $ - $ 219,752Doctors Hospital - Grand Forks, LLC - 259,050Northern Indiana Rehab Hospital, LLC d/b/a

Doctor's Hospital & Neuromuscular Center - 673,388Michiana Multi-Specialty Medical Group 63,624 63,624Due from physician 180,438 -Other related parties 49,175 18,797

Related party through common control: - -Knox Winamac Community Health Center, Inc. - 131,514

Total affiliate receivables $ 293,237 $ 1,366,125

Affiliate Payables: Following is the composition of affiliate payables at December 31:

2013 2012

Related parties through common ownership:Due to members $ - $ -Doctors Behavioral Hospital, LLC d/b/a Doctors

Neuropsychiatric Hospital - 29,909Doctor's Development Company, LLC - 400,000Physician's Management/Employee Leasing Company,

LLC - 249,642

Total affiliate payables $ - $ 679,551

Due to/from Parent: Following is the composition of due to/from Parent at December 31:

2013 2012Physicians ASC Management, LLC:

Due from Parent $ 990,565 $ 325,342

Due to Parent $ 250,000 $ -

The Company has certain transactions with its Parent and from time to time receivables due from theParent. Management has determined that the repayment of these receivables is dependent upon futuredistributions received from the Company, and therefore, has classified these receivables in members'deficit.

(Continued)

18.




NOTE 10 - CONTINGENCIES AND COMMITMENTS

Litigation: The Company is, at times, involved in professional liability claims arising from the use of thehospital, and from provision of medical services in the physician practices, which are defended andhandled in the ordinary course of business. At December 31, 2013 and 2012, management believes thatthe Company does not have any significant malpractice claims or other litigation in which the ultimateresolution is probable and could have a material financial impact, and therefore has not reflected anyliabilities, or corresponding receivables, in the consolidated balance sheets.

NOTE 11 - SUBSEQUENT EVENTS

Management has performed an analysis of the activities and transactions subsequent to December 31,2013 to determine the need for any adjustments to and/or disclosures within the audited financialstatements for the year ended December 31, 2013. Management has performed their analysis throughJune 23, 2014, the date the financial statements were available for issuance and has determined that allmaterial subsequent events have been properly disclosed.

19.

Documents

UNITED SURGEONS, LLC - IN.govUnity Medical and Surgical Hospital, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements