UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION. Chapter 11

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1 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Samuel R. Maizel (CA Bar No ) Jeffrey L. Kandel (CA Bar No ) Teddy M. Kapur (CA Bar No ) PACHULSKI STANG ZIEHL & JONES LLP Santa Monica Blvd., 11th Floor Los Angeles, California Telephone: 310/ Facsimile: 310/ smaizel@pszjlaw.com jkandel@pszjlaw.com tkapur@pszjlaw.com Attorneys for S&B Surgery Center, Debtor and Debtor in Possession In re: S&B SURGERY CENTER, 1 UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA Debtor LOS ANGELES DIVISION Case No.: LA SB Chapter 11 DEBTOR S DISCLOSURE STATEMENT DESCRIBING DEBTOR S PLAN OF REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE (DATED AUGUST 25, 2009) Disclosure Statement Hearing Date: October 6, 2009 Time: 2:00 p.m Proposed Plan Confirmation Hearing Date: TBA Time: TBA Place: Courtroom West Temple St. Los Angeles, CA Judge: Honorable Samuel L. Bufford 1 The Debtor is a California corporation, Fed. Tax I.D. No The Debtor s address is 120 South Spalding Drive, Suite 301, Beverly Hills, California \DOCS_LA:

2 1 TABLE OF CONTENTS PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA I. INTRODUCTION... 1 II. DISCLAIMER... 3 III. OVERVIEW OF THE CHAPTER 11 PROCESS AND THE PLAN... 5 A. The Chapter 11 Process... 5 B. Overview of the Debtor s Proposed Plan... 6 C. Deadlines for Voting and Objecting; Date of Plan Confirmation Hearing Time and Place of the Confirmation Hearing Deadline For Voting For or Against the Plan Deadline For Objecting to the Confirmation of the Plan Page 4. Identity of Person to Contact for More Information Regarding the Disclosure Statement or Plan IV. BACKGROUND A. Description and History of the Debtor s Business B. Collections and Financial History C. Corporate History D. Corporate Structure E. Management and Employees F. Fortress Credit Corporation and S&B SPV, LLC G. Other Liabilities Arising from Salus and CCDH H. Events Precipitating the Bankruptcy Filing I. Liabilities J. Management of the Debtor During and After the Bankruptcy K. Significant Events During the Bankruptcy Motion to Avoid Appointment of Patient Care Ombudsman \DOCS_LA:

3 1 2. Employee Benefits PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Motion to Reject Lease Professionals Non-Bankruptcy Legal Proceedings Claims Administration and Payments Appointment of the Committee Operations Actual and Projected Recovery of Preferential or Fraudulent Transfers V. LITIGATION AND CAUSES OF ACTION A. Litigation Commenced Prepetition B. Postpetition and Other Potential Causes of Action In General Causes of Action Claims Objections VI. THE PLAN OF REORGANIZATION A. Overview of the Plan B. Treatment of Claims and Interests Under the Plan C. Allowance and Treatment of Unclassified Claims (Administrative Claims and Priority Tax Claims) D. Administrative Claims E. Priority Tax Claims F. Classification and Treatment of Secured Claims (Class 1) G. Classification and Treatment of Priority Non-Tax Claims (Class 2) H. Classification and Treatment of General Unsecured Claims (Class 3) I. Classification and Treatment of Other Unsecured Claims (Class 4) J. Classification and Treatment of Interests (Class 5) K. Executory Contracts and Unexpired Leases \DOCS_LA:

4 1 L. New Value Contribution PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA M. Sale Transaction N. Claims Reserve O. Claims Objections Disputed Claims P. Provisions Governing Plan Implementation Q. Corporate Action R. Class 4 Creditor Trust S. Vesting of Assets T. The Reorganized Debtor Directors and Officers Articles of Incorporation and Bylaws Periodic Reporting Employee Benefit Plans U. Litigation Preservation of Causes of Action and Avoidance Actions VII. OTHER PLAN PROVISIONS A. Exculpation and Release B. Exemption from Stamp, Transfer and Other Taxes C. Injunction Enjoining Holders of Claims Against Debtor D. Discharge of the Debtor E. Entry of a Final Decree F. Post-Effective Date Quarterly Fees G. Post-Effective Date Status Reports H. Withholding and Reporting Requirements I. Evidence of Claims \DOCS_LA:

5 1 J. Cancellation of Interests PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA K. Injunctions or Stays L. No Admissions M. Revocation of the Plan N. Retention of Jurisdiction O. Successors and Assigns P. Nonconsensual Confirmation Q. Saturday, Sunday, or Legal Holiday R. No Waiver S. Plan Modification T. Post-Effective Date Notice VIII. CERTAIN RISK FACTORS TO BE CONSIDERED A. Risk that the Debtor Will Have Insufficient Cash for the Plan to Become Effective B. Risk Regarding the Distributions to Be Made to Creditors C. Bankruptcy Risks D. Risks Related to New Common Stock Lack of Market/Volatility of Stock Price Transfer Restrictions for Holders of New Common Stock Risk of Dilution/Impairment of Value to Holders of New Common Stock IX. VOTING PROCEDURES AND REQUIREMENTS A. Parties Entitled to Vote B. Standards for Acceptance of a Class X. CONFIRMATION OF THE PLAN A. Confirmation Hearing B. Requirements for Confirmation of the Plan Acceptance \DOCS_LA:

6 Fair and Equitable Test Feasibility Best Interests Test XI. ALTERNATIVES TO CONFIRMATION OF THE PLAN XII. CERTAIN U.S. FEDERAL TAX CONSEQUENCES OF THE PLAN A. Introduction B. Consequences to the Debtor XIII. SECURITIES LAW MATTERS XIV. RECOMMENDATION PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA \DOCS_LA:

7 I. INTRODUCTION S&B Surgery Center, the above-captioned debtor and debtor in possession (the Debtor ), submits this Debtor s Disclosure Statement Describing Debtor s Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the Disclosure Statement ) in connection with the solicitation of acceptances and rejections with respect to the Debtor s Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the Plan ) under chapter 11 of title 11 of the United States Code, PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA U.S.C (the Bankruptcy Code ). 2 A copy of the Plan is attached hereto as Exhibit A. Capitalized terms used and not otherwise defined herein will have the same meaning as ascribed to them in the Plan. The purpose of this Disclosure Statement is to set forth information (a) regarding the history of the Debtor, its business, and the chapter 11 case, (b) concerning the Plan and alternatives to the Plan, (c) advising the Holders of Claims and Interests of their rights under the Plan, (d) assisting the Creditors and Interest Holders who are entitled to vote on the Plan in making an informed judgment regarding whether they should vote to accept or reject the Plan, and (e) assisting the Bankruptcy Court in determining whether the Plan complies with the provisions of chapter 11 of the Bankruptcy Code and should be confirmed. By Order dated, 2009 (the Disclosure Statement Order ), the Bankruptcy Court for the Central District of California, Los Angeles Division (the Bankruptcy Court ), after notice and a hearing, approved this Disclosure Statement as containing adequate information to permit affected Creditors and Interest Holders to make an informed judgment in exercising their rights to vote to accept or reject the Plan, and authorized its use in connection with the solicitation of votes with respect to the Plan. THE BANKRUPTCY COURT S APPROVAL OF THIS 2 All references to sections herein are to sections of the Bankruptcy Code, unless otherwise noted. All references to Bankruptcy Rules are to provisions of the Federal Rules of Bankruptcy Procedures. Copies of both the \DOCS_LA:

8 DISCLOSURE STATEMENT DOES NOT MEAN THAT THE COURT RECOMMENDS EITHER ACCEPTANCE OR REJECTION OF THE PLAN. No solicitation of votes may be made except pursuant to this Disclosure Statement and section In voting on the Plan, Creditors and Interest Holders should not rely on any information relating to the Debtor, other than that contained in this Disclosure Statement, the Plan, and all exhibits hereto and thereto, or such other materials approved by the Bankruptcy Court. A copy of the Disclosure Statement Order is attached hereto as Exhibit B. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Only Holders of Claims or Interests allowed under section 502, or temporarily allowed for voting purposes under Bankruptcy Rule 3018, whose Claims or Interests are in those Classes of Claims or Interests that are impaired (as defined in section 1124) under the Plan are entitled to vote to accept or reject the Plan. A Class is Impaired if the legal, equitable, or contractual rights of the Claims or Interests in the Class are altered. Classes of Claims that are not Impaired are conclusively presumed to have voted to accept the Plan pursuant to section 1126(f) and, therefore, are not entitled to vote on the Plan. THE DEBTOR, AS PROPONENT OF THE PLAN, RECOMMENDS THAT THE HOLDERS OF CLAIMS IN CLASS 3 AND CLASS 4 VOTE TO ACCEPT THE PLAN. VOTING ON THE PLAN, BY EACH HOLDER OF A CLAIM AND/OR INTEREST ENTITLED TO VOTE, IS IMPORTANT. EACH SUCH CREDITOR OR INTEREST HOLDER SHOULD READ THIS DISCLOSURE STATEMENT WITH ITS EXHIBITS, INCLUDING THE PLAN, IN ITS ENTIRETY. AFTER CAREFULLY REVIEWING THESE DOCUMENTS, PLEASE FOLLOW THE DIRECTIONS FOR VOTING CONTAINED LATER HEREIN AND ON THE BALLOT, AND RETURN THE BALLOT IN THE ENVELOPE PROVIDED. TO BE COUNTED, YOUR BALLOT MUST BE RECEIVED BY, 2009, AT 5:00 P.M. (PACIFIC) (THE VOTING DEADLINE ) AT THE PACHULSKI STANG ZIEHL & JONES LLP 28 Bankruptcy Code and the Bankruptcy Rules can be found on many websites on the internet, including the Bankruptcy Court s website, at \DOCS_LA:

9 ( PSZJ ) OFFICE AT THE ADDRESS SET FORTH ON THE COVER PAGE AND ON THE PRE-ADDRESSED ENVELOPE ENCLOSED WITH YOUR BALLOT. Votes cannot be transmitted orally, by fax or by . Accordingly, you are urged to return your signed and completed Ballot promptly. Ballots not received by the Voting Deadline and unsigned Ballots will not be counted. Any executed Ballots that are timely received, but which do PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA not indicate either an acceptance or rejection of the Plan, will be deemed to constitute an acceptance of the Plan. Attached as Exhibits to the Disclosure Statement are copies of the following documents: The Plan (Exhibit A). The Disclosure Statement Order that, among other things, approved this Disclosure Statement and forms of ballot, established certain voting procedures with respect to the solicitation and tabulation of votes to accept or reject the Plan, and scheduled the Confirmation Hearing (Exhibit B). The Class 4 Creditor Trust Agreement (Exhibit C). The Debtor s liquidation analysis (Exhibit D). The Debtor s feasibility analysis 5-year projections (Exhibit E). Identity and fair market value of assets (Exhibit F). Potential Parties to Causes of Action (Exhibit G). List of filed and scheduled claims that are not contingent, unliquidated or disputed (Exhibit H). List of executory contracts and leases to be assumed (Exhibit I). Three-year financial history (Exhibit J). In addition, as provided above, a ballot for the acceptance or rejection of the Plan is enclosed with the Disclosure Statement submitted to those Holders of Claims that the Debtor believes are entitled to vote to reject or accept the Plan II. DISCLAIMER \DOCS_LA:

10 This Disclosure Statement contains information that may bear upon your decision to accept or reject the Plan. Please read this document with care. The purpose of this Disclosure Statement is to provide adequate information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the Debtor and the condition of the Debtor s books and records, that would enable a hypothetical reasonable investor, typical of Holders of claims or interests of the relevant class, to make an informed judgment concerning the Plan as required by section 1125(a). Unless otherwise indicated, the date of all of the financial information provided in PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA this Disclosure Statement is as of June 30, For the convenience of Creditors and Interest Holders, this Disclosure Statement summarizes the terms of the Plan, but the Plan itself qualifies any summary. If any inconsistency exists between the Plan and the Disclosure Statement, the terms of the Plan are controlling. No representations concerning the Debtor, its financial condition, or any aspect of the Plan are authorized by the Debtor, other than as set forth in this Disclosure Statement. Any representations or inducements made to secure your acceptance which are other than as contained in, or included with, this Disclosure Statement, should not be relied upon by you in arriving at your decision. The financial information contained herein, unless otherwise indicated, is unaudited. The Debtor is unable to warrant or represent that the information contained herein is without inaccuracies. Great effort, however, has been made to ensure that all such information is presented fairly PSZJ has relied upon information provided by the Debtor s management and employees in connection with preparation of this Disclosure Statement. Although PSZJ has performed certain limited due diligence in connection with the preparation of this Disclosure Statement, it has not independently verified all of the information contained herein \DOCS_LA:

11 The contents of this Disclosure Statement should not be construed as legal, business, or tax advice. Any tax advice herein was not intended to be used, and it cannot be used, for the purpose of avoiding any tax penalties that may be imposed on any person. There is no limitation imposed on anyone reading this Disclosure Statement on disclosure of the tax treatment or tax structure of any transaction. Nothing in this Disclosure Statement may be used or referred to in promoting, marketing, or recommending a partnership or other entity, investment plan, or arrangement to any person. All Creditors and/or Interest Holders should consult their own legal counsel and/or PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA accountant(s) as to legal, tax, and other matters concerning their Claims or Interests. III. OVERVIEW OF THE CHAPTER 11 PROCESS AND THE PLAN A. The Chapter 11 Process Chapter 11 of the Bankruptcy Code contains numerous provisions, the general effect of which is to provide debtors with breathing space within which to propose a restructuring of their obligations to third parties. The filing of a chapter 11 bankruptcy petition creates a bankruptcy estate comprising all of the property interests of the debtor. Unless a trustee is appointed by the Bankruptcy Court for cause (no trustee has been appointed in this Case), a debtor remains in possession and control of all its assets as a debtor in possession. The debtor may continue to operate its business in the ordinary course on a day-to-day basis without bankruptcy court approval. Bankruptcy court approval is only required for various enumerated kinds of transactions (such as certain financing transactions) and transactions out of the ordinary course of a debtor s business. The filing of the bankruptcy petition gives rise to what is known as the automatic stay which, generally, enjoins creditors from taking any action to collect or recover obligations owed by a debtor prior to the commencement of a chapter 11 case. The Bankruptcy Court can, however, grant relief from the automatic stay, under certain specified conditions or for cause \DOCS_LA:

12 A chapter 11 debtor may propose a plan providing for the reorganization of the debtor or for the orderly liquidation and administration of the assets of the estate. A plan may either be consensual or non-consensual and provides, among other things, for the treatment of the claims of creditors and interests of shareholders. B. Overview of the Debtor s Proposed Plan The following is a brief overview of the material provisions of the Plan and is qualified in its entirety by reference to the full text of the Plan. For a more detailed description of the terms and provisions of the Plan, see Article VI below, entitled The Plan of Reorganization. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA The Plan that is described in this Disclosure Statement is a new value plan of reorganization that has following sources of funding: (a) the $1.5 million New Value Contribution, (b) the Class 4 Creditor Trust Sale Transaction Proceeds, which are expected to be $1.5 million plus 70% of the Excess SPV Receivables, (c) the Causes of Action, (d) the Excess Debtor Petition Date Receivables, and (e) the Avoidance Actions. The Reorganized Debtor shall pay Allowed Non-Class 4 Claims from the Claims Reserve, which shall be funded by $1.0 million from the Plan Funding, plus certain Debtor Petition Date Receivables, as further described below in Section VI.N. Class 4 Claims shall be paid from the Class 4 Creditor Trust, which shall be funded as provided in Section VI.R below. The Plan divides Creditors and Holders of Interests into Classes based on their legal rights and interests and provides for the full payment of all Allowed Claims, except the Class 4 Claims which shall be paid the amounts in the Class 4 Creditor Trust. The following table (the Plan Summary Table ) summarizes the treatment of Claims and Interests under the Plan with: (a) the Debtor s estimates of the amount of Claims in each category or Class that will be finally determined to be Allowed Claims, and (b) a description of the treatment provided for in the Plan for each Class of Claims and Interests. The dollar amounts included in the Plan Summary Table have been estimated by the Debtor as of the date of the Disclosure Statement \DOCS_LA:

13 and do not constitute an admission by the Debtor as to the validity or amount of any particular Claim or Interest. The Debtor reserves the right to dispute the validity or amount of any Claim or Interest that has not already been Allowed by the Bankruptcy Court or by agreement of the parties. The summary of estimated distributions under the Plan, set forth below and in the Plan, lists both estimated Allowed Amount of Claims in each Class and an estimated percentage recovery for such Class. The estimated aggregate amounts of all Classes of Claims are based on the Debtor s good faith estimates of the aggregate amount of such Claims upon resolution of all such Claims that PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA are Disputed Claims, based on all currently known information. The amount that ultimately will be received by a particular Holder of an Allowed Claim may be adversely or favorably affected by the aggregate amount of Administrative Claims and Priority Tax Claims ultimately Allowed. The estimates of distributions under the Plan also are based on good faith estimated amounts of available Cash for distribution to Holders of Claims, based on all currently known information. These estimates exclude any recovery on the Avoidance Actions and Causes of Action to be prosecuted by the Class 4 Creditor Trust after the Effective Date pursuant to the Plan. For all of the reasons stated above, no representation can be, or is being, made with respect to whether (a) the estimated Allowed amount of Claims in each Class is accurate, or (b) the estimated percentage recoveries shown on the table below actually will be realized by the Holder of an Allowed Claim or Allowed Interest in any particular Class SUMMARY OF CLAIMS AND INTERESTS UNDER THE PLAN Class Claim/Interest Treatment Estimated Aggregate Amount of Allowed Claims n/a Administrative Claims Except to the extent that any entity entitled to payment of an Allowed Administrative Claim $770,000 (unpaid amounts) Estimated Percentage Recovery of Allowed Claims or Interests 3 100% 28 3 See Liquidation Analysis, Exhibit D attached hereto, for additional explanations \DOCS_LA:

14 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA n/a Priority Tax Claims agrees to a less favorable treatment or unless otherwise ordered by the Court, each Holder of an Allowed Administrative Claim will receive in full satisfaction, discharge, exchange and release thereof, Cash in an amount equal to such Allowed Administrative Claim on the later of (i) the Effective Date, and (ii) the fifteenth (15th) Business Day after such Administrative Claim becomes an Allowed Administrative Claim, or, in either case, as soon thereafter as is practicable; provided, however, that Ordinary Course Administrative Claims will be paid in full in accordance with the terms and conditions of the particular transactions and any applicable agreements or as otherwise authorized by the Court. Except to the extent that a Holder of an Allowed Priority Tax Claim has been paid by the Debtor before the Effective Date or agrees to a less favorable treatment, each Holder of an Allowed Priority Tax Claim will receive in full satisfaction, discharge, exchange and release thereof, Cash in an amount equal to such Allowed Priority Tax Claim on the later of (i) the Effective Date and (ii) the fifteenth (15 th ) Business Day after such Priority Tax Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is practicable. 1 Secured Claims As soon as practicable after the Effective Date, each entity holding an Allowed Class 1 Claim will receive, at the election of the Reorganized Debtor, one of the following treatments in full satisfaction, discharge, exchange and release of its Allowed Class 1 Claim: The Holder of the Class 1 Claim will receive the Collateral in which that Person has a security interest; or (b) the Holder of the Class 1 Claim will receive any proceeds actually received by the Debtor or Reorganized Debtor (as applicable) from the sale or disposition of the Collateral in which that Person has a security interest; or (c) the Holder of the Class 1 Claim will receive Cash in the amount of that Person s Allowed Class 1 Claim; or (d) the Holder of the Class 1 Claim will receive such other distributions or treatment as are necessary to leave the rights of said Person Unimpaired or as are necessary to otherwise satisfy the requirements of Chapter 11 of the Bankruptcy Code. 2 Priority Non- Tax Claims Except to the extent that a Holder of an Allowed Priority Non-Tax Claim agrees to a less favorable treatment, each Allowed Priority Non- Tax Claim will be paid, in full satisfaction, discharge, exchange and release thereof, in Cash in full the amount of the Allowed Priority Non- Tax Claim on the later of (i) the Effective Date and (ii) the fifteenth (15th) Business Day after such date that the Claim becomes an Allowed $22,000 (filed amounts) 100% $ % $ % \DOCS_LA:

15 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Priority Non-Tax Claim, or as soon thereafter as is practicable. 3 General Except to the extent that a Holder of an Allowed $320, % Unsecured Claims General Unsecured Claim agrees to a less favorable treatment, each Allowed General Unsecured Claim will be paid in full satisfaction, discharge, exchange and release thereof, in Cash: a) if Allowed Non-Class 4 Claims total $1.25 million or less: in full (without any interest), or b) if Allowed Non- Class 4 Claims exceed $1.25 million: the Reduced Class 3 Distribution Amount. Such payments shall occur on the later of (i) the Effective Date and (ii) the fifteenth (15 th ) Business Day after such date that the Claim becomes an Allowed General Unsecured Claim, or as soon thereafter as is practicable. 4 Other In full satisfaction, discharge, exchange and $38 million 6.6% Unsecured Claims release of all Class 4 Other Unsecured Claims, including a waiver of California Civil Code section 1542 the Class 4 Creditor Trust shall be funded as provided in Section VI.R below. The Class 4 Creditor Trust shall pay the Holders of Allowed Class 4 Other Unsecured Claim their Pro Rata share of the Class 4 Creditor Trust Proceeds pursuant to the terms of the Class 4 Creditor Trust Agreement. 5 All Interests On the Effective Date of the Plan, the Interests will be cancelled. Each Holder of an Allowed Interest will receive no Distribution on account of such Interest. $0.00 0% The treatment and Distributions provided to Holders of allowed Claims and Interests pursuant to the Plan are in full and complete satisfaction of the allowed Claims and Interests on account of which such treatment is given and distributions are made. C. Deadlines for Voting and Objecting; Date of Plan Confirmation Hearing The Bankruptcy Court has not yet confirmed the Plan described in this Disclosure Statement. In other words, the terms of the Plan are not yet binding on anyone. However, if the Bankruptcy Court later confirms the Plan, then the Plan will be binding on the Debtor and on all Creditors and Interest Holders in this case \DOCS_LA:

