Note 7 – Borrowings and Capital Lease Obligations

The Company’s short-term debt obligations are as follows:


	Rate (1)			September 30, 2013		December 31, 2012
Senior Lender:
Notes payable – working capital		6.5 – 7.0	%	$	2,787,937	$	778,287
Other Lenders:
Note payable – FHA		7.0	%		1,730,489		—
Note payable – S&H Leasing		11.5	%		1,865,600		—
Note payable – working capital		5.0	%		800,000		796,231
Note payable – HC REIT					—		100,000
Notes payable – acquisition		6.0 - 8.0	%		25,188		156,242
Insurance premium financings		3.1 – 3.9	%		106,869		176,837

Short-term debt				$	7,316,083	$	2,007,597

(1)	Effective rate as of September 30, 2013

On March 19, 2013, the Company received a short-term working capital loan for $2,010,027 from its senior lender that is collateralized by the inventory, accounts receivable, equipment and other assets of one of the Company’s hospital subsidiaries. The note bears interest at a variable rate of prime plus 3.75%, with a minimum rate of 7%, and the Company is required to make monthly payments of interest only with the balance due at maturity in March 2014.

On July 22, 2013, in conjunction with the Foundation acquisition, the Company issued a promissory note for $2,000,000 to FHA. The note is unsecured, bears interest at a fixed rate of 7% and is due on demand. During the period from July 22, 2013 to September 30, 2013, the Company made payments totaling $286,904 on the FHA note. On October 14, 2013, the total principal and interest due on the FHA note, totaling $1,727,377 was paid.

On July 22, 2013, in conjunction with the Tyche Transaction (see Note 8 – Preferred Noncontrolling Interests), the Company issued a note payable to S&H Leasing, LLC (“S&H Leasing”), a member of Tyche. The note is unsecured and bears interest at a fixed rate of 11.5%. All principal and interest on the note is due at maturity on August 1, 2014.

In August 2013, the HC REIT short-term note payable (“HC REIT Note 1”) was forgiven by HC REIT in conjunction with the El Paso Real Estate Transaction described in Note 10 – Extraordinary Gain and Other Item.

The Company’s long-term debt and capital lease obligations are as follows:


	Rate (1)			Maturity Date		September 30, 2013			December 31, 2012
Senior Lender:
Line of credit		7	%		Jun. 2014	$	896,000		$	431,000
Notes payable – working capital		5.5 – 7	%		Mar. 2014 – Feb. 2016		4,059,723			5,216,251
Note payable – equity investments		6.25	%		Sept. 2016		3,538,734			4,289,057
Note payable – management agreements		6.75	%		Dec. 2016		687,808			826,617
Note payable – assumption		6.75	%		Jan. 2015		178,801			—
Other Lenders:
Note payable – preferred interest redemption		10	%		Jul. 2015		5,100,000			—
Notes payable – THE		4.6 – 8	%		Dec. 2014 – Feb. 2016		348,304			453,034
Note payable – HC REIT							—			450,917
Notes payable – physician partners		5.25 – 6.75	%		Oct. 2013 – Nov. 2014		166,413			617,198
Note payable – equity investment		7.7	%		Nov. 2013		30,054			167,841
Note payables – settlements		5.25 – 8	%		Nov. 2013 – Jan. 2018		1,312,411			—
Notes payable – acquisition		6.0	%		Dec. 2014 – Oct. 2015		119,572			172,289
Capital lease obligations		0.2 – 12.3	%		Apr. 2013 – Dec. 2022		2,831,339			4,879,886

Total							19,269,159			17,504,090
Less: Current portion of long-term debt							(8,134,412	)		(5,971,339	)

Long-term debt						$	11,134,747		$	11,532,751

(1)	Effective rate as of September 30, 2013

On July 22, 2013, as part of the acquisition of Foundation, the Company assumed a note payable with its senior lender from FHA. The note is unsecured and bears interest at a fixed rate of 6.75%. The Company is required to make monthly principal and interest payments under the note of $11,628.

In August 2013, the HC REIT note payable (“HC REIT Note 2”) was assigned to FSHA as part of the El Paso Real Estate Transaction described in Note 10 – Extraordinary Gain and Other Item.

The Company has a note payable with a bank that is collateralized by the Company’s equity investment in one of its Affiliates. The note bears interest at a fixed rate of 7.7% and the Company is required to make monthly principal and interest payments of $16,000.

On July 22, 2013, as part of the acquisition of Foundation, the Company assumed various notes payable from FHA, totaling $1.2 million that are owed to various third parties and a bank. The notes payable were related to past legal settlements of the Company that were funded by FHA through the notes payable. The assumed settlement notes bear interest at fixed rates ranging from 5.25% to 8%. On September 3, 2013, the Company entered into a note payable with a noncontrolling interest holder in one of the Company’s hospital subsidiaries. The note bears interest at prime plus 2% and was entered into as a settlement of a dispute and for the purpose of purchasing the noncontrolling interest from the holder. All of the settlements notes payable are unsecured and the Company is required to make monthly principal and interest payments totaling $51,449.

On August 30, 2013, the Company’s capital lease with HC REIT was forgiven in conjunction with the El Paso Real Estate Transaction described in Note 10 – Extraordinary Gain and Other Item.

The Company has entered into various short-term and long-term notes payable with its senior lender, Legacy Bank (referred to as “Legacy Debt”). As of September 30, 2013 and 2012, the balance of the Legacy Debt was $12.1 million and $11.5 million, respectively. The Legacy Debt is collateralized by substantially all of the assets of the Company’s subsidiaries, FSA and FSHA, and a portion is personally guaranteed by certain officers of the Company. In conjunction with the Legacy Debt, the Company has agreed to comply with certain financial covenants (as defined and calculated at the FSA and FSHA level) including:

•

Debt Service Coverage Ratio of 1.05 to 1 and increasing to 1.1 to 1 by December 31, 2013; 1.15 to 1 by March 31, 2014; and 1.2 to 1 by June 30, 2014; and

•

Minimum Tangible Net Worth of $11.1 million increased each quarter (beginning in September 30, 2013 by 50% of FSA’s and FSHA’s net income for the quarter).

As of September 30, 2013, FSA and FSHA are in compliance with the Legacy Bank Financial Covenants. Legacy Bank has waived the financial covenants until January 15, 2014. There is no assurance that Legacy Bank will waive any future violations of the financial covenants. The Company anticipates that it will also meet the financial covenants at January 15, 2014. Historically, management has been successful in obtaining waivers from the bank for any covenant non-compliance; however there is no assurance that the Company will be able to obtain waivers in the future.

At September 30, 2013, future maturities of long-term debt were as follows:


2014	$	8,134,412
2015		8,654,703
2016		2,227,649
2017		197,395
2018		55,000
Thereafter		—