16 Time and Place of the Confirmation Hearing The hearing where the Court will determine whether or not to confirm the Plan will take place on, 2009, at :00 _.M., in Courtroom 1675, 255 East Temple Street, Los Angeles, California. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Deadline For Voting For or Against the Plan If you are entitled to vote, it is in your best interest to timely vote on the enclosed ballot and return the ballot in the enclosed envelope to counsel for the Debtor, Pachulski Stang Ziehl & Jones LLP, Attn: Felice Harrison, Santa Monica Boulevard, 11th Floor, Los Angeles, California Your ballot must be received by 5:00 p.m. Pacific on, 2009 or it will not be counted. 3. Deadline For Objecting to the Confirmation of the Plan Objections to the confirmation of the Plan must be in writing and filed with the Court and served upon Counsel to the Debtor, Pachulski Stang Ziehl & Jones LLP, Attn: Teddy Kapur, Esq., Santa Monica Boulevard, 11 th Floor, Los Angeles, California 90067, so as to be received by 5:00 p.m. (Pacific) on, Identity of Person to Contact for More Information Regarding the Disclosure Statement or Plan Any interested party desiring further information about the Disclosure Statement or Plan should contact counsel for the Debtor, Pachulski Stang Ziehl & Jones LLP, Attn: Teddy Kapur, Esq., Santa Monica Boulevard, 11th Floor, Los Angeles, California 90067; telephone (310) IV. BACKGROUND A. Description and History of the Debtor s Business The Debtor owns and operates a fully-accredited, Medicare-certified, outpatient surgery center located at 120 South Spalding Drive in Beverly Hills, California (the Surgery Center ). The Debtor was founded in 1997 by anesthesiologist Randy Rosen, M.D. ( Dr. Rosen ), and the Surgery \DOCS_LA:

17 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Center opened for service in March The Debtor differentiates itself from other surgical centers and hospitals based on price, location, convenience, quality of staff, and attention to patient needs. The Surgery Center currently occupies approximately 22,200 square feet of space for clinical, administrative and medical record storage purposes. The Debtor is condensing its administrative offices as part of its reorganization and expects to lease approximately 11,000 square feet after the Effective Date. The space reductions will not affect the Surgery Center s five state-ofthe-art operating rooms, two-room preoperative center or its twelve-bed recovery area. The Debtor furnishes the Surgery Center facilities as well as staff and support to physicians and surgeons who provide a wide range of procedures to patients. Approximately 89 physicians have surgical privileges at the Debtor s facilities. The procedures performed at the Surgery Center are elective and non-emergency, and are scheduled in advance between the patient and physician. Procedures performed at the Surgery Center include gastrointestinal (colonoscopies and endoscopies), orthopedic (arthroscopies of knees and shoulders), pain management (the control of chronic pain through various injections), neurological (disc and spinal care) and plastic surgery and reconstruction (breast reduction/ augmentation and rhinoplasty) procedures. Physicians with surgical privileges perform in excess of 5,300 procedures annually at the Surgery Center B. Collections and Financial History The Debtor generates revenues from a facility fee that is charged pursuant to a fee schedule for each surgical procedure performed at the Surgery Center. The facility fee may be paid by patients, commercial insurance companies, or federal or state agencies. The fee schedule is established by the Surgery Center and is based on prevailing and competitive rates in the local community. Prior to the Petition Date, an outside contractor, Physicians Management Group ( PMG ), generated patient and insurance bills based on its review of physician case transcriptions, \DOCS_LA:

18 notes and coding. PMG typically collected co-payments from patients and pursues the remaining balance from third party payors. PMG was paid 6% of net revenues for its services prior to October 2008 and has been paid 5% of net revenues between October 2008 and the Petition Date. Postpetition, however, Ambulatory Surgical Group, LLC ( ASG ), the Debtor s current manager, took over the billing and collections responsibilities at a lower cost to the Debtor. The Debtor s payments primarily come from Medicare (approximately 25-30% annually), Managed Care payors such as Aetna, Blue Cross, Cigna, and Pacificare/United (approximately 40% PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA annually) and the state s worker compensation system (approximately 20% annually). Payments to the Debtor for the services it provides to patients and doctors can take anywhere from 60 days to more than 2 years depending on the type of case and the payor. Payments are made to ASG and deposited into one of the Debtor s bank accounts. Accounts are periodically reviewed and noncollected amounts are determined to be either workable or write off. Annual net revenues, calculated as actual cash collected, were approximately $26,352,281 in 2004, and declined an average of 12.5% year-over-year between 2004 and Annual net revenues fell to approximately $14,828,948 in 2008, a decline of more than 50% from The Debtor experienced a significant decline in the number of procedures performed between 2003 and Whereas approximately 15,000 procedures were performed at the Surgery Center in 2003, 6,849 procedures were performed in 2004, when Century City Doctor s Hospital ( CCDH ) opened, and only 5,306 procedures were performed in 2008, representing a decline of approximately 65% when compared against the number of procedures performed in C. Corporate History The Debtor, a privately held California S corporation, was founded in Beverly Hills, California in 1997 and has operated continuously since that time \DOCS_LA:

19 D. Corporate Structure Through a series of private offerings over several years, the Debtor gradually expanded its physician ownership to its current level of 42 physician investors. As of the Petition Date, approximately 48% of the Debtor s ownership was held by four physicians, including Dr. Rosen, PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA who owned approximately 25%. The Debtor s physician ownership structure is the predominant business model utilized for similar facilities throughout the United States. Under guidelines established by MediCare, physicians that invest in an ambulatory surgical center such as the Surgery Center can only receive distributions of profits that are proportional to their ownership interest, and cannot receive distributions based on their productivity. E. Management and Employees As of the Petition Date, the Debtor employed approximately 64 individuals on full, part-time and per diem bases. The staff consists of both clinical (i.e., nurses and medical technicians) and non-clinical (i.e., reception, accounting and facilities) personnel. Many of these employees are highly trained and possess specific skills necessary to the ongoing operation of the business. Since the Petition Date, the Debtor has reduced its workforce to 37 employees. Dr. James H. Sherman is the Debtor s Chief Executive Officer and Dr. Theodore Goldstein is the Secretary and Treasurer. Dr. Sherman serves as the point person for concerns among the physician investors, and both Dr. Sherman and Dr. Goldstein assist ASG with its day-to-day management tasks. 1. Salus Surgical Group, LLC Until September 2008, the Debtor was managed by Salus Surgical Group, LLC ( Salus ), which was founded by Dr. Rosen. Salus managed the Debtor s business operations in exchange for a management fee calculated as a percentage of funds collected by the Debtor and an option for an equity stake in the Debtor. Salus s services included marketing, human resources, accounting and \DOCS_LA:

20 finance, materials management, supervision of billings and collection, and contracting with vendors and insurance providers. The formal relationship between Salus and the Debtor began on January 6, 2003, when Salus and the Debtor entered into a Management and Development Agreement, which was amended by Amendment No. 1 to Management and Development Agreement, dated August 4, 2004 (collectively the Management Agreement ), whereby the Debtor contracted with Salus for Salus to provide management and related services to the Debtor. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA The Management Agreement provided, in part, that Salus was to be paid annual compensation of 25% of the Debtor s net profits, and that Salus had the right to (i) convert its annual compensation into shares of the Debtor s capital stock (the Shares ) equal to 25% of the aggregate Shares then issued and outstanding upon consummation of the conversion, and (ii) purchase from the Debtor s shareholders on a pro rata basis at the Exercise Price per Share (as defined in the Management Agreement), additional Shares up to an amount such that Salus would own 51% of the aggregate Shares then issued and outstanding upon consummation of the purchase, including Shares previously owned. The Debtor terminated the Management Agreement with Salus in the fall 2008, and the parties entered into a settlement agreement whereby the Debtor assumed $1.5 million of debt that Salus owed to T. King Partners LLC ( T. King Partners ) in exchange for Salus waiving any rights to purchase the Debtor s stock under the Management Agreement. The issues underlying the settlement agreement stemmed from a loan Salus obtained from T. King Partners for approximately $4,873,500 pursuant to a Loan Agreement dated as of November 8, 2004, as evidenced by a Promissory Note dated November 8, 2004, as well as Salus s assertions that the Management Agreement gave it the right to purchase up to 51% of the outstanding stock of the Debtor. The Debtor disputed that the right was available to Salus and disputed how much it would cost Salus to \DOCS_LA:

21 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA exercise the right, if it existed. However, after obtaining a business valuation from Medical Development Specialists that determined that the fair market value of a 100% controlling ownership interest in the Debtor was $5.9 million, the Debtor s Management decided to execute the settlement agreement with Salus because it recognized that the impending failure of Salus would create significant difficulties for it if Salus was deemed to own 51% of the Debtor s stock. 2. Ambulatory Surgery Group, LLC The Debtor s Board of Directors replaced Salus with ASG in September ASG s cofounder, chairman and CEO, John Seitz has provided management services in the healthcare industry for over twenty five years. Mr. Seitz is widely recognized in the ambulatory surgical center industry and has overseen the operational and financial management of ambulatory surgical centers, central business office services and business development. ASG provides the Debtor with a fullrange of management and business services, and it has implemented significant changes related to the operations and finance of the Debtor. ASG has revised the staff compensation structure, renegotiated vendor contracts and rates, improved the billings and collection process, and begun negotiations with several of the Debtor s major commercial payors. F. Fortress Credit Corporation and S&B SPV, LLC On or about February 18, 2005, the Debtor and Salus jointly obtained a $24 million loan from Fortress, as agent, and a consortium of lenders (the Fortress Loan ). The Fortress Loan was secured by, among other things, all of the Debtor s tangible and intangible personal property, including certain long term account receivables that represent the balance of payor debt for pre worker s compensation claims (the Aged Receivables ). The Debtor and Salus were jointly and severally liable for the entirety of the Fortress Loan. The Debtor, however, did not receive any of the proceeds. The proceeds not used to pay fees and costs associated with the loan and to refinance existing debt was paid directly to Salus to finance the construction of CCDH and other surgical \DOCS_LA:

22 facilities in which the Debtor had and has no interest. As far as the Debtor is aware, the Debtor made all the payments owing on the Fortress Loan, and Salus made none. Debt service on the Fortress Loan took essentially all of the Debtor s net cash flow (through a daily sweep of the Debtor s accounts receivable collection accounts) which caused severe cash flow problems. In return for shouldering the burden of a $24 million loan (and making all the payments thereon to Fortress), the Debtor received an unsecured Subordinated Intercompany Note from Salus (the Salus Note ). Salus quickly defaulted on the Salus Note, which the Debtor began writing off as bad debt PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA in Salus filed a petition under chapter 7 of the Bankruptcy Code on May 6, As of March 31, 2008, the balance due from the Debtor to Fortress was approximately $6.8 million, and the interest due on the remaining term of the note was accruing at the lesser of LIBOR plus 11.5% or 13.75% annually. The Debtor sought to reduce the cost of this debt through a loan transaction with SBWC Lending Group LP, which is controlled by Alan Tivoli. Pursuant to the transaction, the Debtor transferred the Aged Receivables to a special purpose vehicle, S&B SPV, LLC ( SPV ), in which the Debtor owns 100% of the membership interests. In August 2008, SBWC Lending Group LP advanced $7 million to SPV to pay off and assume the Fortress Loan (the SBWC Lending Group Loan ). SPV currently uses the collected Aged Receivables to pay down the SBWC Lending Group Loan, which has a current balance of approximately $6.5 million. On August 18, 2009, the Debtor filed a motion pursuant to sections 105, 363 and 365 of the Bankruptcy Code and Rules 2002, 6004, 6006 and 9014 of the Federal Rules of Bankruptcy Procedure for approval of certain procedures to conduct a sale through an auction and for authorization to sell all of the Debtor s membership interests in SPV (the SPV Interest ) to S&B Workers Comp Co, LLC (the Buyer ) or a higher bidder at such auction. The purchase price for the SPV Interest will be $1.5 million in cash, an assumption or other satisfaction of the SBWC Lending Group Loan, and the Excess SPV Receivables, which are 15% of any amounts collected by \DOCS_LA:

23 the Buyer from the Aged Receivables over $12 million, or such higher price bid at the auction. The Debtor knows of at least two other potential bidders who have expressed an interest in purchasing the SPV Interest, but any buyer will be required to pay the SBWC Lending Group Loan, plus a prepayment fee, in full. The Debtor anticipates that this sale will be consummated prior to confirmation of the Plan, and has committed the $1.5 million in cash to be received to payment of creditors under the Plan. However, the Buyer is completing its due diligence with respect to the Aged Receivables and thus PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA the Debtor cannot be sure that the sale will be consummated. G. Other Liabilities Arising from Salus and CCDH The Debtor incurred a number of other liabilities arising from its relationships with Salus and CCDH. Dr. Rosen started Salus soon after founding the Debtor, and he recruited a majority of the Debtor s physician shareholders as equity investors in Salus. In addition to managing the Surgery Center, Salus expanded its operations to assume management responsibilities of surgical centers in Short Hills and Fort Lee, New Jersey. Salus took over Independence Surgery Center, LLC, a medical facility in Independence, Ohio. Salus also formed CCDH by leasing and improving an existing hospital in Century City that had been closed. Salus was at one point the general partner of CCDH, and at the time CCDH filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on August 22, 2008, Salus owned 70% of the stock of CCDH. Various shareholders of the Debtor are or were also affiliated with CCDH. These relationships resulted in several transactions that subsequently created significant financial difficulties for the Debtor. For example, the Debtor s funds were used to purchase operating supplies for CCDH that were unrelated to the Debtor s operations. Accordingly, a significant receivable accrued from CCDH to the Debtor. In February 2008, CCDH restructured its debt whereby various creditors, including the Debtor, were offered and accepted 21 cents on the dollar as \DOCS_LA:

24 settlement for a portion of their outstanding debt. The Debtor wrote off approximately $2.1 million owed by CCDH to it as a result of this restructuring. Additionally, under Salus s management the Debtor was named as a co-guarantor for various capital lease agreements on behalf of CCDH and other surgery centers operated by Salus. When CCDH ceased operations, counterparties to the guarantees sought payments from the Debtor. For instance, First Premier Capital, LLC, d/b/a Smith & Nephew Capital ( Smith & Nephew ) and Siemens Medical Solutions, USA, Inc. for itself and as assignee of Siemens, One, Inc., and Siemens PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Financial Services, Inc. ( Seimens ) have asserted claims against the Debtor arising from guarantees the Debtor made on behalf of CCDH relating to leased medical equipment used solely at CCDH. Similarly, Marquette Equipment Finance, LLC a/k/a Applied Financial, LLC ( Marquette Equipment Finance ) has sought to recover from the Debtor as result of a lease agreement it entered into with CCDH for equipment to be used solely at CCDH. The Debtor guaranteed CCDH s payment of the Marquette leases, and when CCDH stopped making payments in mid-2007, Marquette filed suit against CCDH, Salus and the Debtor. Salus failed to defend the suit, and in March 2008 Marquette obtained a default judgment against CCDH, Salus and the Debtor in an amount exceeding $2.5 million. H. Events Precipitating the Bankruptcy Filing The Debtor s relationship with Salus and CCDH caused significant business problems leading to the Debtor s chapter 11 filing. First, the opening of CCDH directly caused a decrease in both the Debtor s revenues and procedure volume because physicians attempted to generate revenues at the hospital and directed business away from the Debtor. Second, the Debtor s current operations did not support payments on the loans and guarantees connected to Salus and CCDH. As discussed above, the debt service on the Fortress Loan was especially burdensome and caused a severe detriment to the Debtor s cash flow and \DOCS_LA:

25 overall operations. Moreover, CCDH s filing for bankruptcy spurred significant claims against the Debtor by Marquette, Smith & Nephew, Siemens, and T. King Partners. Third, the Debtor s business model is unsustainable because a majority of the Debtor s equity is being held by physicians that do not generate a significant amount of procedures. Approximately 35% of the Debtor s equity is held by physicians who do not bring patients to the Surgery Center, and approximately 25% is held by Dr. Rosen, who, as an anesthesiologist, primarily services the anesthesiology demands for other physicians and does not bring additional patients to the Surgery PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Center. This combined 60% equity block does not generate enough procedures or contribute sufficient revenues to sustain the Debtor s business model. Moreover, because Medicare guidelines require that distributions be proportional to ownership interests rather than procedures, prospective shareholders are reluctant to join the Debtor because they fear that they would not receive profit distributions commensurate with the revenues they would contribute. I. Liabilities Class 1 Secured Debt The Debtors do not believe they have any secured debt. Class 2 Priority Non-Tax Claims The Debtors do not believe there are any Priority Non-Tax Claims. Class 3 General Unsecured Claims In the Bankruptcy Schedules, the Debtor scheduled approximately $1,043,152 in General Unsecured Claims (the Claims of Smith & Nephew, Siemens and T. King Partners are classified as Class 4 Other Unsecured Claims). As of August 14, 2009, the proofs of claim for Class 3 filed on or before the Claims Bar Date of August 14, 2009 total approximately $1,907,076. The Debtor estimates that Allowed Class 3 General Unsecured Claims total approximately $320,000. Class 4 Other Unsecured Claims \DOCS_LA:

26 Class 4 Other Unsecured Claims consist of the disputed Unsecured Claims of Smith & Nephew, Siemens, Marquette and T. King Partners, which total approximately $38 million and are discussed above in Section IV.E and G herein. J. Management of the Debtor During and After the Bankruptcy The Debtor s management after the Effective Date shall be the same as during the chapter 11 case. ASG will continue to provide the Debtor with a full-range of management and business services. Dr. James H. Sherman will remain the Debtor s Chief Executive Officer and Dr. Theodore Goldstein will remain the Secretary and Treasurer. Dr. Sherman will continue to serve as the point PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA person for concerns among the physician investors, and both Dr. Sherman and Dr. Goldstein will assist ASG and Mr. Seitz with its day-to-day management tasks. Mr. Seitz will continue to be responsible for the day-to-day operations of the Debtor. K. Significant Events During the Bankruptcy The following is a list of significant events which have occurred during this Case. 1. Motion to Avoid Appointment of Patient Care Ombudsman On May 6, 2009, the Debtor filed its Motion of Debtor for Order Avoiding Appointment of Patient Care Ombudsman [Docket No. 26]. Section 333 of the Bankruptcy Code requires the appointment of a patient care ombudsman unless the Court finds, under the particular circumstances of the case, that the protection of the Debtor s patients does not require the appointment of a patient care ombudsman ( PCO ). The Debtor argued that: first, it provides facilities and support staff to doctors who perform medical procedures to their patients; second, the doctors who are treating the patients are not in bankruptcy and they remain the best evaluators of whether the Debtor is negatively affected by its bankruptcy filing; third, the bankruptcy was not caused by any failure by the Debtor to provide adequate care, facilities or services to the patients treated within its facility and, indeed, the Debtor is regularly inspected by many state and private agencies to ensure it is a \DOCS_LA:

27 well run, and safe facility; and fourth, the Debtor is a small, single-site debtor that can ill afford the additional administrative expenses associated with a PCO. On June 29, 2009, the Court entered an order granting the Debtor s motion [Docket No. 89]. 2. Employee Benefits The Debtor obtained an order authorizing, but not directing, the Debtor to (a) pay prepetition wages, salaries, benefits, other compensation and reimbursable expenses, (b) remit withholding obligations, and (c) maintain employee compensation and benefits programs and pay related administrative obligations. [Docket No. 32.] Pursuant to the authority provided by this Order the PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Debtor paid these obligations to its employees. The Debtor believes that there should not be any unpaid prepetition employee benefit priority claims, which are Class 2 Claims under the Plan. 3. Motion to Reject Lease On May 6, 2009, the Debtor filed its Motion for Order Authorizing Rejection of Executory Contract with Rosen Anesthesia Group [Docket No. 56]. The Debtor had a contract (the Contract ) with Rosen Anesthesia Group, PC ( RAG ) for RAG to provide anesthesia and ancillary services at Debtor s facility. In order for the Debtor to revitalize its business and increase the number of doctors who utilize the Debtor s services, it was imperative that the Debtor sever its business relationship with RAG, and that anesthesia services at the Debtor be provided by an entity unaffiliated with RAG. The Debtor sought to replace RAG with very competent physicians at no additional cost to the Estate. Accordingly, the Motion sought an order authorizing rejection of the Contract. On June 29, 2009, the Court entered an order granting the Debtor s motion [Docket No. 90]. 4. Professionals The Court has approved the employment of the following professionals: (1) PSZJ, general bankruptcy counsel to the Debtor, commencing on April 27, 2009 [Docket No. 58]; (2) Ambulatory Surgical Group, LLC as financial and operational manager of the Debtor, commencing on April 27, \DOCS_LA:

28 [Docket No. 84]; (3) Pope & Associates, accountants to the Debtor, commencing on April 27, 2009 [Docket No. 93] and (4) Buchalter Nemer, a Professional Corporation, counsel to the Creditors Committee, commencing on April 27, 2009 [Docket No. - order not yet entered]. The Debtor has filed an application to employ Nossaman, LLP as special corporate counsel [Docket No. 110], and the application is pending before the Court. 5. Non-Bankruptcy Legal Proceedings The Debtor is currently involved in the following nonbankruptcy legal proceedings: PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Deborah Schoenick v. Salus Medical Group, S&B Surgery Center, et al. Case No. SC099519, Complaint for Damages for General Negligence/Medical Malpractice pending in the Superior Court of the State of California, County of Los Angeles; David Jessen and Alexandra Jessen v. S&B Surgery Center, Case No. SC083187, Product Liability, Professional Negligence and Loss of Consortium pending in the Superior Court of the State of California County of Los Angeles; The Debtor also is indirectly involved in nonbankruptcy legal proceedings before the State of California Workers Compensation Appeals Board (the WCAB ) related to SPV s efforts to recover proceeds based on the Aged Receivables. SPV has contracted with two collection firms, Medical Practice Management Resources, Inc. and Drawbridge Holdings, LLC, whose representatives appear at hearings before the WCAB on a regular basis. As discussed above, the collected Aged Receivables are owned by the SPV and currently being used to pay down the SBWC Lending Group Loan. 6. Claims Administration and Payments The Court set a deadline of August 14, 2009 for prepetition creditors to file proofs of claim [Docket No. 75]. As of August 14, 2009, Class 3 Claims filed against the Debtor s estate total approximately $1,907, Appointment of the Committee On May 13, 2009, the Office of the U.S. Trustee formed the Creditors Committee to represent the interests of the general unsecured creditors of the Estate, and appointed three members \DOCS_LA:

29 thereto: (i) Siemens Medical Solutions Inc., (ii) Smith & Nephew Capital, LLC, and (iii) Physicians Management Group. Since the formation of the Committee, the Debtor has extensively consulted and cooperated with the Committee concerning various aspects of the Case. The Committee has employed Buchalter Nemer, a Professional Corporation, as its bankruptcy counsel in the Case. 8. Operations ASG provides the Debtor with a full-range of management and business services, and it has implemented significant changes related to the operations and finance of the Debtor. ASG has reduced staffing, which has resulted in annual savings of approximately $500,000; recruited new PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA physicians; engaged in negotiations with Aetna to become an in network provider for spine surgeries; renegotiated rent amounts and reduced the amount of space the Debtor rents; renegotiated vendor contracts and rates; and improved the billings and collection process. 9. Actual and Projected Recovery of Preferential or Fraudulent Transfers Approximately $2,550,624 was paid in the 90 days prior to the Petition Date to creditors that would possibly be subject to recovery as preferential transfers; approximately $225,000 was paid to insiders in the year prior to the Petition Date. Furthermore, the Debtor asserts that it did not receive any benefit from the Fortress Loan. The proceeds of the Fortress Loan were used for the benefit of Salus and its principals. As a result, the Debtor or the Class 4 Creditor Trust intends to file a fraudulent conveyance action against Fortress. The Debtor may assert fraudulent conveyance and preference actions in this Case against the parties listed in Exhibit G. V. LITIGATION AND CAUSES OF ACTION \DOCS_LA:

30 A. Litigation Commenced Prepetition As of the Petition Date, the Debtor was involved in certain litigation, as set forth in the Bankruptcy Schedules [Docket Nos. 62 and 63]. The Debtor does not believe that any such litigation will have a material impact on the Plan and the feasibility and implementation thereof, if PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA confirmed by the Court. B. Postpetition and Other Potential Causes of Action In General Since the Petition Date, the Debtor has not commenced any litigation against third parties in the Bankruptcy Court. As discussed below, based on a preliminary review and analysis by the Debtor and its professionals, the Debtor expects that certain litigation will be commenced on behalf of the Estate prior to Confirmation of the Plan. As set forth in Section VII.A of the Plan, the Debtor and Committee will file at least ten (10) Business Days prior to the Confirmation Hearing a nonexhaustive list of potential Causes of Action; provided, however, notwithstanding any otherwise applicable principle of law or equity, including, without limitation, any principles of judicial estoppel, res judicata, collateral estoppel, issue preclusion, or any similar doctrine, the failure to list, disclose, describe, identify, analyze or refer to any Cause of Action, or potential Cause of Action, in the Plan, this Disclosure Statement, or any other document filed with the Bankruptcy Court will in no manner waive, eliminate, modify, release, or alter the Debtor s or the Class 4 Creditor Trust s right to commence, prosecute, defend against, settle, and realize upon any Cause of Action that the Debtor or the Estate has or may have as of the Confirmation Date. Unless otherwise provided in the Plan or Confirmation Order, to the extent any filed or to-be-filed actions are not resolved, after the Effective Date, the Class 4 Creditor Trust will continue to prosecute, settle, or otherwise resolve or dispose of those actions. The discussion in this Section is for general informational purposes only. Nothing herein is intended nor should be construed to be any admission or acknowledgement by the Debtor or the \DOCS_LA:

31 Estate of any matter. The Debtor and the Class 4 Creditor Trust reserve all of their respective rights with respect to any potential and/or actual claims against any Persons. 1. Causes of Action The Debtor is reviewing the potential causes of action it may assert against a number of parties including, but not limited to, the parties listed in Exhibit G. The actions under consideration sound in theories of fraudulent conveyance, avoidance and breach of fiduciary duty. Among the claims under consideration, the Debtor is assessing the underlying basis for the approximately $2,550,624 that was paid to creditors in the 90 days prior to the filing of the Petition PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA and the approximately $225,000 paid to insiders in the year prior to the filing of the Petition, and it may commence avoidance actions to recover those payments. A preliminary review by the Debtor indicates that the vast majority of these payments were made in the ordinary course of business. Therefore the Debtor has not included any value from the liquidation of Avoidance Actions in its liquidation analysis. This brief description of potential causes of action is not intended as a list of each and every claim, right or cause of action held by the Debtor, and the Debtor expressly reserves the right to file any adversary proceedings as provided for under the Bankruptcy Code and any other proceedings in non-bankruptcy forums as may be appropriate Claims Objections The Debtor has not completed its review, analysis and investigation of the filed Claims; however, the Debtor expects that it will file objections to various scheduled and filed Claims. A list of the filed and scheduled claims which are not contingent, unliquidated or disputed is attached as Exhibit H hereto. The Debtor expects to be able to significantly reduce the Claims filed against it. The Debtor s review of the Claims filed against it suggest that the Debtor may be able to reduce the \DOCS_LA:

32 Claims to a total value of under $320,000. However, because any such resolution is, naturally, speculative, the Debtor has used a conservative estimate of $500,000 for its liquidation analysis. VI. THE PLAN OF REORGANIZATION A. Overview of the Plan The following is only a brief summary of the material terms of the Plan. Creditors, Interest Holders and other parties in interest are urged to review the Plan in its entirety. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA The Plan is a new value plan of reorganization that has the following plan funding: (a) the New Value Contribution (see section VI.L below), (b) the proceeds of the sale of the SPV stock (see section VI.M below), (c) the Causes of Action (see section V.B above), (d) the Avoidance Actions (see section V.B.1 above), (e) the Excess Debtor Petition Date Receivables and (f) certain Debtor Petition Date Receivables, if necessary. The Reorganized Debtor shall pay Allowed Non- Class 4 Claims from the Claims Reserve, which shall be funded by $1.0 million from the Plan Funding, plus certain Debtor Petition Date Receivables, if necessary, as described below in Section VI.N. Class 4 Claims shall be paid from the Class 4 Creditor Trust, which shall be funded as provided in Section VI.R below. After the Reorganized Debtor has paid all Allowed Non-Class 4 Claims under the Plan, any remaining monies in the Claims Reserve shall be paid to the Class 4 Creditor Trust. If Allowed Non-Class 4 Claims exceed the Claims Reserve, then the Class 4 Creditor Trust shall pay the amount of such Claims. The Class 4 Creditor Trust shall liquidate the Causes of Action and Avoidance Actions, as appropriate, pursuant to its business judgment, and disburse the Class 4 Creditor Trust Proceeds in satisfaction of the Debtor s obligations to Class 4 pursuant to this Plan. All Allowed Claims will be paid in full, with the exception of Class 4 Other Unsecured Claims, which shall receive all Class 4 Creditor Trust Proceeds remaining in the Class 4 Creditor Trust after payment of all obligations under the Class 4 Creditor Trust. The Interest Holders will not receive or retain anything on \DOCS_LA:

33 account of their Existing Stock; however, as provided in Sections VI.A and VIII.A of the Plan, the New Value Contributors will receive 100% of the equity of the Reorganized Debtor and a full and unconditional release from claims in exchange for their New Value Contributions. B. Treatment of Claims and Interests Under the Plan The treatment under the Plan of Allowed Claims and Allowed Interests is in full and complete satisfaction of the legal, contractual, and equitable rights that each entity holding an Allowed Claim or an Allowed Interest may have in or against the Debtor or its property. This treatment supersedes and replaces any agreements or rights those entities have in or against the PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Debtor or its property. All Distributions under the Plan will be tendered to the Person holding the Allowed Claim or the Allowed Interest. Except as specifically set forth in the plan, no distributions will be made and no rights will be retained on account of any claim or interest that is not an Allowed Claim or Allowed Interest. C. Allowance and Treatment of Unclassified Claims (Administrative Claims and Priority Tax Claims) Certain types of Claims are not placed into Classes that are entitled to vote to accept or reject the Plan; instead, such Claims are unclassified. Such Claims are not considered impaired and they do not vote on the Plan because they are automatically entitled to specific treatment provided for them in the Bankruptcy Code. As such, the Debtor has not placed the following Claims in a Class. The respective treatments for these Claims are provided below. D. Administrative Claims Administrative Claims are claims for administrative costs or expenses that are allowable under section 503(b) or 28 U.S.C. 1930, which costs or expenses may include: (a) actual, necessary costs and expenses of preserving the Debtor s Estate after the Petition Date; (b) Ordinary Course Administrative Claims; (c) Professional Fee Claims; (d) Administrative Tax Claims; and (e) U.S. Trustee Fees. Except to the extent that any entity entitled to payment of any Allowed \DOCS_LA:

34 Administrative Claim agrees to a less favorable treatment or unless otherwise ordered by the Bankruptcy Court, each Holder of an Allowed Administrative Claim shall receive in full satisfaction, discharge, exchange and release thereof, Cash in an amount equal to such Allowed Administrative Claim on the later of (i) the Effective Date, and (ii) the fifteenth Business Day after such Administrative Claim becomes an Allowed Administrative Claim, or, in either case, as soon thereafter as is practicable; provided, however, that Ordinary Course Administrative Claims shall be paid in full in accordance with the terms and conditions of the particular transactions and any PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA applicable agreements or as otherwise authorized by the Bankruptcy Court. (i) Claims Reserve On the Effective Date, the Claims Reserve will be held by the Reorganized Debtor. The Reorganized Debtor will make distributions to Holders of Allowed Administrative Claims from the Claims Reserve. To the extent the Claims Reserve has insufficient funds to pay all Allowed Administrative Claims in full, the Reorganized Debtor shall pay the remaining Allowed Administrative Claims. Any amounts remaining in the Claims Reserve after payment of all Allowed Non-Class 4 Claims will be transferred to the Class 4 Creditor Trust. (ii) Administrative Claim Bar Dates All requests for payment of an Administrative Claim that accrued between the filing of the Petition through and including the date the Bankruptcy Court enters the Disclosure Statement Order, or other such date selected by the Bankruptcy Court (the First Administrative Claim Bar Date ), except for (i) U.S. Trustee Fees and (ii) Professional Fee Claims, must be filed with the Bankruptcy Court no later than thirty days after the entry of the Disclosure Statement Order (the First Administrative Claim Bar Date ) or be forever barred. The Debtor will serve notice of the \DOCS_LA:

35 entry of the Disclosure Statement Order and the First Administrative Claim Bar Date on all creditors and parties in interest. All requests for payment of an Administrative Claim that accrued since the expiration of the First Administrative Claim Bar Date through the Effective Date, except for (i) U.S. Trustee Fees and (ii) Professional Fee Claims, must be filed with the Bankruptcy Court no later than thirty days after the Effective Date (the Second Administrative Claim Bar Date ) or be forever barred. Within five (5) business days after the Effective Date, the Reorganized Debtor will serve notice of the PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Effective Date and the Second Administrative Claim Bar Date on all creditors and parties in interest. (iii) Deadline for Objections All objections to allowance of Administrative Claims (excluding Professional Fee Claims) must be filed by any parties in interest no later than thirty (30) days after the First or Second Administrative Claim Bar Date (the Administrative Claim Objection Deadline ). If no objection to the applicable Administrative Claim is filed on or before that date, such Administrative Claim shall be deemed Allowed as of that date. (iv) U.S. Trustee Fees Quarterly fees owed to the Office of the U.S. Trustee shall be paid prior to the Effective Date by the Debtor, and after the Effective Date by the Reorganized Debtor and the Class 4 Creditor Trust, as applicable, in each case when due in accordance with applicable law, and the Reorganized Debtor shall continue to file reports to show the calculation of such fees for the Estate until the Case is closed under section (v) Professional Fee Claims Each Holder of a Professional Fee Claim seeking an award by the Bankruptcy Court of compensation for services rendered or reimbursement of expenses incurred through and including the Effective Date shall (i) file their respective interim (if applicable) and final applications for \DOCS_LA:

36 allowances of compensation for services rendered and reimbursement of expenses incurred through the Effective Date by no later than the forty-fifth (45 th ) day after the Effective Date or such other date as may be fixed by the Bankruptcy Court, and (ii) if granted, such an award by the Bankruptcy Court, be paid in full satisfaction, discharge, exchange and release thereof, Cash in such amounts as are Allowed by the Bankruptcy Court on the date such Professional Fee Claim becomes an Allowed Claim, or as soon thereafter as is practicable. All objections to allowance of Professional Fee Claims through the Effective Date must be timely filed and served in accordance with Local PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Bankruptcy Rule (b)(4). The following chart shows the estimated Administrative Expenses of the Estate: Name Amount Owed Treatment Pachulski Stang Ziehl & Jones LLP $500,000 (this amount is in addition Paid in full on the later of the to PSZJ s $230,000 retainer) Effective Date or after approval by the Buchalter Nemer, a Professional Corporation Nossaman LLP Ambulatory Surgical Group, LLC Pope & Associates Bankruptcy Court after a hearing $250,000 Paid in full on the later of the Effective Date or after approval by the Bankruptcy Court after a hearing $10,000 (this amount is in addition to Nossaman s $10,000 retainer) $0 (paid in the ordinary course of business) $0 (paid in the ordinary course of business) Paid in full on the later of the Effective Date or after approval by the Bankruptcy Court after a hearing Paid in full on the later of the Effective Date or after approval by the Bankruptcy Court after a hearing Paid in full on the later of the Effective Date or after approval by the Bankruptcy Court after a hearing Clerk s Office Fees Unknown Paid in full on Effective Date Office of the U.S. Trustee Fees Unknown Paid in full on Effective Date Ordinary Course Trade Obligations Approximately $20,000 Paid in full on the later of the Effective Date or in the Ordinary Course of Business as those obligations become due TOTAL: $780,000 E. Priority Tax Claims Priority Tax Claims are Claims entitled to priority against the Estate under section 507(a)(8). Distributions will be made to Holders of Allowed Priority Tax Claims from the Claims Reserve by the Debtor or Reorganized Debtor, as appropriate. To the extent the Claims Reserve has insufficient funds to pay all Priority Tax Claims in full, the Reorganized Debtor shall pay the \DOCS_LA:

37 remaining Allowed Priority Tax Claims. Any amounts remaining in the Claims Reserve after payment of all Allowed Non-Class 4 Claims will be transferred to the Class 4 Creditor Trust. The following chart lists all of the Debtor s Section 507(a)(8) Priority Tax Claims and their treatment under the Plan: PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Description Amount Owed Treatment Priority Tax Claims Beverly Hills - $13, (filed amount) IRS - $7,690 (filed amount) Employment Development Department - $1,114 (filed amount) Except to the extent that a Holder of an Allowed Priority Tax Claim has been paid by the Debtor before the Effective Date or agrees to a less favorable treatment, each Holder of an Allowed Priority Tax Claim will receive in full satisfaction, discharge, exchange and release thereof, Cash in an amount equal to such Allowed Priority Tax Claim on the later of (i) the Effective Date and (ii) the fifteenth Business Day after such Priority Tax Claim becomes an Allowed Priority Tax Claim, or as soon thereafter as is practicable. F. Classification and Treatment of Secured Claims (Class 1) Class 1 consists of all Secured Claims which are Claims that are secured by a valid and unavoidable lien against property in which the Estate has an interest or that is subject to setoff under section 553. A Claim is a Secured Claim only to the extent of the value of the claimholder s interest in the Collateral securing the Claim or to the extent of the amount subject to setoff, whichever is applicable, and as determined under section 506(a). To the extent that there is more than one Holder of a Class 1 Claim, the Claim of each such Holder will be deemed to be classified in a separate sub-class of Class 1, and each such sub-class of Class 1 will be deemed to be a separate Class under the Plan. The following chart provides the treatment of Class 1 Claims under this Plan \DOCS_LA:

38 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Class Description Amount Owed Impaired (Y/N) Treatment 1 None n/a Not impaired; claims in this class are not entitled to vote on the Plan, class is deemed to have accepted the Plan As soon as practicable after the Effective Date, each entity holding an Allowed Secured Claim will receive, at the election of the Reorganized Debtor, in its discretion, one of the following treatments in full satisfaction, discharge, exchange and release of its Allowed Claim: (a) the Creditor will receive the Collateral in which that Person has a security interest; (b) the Creditor will receive any proceeds actually received by the Reorganized Debtor from the sale or disposition of the Collateral in which that Person has a security interest; (c) the Creditor will receive Cash in the amount of that Person s Allowed Secured Claim; or (d) the Creditor will receive such other Distributions or treatment as are necessary to leave the rights of said Person Unimpaired or as are necessary to otherwise satisfy the requirements of chapter 11 of the Bankruptcy Code. The Debtor or the Reorganized Debtor, as applicable, shall have ten Business Days after the date on which the Class 1 Claim is Allowed or deemed Allowed, to elect which treatment to provide to such Holder of an Allowed Class 1 Claim. To the extent that any such Holder of an Allowed Class 1 Claim is deemed to have a beneficial interest in the Class 4 Creditor Trust, such beneficial interest shall be governed by the terms of this Plan and shall not be evidenced by any type of certificate or other instrument The Debtor believes that it has no secured claims: the only potential secured claim is that of Marquette, which obtained a judgment, and subsequently recorded a judgment lien (the Marquette Judgment Lien ), in the amount of $1,390,950 against the Debtor. However, recordation of the Marquette Judgment Lien occurred within the preference period, and the Debtor believes that it is \DOCS_LA:

39 therefore avoidable. Marquette s Claim is treated as a Class 4 Other Unsecured Claim, as described herein. G. Classification and Treatment of Priority Non-Tax Claims (Class 2) Class 2 consists of all Priority Non-Tax Claims which are Claims, other than Administrative Claims or Priority Tax Claims, entitled to priority in right of payment under section 507(a) of the Bankruptcy Code. The following chart lists all classes containing Debtor s section 507(a)(3), (a)(4), (a)(5), (a)(6), and (a)(7) priority unsecured claims and their treatment under this Plan PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA CLASS DESCRIPTION IMPAIRED (Y/N) 2 Unimpaired; Total amt of claims = $0 claims in this class are not entitled to vote on the Plan, class is deemed to have accepted the Plan TREATMENT Except to the extent that a Holder of an Allowed Priority Non-Tax Claim agrees to a less favorable treatment, each Allowed Priority Non-Tax Claim will be paid, in full satisfaction, discharge, exchange and release thereof, in Cash in full the amount of the Allowed Priority Non-Tax Claim on the later of (i) the Effective Date and (ii) the fifteenth (15 th ) Business Day after such date that the Claim becomes an Allowed Priority Non-Tax Claim, or as soon thereafter as is practicable Distributions shall be made to Holders of Allowed Priority Non-Tax Claims from the Claims Reserve by the Debtor or Reorganized Debtor, as appropriate. To the extent the Claims Reserve has insufficient funds to pay all Allowed Class 2 Priority Non-Tax Claims in full, the Reorganized Debtor shall pay the remaining Allowed Priority Non- Tax Claims \DOCS_LA:

40 The Debtor believes all Claims in Class 2 have already been paid. H. Classification and Treatment of General Unsecured Claims (Class 3) Class 3 consists of all General Unsecured Claims, which are any Claims that are not an Administrative Claim, a Priority Tax Claim, a Class 1 Secured Claim, a Class 2 Priority Non-Tax Claim or a Class 4 Other Unsecured Claim. In the Bankruptcy Schedules, the Debtor scheduled approximately $1,043,152 in General Unsecured Claims (the Claims of Smith & Nephew, Siemens and T. King Partners are classified as Class 4 Other Unsecured Claims). Class 3 is substantially PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA comprised of claims by vendors and other unsecured creditors with whom the Reorganized Debtor intends to continue to do business. As of August 14, 2009, the proofs of claim for Class 3 filed on or before the Claims Bar Date total approximately $1,907,076. The Debtor estimates that Allowed Class 3 General Unsecured Claims total approximately $320,000. The following chart identifies this Plan s treatment of the Class containing all of Debtor s General Unsecured Claims: CLASS DESCRIPTION IMPAIRED (Y/N) 3 General Unsecured Claims Impaired; Estimated amt of Allowed Claims = claims in this approximately $320,000 class may vote on the Plan TREATMENT Except to the extent that a Holder of an Allowed General Unsecured Claim agrees to a less favorable treatment, each Allowed General Unsecured Claim will be paid in full satisfaction, discharge, exchange and release thereof, in Cash: a) if Allowed Non-Class 4 Claims total $1.25 million or less: in full (without any interest), or b) if Allowed Non-Class 4 Claims exceed $1.25 million: the Reduced Class 3 Distribution Amount. Such payments shall occur on the later of (i) the Effective Date and (ii) the fifteenth (15 th ) Business Day after such date that the Claim becomes an Allowed General Unsecured Claim, or as soon thereafter as is practicable. Distributions shall be made to Holders of Allowed Class 3 General Unsecured Claims from the Claims Reserve by the Debtor or Reorganized Debtor, as appropriate \DOCS_LA:

41 I. Classification and Treatment of Other Unsecured Claims (Class 4) Class 4 consists of all Other Unsecured Claims, which are the substantially similar Unsecured Claims of Smith & Nephew, Siemens, Marquette and T. King Partners. (See Section IV above.) PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Whereas Class 3 includes the Debtor s vendors with whom the Reorganized Debtor seeks to maintain ongoing business relationships, Class 4 is comprised of claims that have arisen directly or indirectly from Salus s poor management of the Debtor. Each of the Claims asserted by Siemens, Smith & Nephew and Marquette stem from obligations that arose because Salus caused the Debtor to guaranty obligations incurred by CCDH solely for CCDH s benefit. Similarly, T. King s claim shares the same legal character such that Salus s poor management abilities and business deterioration evidenced by its bankruptcy filing indirectly spurred the Debtor to incur the obligation to T. King as part of a settlement arrangement to prevent Salus from obtaining a significant equity stake in the Debtor. If Salus had gained a controlling interest in the Debtor, that would have devastated the Debtor s business prospects because its association with Salus would have doomed any efforts to attract physician investors. The following chart identifies this Plan s treatment of Class 4 Other Unsecured Claims Claims: CLASS DESCRIPTION IMPAIRED (Y/N) 4 Other Unsecured Claims Impaired; Total amt of claims = approximately claims in this $38 million class may vote on the Plan TREATMENT In full satisfaction, discharge, exchange and release of all Class 4 Other Unsecured Claims, including a waiver of California Civil Code section 1542 the Class 4 Creditor Trust Assets shall be transferred to the Class 4 Creditor Trust, as provided in Section VI.R below and Section VI.E.1 of the Plan. The Class 4 Creditor Trust shall pay the Holders of Allowed Class 4 Other Unsecured Claim their Pro Rata share of the Class 4 Creditor Trust Proceeds pursuant to the terms of the Class 4 Creditor Trust Agreement \DOCS_LA:

42 J. Classification and Treatment of Interests (Class 5) Class 5 consists of all Interests, which under the Plan has the same meaning as Existing Stock. Interests means the interest as the term interest is defined in section 101(17) of any entity that holds an equity security in the Debtor no matter how held, including issued and PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA outstanding shares of common stock, preferred stock, stock options, warrants, membership interests, or other evidence of interests in securities of the Debtor. As provided in Article VI.A of the Plan, the New Value Contributors, which are certain Holders of Existing Stock that are providing New Value Contributions, shall receive 100% of the New Common Stock of the Reorganized Debtor on the Effective Date in exchange for their New Value Contribution. The following chart identifies the Plan s treatment of the class 5 of Interest Holders: CLASS DESCRIPTION IMPAIRED (Y/N) TREATMENT 5 Interest Holders Impaired, and Interest Holders in this class are deemed to have rejected the Plan Existing Stock will be cancelled and Class 5 Interest Holders will receive no distributions under the Plan. K. Executory Contracts and Unexpired Leases Effective upon the Effective Date, the Debtor under the Plan rejects all executory contracts and unexpired leases that exist between the Debtor and any other Person which have not previously been rejected, except the Debtor does not reject those executory contracts and unexpired leases (a) which are listed in Exhibit I hereto and assumed on the Effective Date, or (b) which are or have been specifically assumed, or assumed and assigned, by the Debtors with the approval of the Court by separate proceeding in the Case. All Allowed Claims arising from the rejection of executory contracts or unexpired leases, whether under the Plan or by separate proceeding, shall be treated as General Unsecured Claims in Class \DOCS_LA:

43 If the rejection of an executory contract or unexpired lease by the Debtor results in damages to the counterparty to such contract or lease, then a Claim for damages or any other amounts related in any way to such contract or lease shall be forever barred and shall not be enforceable against the Debtor, the Estate or their property, unless a proof of claim is filed with the Bankruptcy Court and served on the Reorganized Debtor s counsel within thirty days after the Effective Date. The rejection claim bar date for leases and contracts rejected prior to the Effective Date, outside of the Plan, shall be, as applicable, (i) the date(s) set forth in the applicable order(s) rejecting such lease or PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA contract or (ii) the Claims Bar Date. L. New Value Contribution On the Effective Date, each of the New Value Contributors shall deposit their New Value Contribution in Cash into the New Value Contribution Account, for a total amount of $1,500,000. In exchange for the New Value Contribution, on the Effective Date the New Value Contributors shall receive 100% of the outstanding New Common Stock, and each New Value Contributor shall receive a Pro Rata share of the outstanding New Common Stock. The Debtors shall file with the Court a list of the New Value Contributors and the New Value Contributions within ten days before the confirmation hearing. Dr. Rosen and Scott Rein shall not be New Value Contributors. The Debtor s solicitation of New Value Contributions is in progress and is being handled by Nossaman LLP, the Debtor s corporate counsel M. Sale Transaction On August 18, 2009, the Debtor filed a motion pursuant to sections 105, 363 and 365 of the Bankruptcy Code and Rules 2002, 6004, 6006 and 9014 of the Federal Rules of Bankruptcy Procedure for approval of certain procedures to conduct a sale through an auction and for authorization to sell all of the Debtor s SPV Interest to S&B Workers Comp Co, LLC or a higher bidder at such auction. The purchase price for the SPV Interest will be $1.5 million in cash, an \DOCS_LA:

44 assumption or other satisfaction of the SBWC Lending Group Loan, and the Excess SPV Receivables, or such higher price bid at the auction. Under the Plan, 70% of the Excess SPV Receivables shall be paid to Holders of Allowed Class 4 Other Unsecured Claims. The remaining 30% of the Excess SPV Receivables shall become part of the Debtor s Assets that will vest in the Reorganized Debtor on the Effective Date. N. Claims Reserve On the Effective Date, the Claims Reserve shall be funded by: a) if the Allowed Non-Class 4 Claims total $1.0 million or less: $1.0 million from the Plan Funding; b) ) if the Allowed Non-Class PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Claims total between $1.0 million and $1.25 million: i) $1.0 million, from the Plan Funding, plus ii) the amount by which Allowed Non-Class 4 Claims exceed $1.0 million, from the Debtor Petition Date Receivables collections that exceed $2.0 million; or c) if the Allowed Non-Class 4 Claims total more than $1.25 million: i) $1.0 million, from the Plan Funding, plus ii) $250,000 from the Debtor Petition Date Receivables collections that exceed $2.0 million. The Claims Reserve shall be held by the Debtor or Reorganized Debtor, as appropriate. Distributions shall be made to Holders of Allowed Non-Class 4 Claims from the Claims Reserve by the Debtor or Reorganized Debtor, as appropriate. To the extent the Claims Reserve has insufficient funds to pay all Non-Class 4 Claims in full, the Reorganized Debtor shall pay the remaining Allowed Non-Class 4 Claims. Any amounts remaining in the Claims Reserve after payment of all Allowed Non-Class 4 Claims shall be transferred to the Class 4 Creditor Trust O. Claims Objections 1. Disputed Claims a. Disputed General Unsecured Claims Reserve The Disputed General Unsecured Claims Reserve shall be the Claims Reserve. The Reorganized Debtor shall keep in the Claims Reserve an amount equal to the Disputed General \DOCS_LA:

45 Unsecured Claims, as if such Claims were Allowed Claims, and shall release or cause to have released from the Claims Reserve monies to fund distributions to Holders of Disputed General Unsecured Claims as, and if and to the extent, Disputed Claims become Allowed Claims. b. Objections to and Resolution of Disputed Claims The Debtor may object to any claims prior to the Effective Date, provided however that any objection filed after the Disclosure Statement has been mailed to Holders of Claims shall not affect the ability of a Holder of a Claim to vote on the Plan. The Debtor may file a motion to estimate Claims for purpose of voting on the Plan or distribution under the Plan. On and after the Effective PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Date, the Reorganized Debtor shall have the right to prosecute, settle and/or withdraw any objections to Claims commenced by the Debtor, and the right to make and file objections to Claims and Administrative Claims and to prosecute, settle and/or withdraw such objections. The Reorganized Debtor shall have the authority to compromise, settle, withdraw or otherwise resolve any objections for any Claim without approval of the Bankruptcy Court; provided, however, that the Reorganized Debtor may in its discretion seek relief before the Bankruptcy Court with respect to any Disputed Claim under Bankruptcy Rule 9019 and the applicable standards thereof. The Reorganized Debtor shall file and serve all objections to Claims upon the Holder of the Claim as to which the objection is made no later than ninety days after the later of (i) the Effective Date or (ii) the date on which a proof of Claim or request for payment is filed with the Bankruptcy Court (the Claims Objection Deadline ). The Reorganized Debtor may extend the Claims Objection Deadline for a single sixty day period by filing a notice of the extended deadline with the Bankruptcy Court; provided, however, that nothing herein shall curtail the statute of limitations for any affirmative Avoidance Action that the Class 4 Creditor Trust may assert against any third party. Thereafter, the deadline may be further extended only by an order of the Bankruptcy Court \DOCS_LA:

46 1 2 P. Provisions Governing Plan Implementation On the Effective Date, the following shall occur in implementation of the Plan: PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA (i) all actions, documents and agreements necessary to implement the Plan shall have been effected or executed; (ii) the Debtor shall have received all authorizations, consents, rulings, opinions or other documents that are determined by the Debtor, in consultation with the Committee, to be necessary to implement the Plan; and (iii) the Reorganized Debtor shall make all Distributions required to be made on the Effective Date to Holders of Allowed Claims pursuant to the Plan. The Plan will not be consummated or become binding unless and until the Effective Date occurs. The Effective Date will be the first Business Day, as determined by the Debtor in its reasonable discretion in consultation with the Committee, on which the following conditions have been satisfied: (i) (ii) (iii) At least ten days have passed since the Confirmation Date; The Confirmation Order has not been stayed; All documents, instruments and agreements, in form and substance reasonably satisfactory to the Debtor and Committee, provided for under or necessary to implement the Plan have been executed and delivered by the parties thereto, unless such execution or delivery has been waived by the parties benefited thereby; and (iv) The Class 4 Creditor Trust Agreement is final and the Class 4 Creditor Trust is funded in accordance with the Plan. The Debtor, in consultation with the Committee, may in its reasonable discretion waive any of the conditions set forth above without notice and a hearing. Additionally, the Debtor s rights under the mootness doctrine shall be unaffected by any provision hereof. The failure to satisfy any condition may be asserted by the Debtor regardless of the circumstances giving rise to the failure of such condition to be satisfied (including, without limitation, any act, action, failure to act, \DOCS_LA:

47 or inaction by the Debtor). If the Debtor fails to assert the non-satisfaction of any such conditions, such failure shall not be deemed a waiver of any other rights thereunder. Q. Corporate Action Upon the Effective Date, all transactions and applicable matters provided for under the Plan shall be deemed to be authorized and approved by the Debtor without any requirement of further action by the Debtor, the Debtor s shareholders, or the Debtor s board of directors. R. Class 4 Creditor Trust The Confirmation Order shall approve, effective on the Effective Date, the Class 4 Creditor PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Trust Agreement, which agreement shall provide for the appointment of three (3) members to act as the Class 4 Creditor Trustees to administer the Class 4 Creditor Trust. The Class 4 Creditor Trustees shall serve without any bond and shall act in accordance with the Class 4 Creditor Trust Agreement and the Plan by majority rule of the Class 4 Creditor Trustees. The Class 4 Creditor Trustees shall be entitled to receive, on a monthly basis, payment of reasonable fees and reimbursement of reasonable expenses without further Court approval from the assets of the Class 4 Creditor Trust, in accordance with the Class 4 Creditor Trust Agreement. Each Class 4 Creditor Trustee shall serve for the duration of the Class 4 Creditor Trust, subject to earlier death, resignation, incapacity or removal as specifically provided in the Class 4 Creditor Trust Agreement. 1. Funding of the Creditor Trust. The Class 4 Creditor Trust will be funded as follows: a. On the Effective Date, the $1.5 million New Value Contributions, plus the Class 4 Creditor Trust Sale Transaction Assets (namely, an estimated $1.5 million Cash plus the rights, title and interest in the 70% of the Excess SPV Receivables), minus $1.0 million, shall be transferred into the Class 4 Creditor Trust. b. On the Effective Date, all right, title and interest in the Causes of Action and the Avoidance Actions shall be transferred to the Class 4 Creditor Trust \DOCS_LA:

48 c. On the Effective Date, all right, title and interest in the Excess Debtor Petition Date Receivables shall be deposited into the Class 4 Creditor Trust. d. Any amounts remaining in the Claims Reserve after payment of all Allowed Non- Class 4 Claims shall be deposited into the Class 4 Creditor Trust. 2. Powers and Duties. The Class 4 Creditor Trust shall have the following rights, powers and duties: PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA a. Hold all of the Class 4 Creditor Trust Assets. The Class 4 Creditor Trust shall have full right, power and discretion to manage such property and execute, acknowledge and deliver any and all instruments as may be appropriate or necessary as determined by the Class 4 Creditor Trust in its discretion; b. Make interim and final distributions to the Holders of Allowed Class 4 Claims; c. Administer the collection, prosecution, settlement, or abandonment of the Causes of Action and Avoidance Actions; d. File all tax and regulatory forms, returns, reports and other documents required with respect to the Class 4 Creditor Trust; and e. File suit or any appropriate motion for relief in the Court or in any other court of competent jurisdiction to resolve any claim, disagreement, conflict or ambiguity in connection with the exercise of its rights, powers or duties. 3. The Termination of the Class 4 Creditor Trust. The Class 4 Creditor Trust shall be irrevocable. The Class 4 Creditor Trust shall terminate when the Class 4 Creditor Trustees have performed all of their duties under the Plan and the Class Creditor Trust Agreement, including the final distribution of all the property of the Class 4 Creditor Trust in respect of Allowed Class 4 Claims, which date shall not be more than four (4) years and one (1) month after the Effective Date; provided, however, the Court may upon good cause shown order the Class 4 Creditor Trust to remain open so long as shall be necessary to liquidate and distribute all its property \DOCS_LA:

49 Upon good cause shown, the Court may modify the rights, powers and duties of the Class 4 Creditor Trust or the procedures for appointing successors to the Class 4 Creditor Trustees in light of material changes in circumstances upon the motion of the Class 4 Creditor Trust. 4. Additional Provisions of the Class 4 Creditor Trust Agreement. In addition to the provisions in the Plan with respect to the Class 4 Creditor Trust, the Class 4 Creditor Trust Agreement will provide for, among other things, other actions to be taken by the Class 4 Creditor Trust and the Class 4 Creditor Trustees, including the removal of Class 4 Creditor Trustees or appointment of successor Class 4 Creditor Trustees, the liability of the Class 4 Creditor PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Trustees, the effect of actions by the Class 4 Creditor Trustees, and the indemnification of the Class 4 Creditor Trustees. To the extent not set forth in the Plan, the functions and procedures applicable to the Class 4 Creditor Trust and the powers and duties of the Class 4 Creditor Trustees and the rights of the holders of Interests in the Class 4 Creditor Trust shall be governed by the provisions of the Class 4 Creditor Trust Agreement. S. Vesting of Assets On the Effective Date, all Assets of the Estate other than the Plan Funding shall vest in the Reorganized Debtor, free and clear of all Claims, liens, encumbrances and Interests. From and after the Effective Date, the Reorganized Debtor may operate its business and use, acquire and dispose of property without supervision by the Court and free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan and the Confirmation Order. On the Effective Date, Assets shall vest in the Class 4 Creditor Trust as provided in Section VI.E.1 of the Plan (and Section VI.R.1 above), including an assignment of all of the Causes of Action and Avoidance Actions, free and clear of all claims, liens, encumbrances, charges and other interests, subject to the provisions of the Plan. On and after the Effective Date, the transfer of the Class 4 Creditor Trust Assets from the Estate to the Class 4 Creditor Trust shall be deemed final and \DOCS_LA:

50 irrevocable. After the Reorganized Debtor has paid all Allowed Non-Class 4 Claims, the monies remaining in the Claims Reserve, if any, shall vest in the Class 4 Creditor Trust free and clear of all liens, claims and interest and shall be deemed final and irrevocable. Distributions to Class 4 Creditors shall be made from the Class 4 Creditor Trust in accordance with the terms of the Class 4 Creditor Trust Agreement and the Plan. T. The Reorganized Debtor 1. Directors and Officers The Directors and Officers of the Reorganized Debtor shall be determined in accordance PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA with the Articles of Incorporation and Bylaws of the Reorganized Debtor. An exhibit listing the Reorganized Debtor s initial directors and officers will be filed no later than fourteen (14) days prior to the Ballot Deadline. The Debtor anticipates that the Reorganized Debtor s Board of Directors will have five members. 2. Articles of Incorporation and Bylaws The Articles of Incorporation and Bylaws of the Reorganized Debtor shall prohibit the issuance of non-voting securities as required by section 1123(a)(6), subject to amendment of such Articles of Incorporation and Bylaws as permitted by applicable law. A substantially final form of the Articles of Incorporation and Bylaws will be filed no later than fourteen days prior to the Ballot deadline. The Reorganized Debtor intends to convert into a limited liability company promptly after the Effective Date. 3. Periodic Reporting The Reorganized Debtor is not a public reporting company under the Securities Exchange Act of 1934, as amended. 4. Employee Benefit Plans It is anticipated that as of the Effective Date, all of the Debtor s employee benefit plans, programs and benefits existing immediately prior to the Effective Date as to persons employed on \DOCS_LA:

51 the Effective Date shall be retained and constitute obligations of the Reorganized Debtor, provided, that nothing herein shall preclude the Reorganized Debtor from amending, modifying or otherwise cancelling such benefit plans, programs and benefits in its discretion to the extent permitted by law. U. Litigation PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Preservation of Causes of Action and Avoidance Actions. Except as expressly released or otherwise expressly provided in the Plan, pursuant to section 1123(b), as of the Effective Date the Class 4 Creditor Trust shall be vested with and shall retain and may enforce all Causes of Action and Avoidance Actions that the Debtor may hold or have against any person or entity, all of which are hereby preserved. As of the Effective Date, the Class 4 Creditor Trustees shall retain all rights on behalf of the Class 4 Creditor Trust to commence, pursue and settle, as appropriate, any and all Causes of Action and Avoidance Actions, whether arising before or after the Petition Date, in any court or other tribunal, including, without limitation, a bankruptcy court adversary proceeding filed in the Case. The failure to explicitly list any Causes of Action and Avoidance Actions is not intended to limit the rights of the Class 4 Creditor Trust, through the Class 4 Creditor Trustees, to pursue any Causes of Action and Avoidance Actions. The Debtor and the Committee shall file a list of Causes of Action and Avoidance Actions they presently intend to pursue at least ten (10) Business Days prior to the Confirmation Hearing; provided, however, notwithstanding any otherwise applicable principle of law or equity, including, without limitation, any principles of judicial estoppel, res judicata, collateral estoppel, issue preclusion, or any similar doctrine, the failure to list, disclose, describe, identify, analyze or refer to any Causes of Action and Avoidance Actions, or potential Causes of Action and Avoidance Actions, in this Plan, the Disclosure Statement, or any other document filed with the Bankruptcy Court shall in no manner waive, eliminate, modify, release, or alter the Debtor s or the Class 4 Creditor Trust right to commence, prosecute, defend against, settle, and realize upon any Causes of Action and Avoidance \DOCS_LA:

52 Actions that the Debtor or the Estate has or may have as of the Confirmation Date. Subject to the limitations expressly set forth in the Class 4 Creditor Trust Agreement, the Class 4 Creditor Trust may commence, prosecute, defend against, recover on account of, and settle all Causes of Action and Avoidance Actions in its sole discretion in accordance with what is in the best interests, and for the benefit, of the Class 4 Creditor Trust. Unless an Avoidance Action or Cause of Actions against a Person is expressly waived, relinquished, released, compromised, or settled in the Plan or any Final Order, the Debtor expressly PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA reserves such Avoidance Actions or Causes of Action for later adjudication (including, without limitation, Causes of Action and Avoidance Actions of which the Debtor may presently be unaware, or which may arise or exist by reason of additional facts or circumstances unknown to the Debtor at this time, or facts or circumstances which may change or be different from those which the Debtor now believes to exist) and, therefore, no preclusion doctrine, including, without limitation, the doctrines of res judicata, collateral estoppel, issue preclusion, claim preclusion, waiver, estoppel (judicial, equitable, or otherwise), or laches shall apply to Causes of Action and Avoidance Actions upon, or after, the Confirmation or consummation of the Plan based on the Disclosure Statement, the Plan, or the Confirmation Order, except where such Causes of Action and Avoidance Actions have been expressly released by virtue of the Plan or other Final Order. As of the Effective Date, subject to the Class 4 Creditor Trust Agreement, the Class 4 Creditor Trustees, on behalf of the Class 4 Creditor Trust, shall be authorized to exercise and perform the rights, powers and duties held by the Debtor s Estate with respect to the Causes of Action and Avoidance Actions, including, without limitation, the authority under Bankruptcy Code section 1123(b)(3) to provide for the settlement, adjustment, retention and enforcement of claims and interests of the Estate, without the consent or approval of any third party, and without any further order of the Bankruptcy Court, except as otherwise provided in this Section \DOCS_LA:

53 Any Person with respect to whom the Debtor has incurred an obligation (whether on account of services, purchase or sale of property, or otherwise), or who has received services from the Debtor or a transfer of money or property of the Debtor, or who has transacted business with the Debtor, or leased equipment or property from the Debtor should assume that such obligation, transfer, or transaction may be reviewed by the Class 4 Creditor Trustees, on behalf of the Class 4 Creditor Trust, subsequent to the Effective Date and may, if appropriate, be the subject of an action after the Effective Date, whether or not (i) such Person has filed a proof of Claim against the Debtor; (ii) such PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Person s proof of Claim has been objected to by the Debtor; (iii) such Person s Claim was included in the Bankruptcy Schedules; or (iv) such Person s scheduled Claims have been objected to by the Debtor or has been identified by the Debtor as disputed, contingent, or unliquidated. Subject to the Class 4 Creditor Trust Agreement, the Class 4 Creditor Trustees will make the decision of whether or not to pursue any Causes of Action or Avoidance Actions, including, without limitation, Causes of Action or Avoidance Actions commenced by the Debtor or the Committee prior to the Effective Date. This decision will be based upon their review of the merits of the various claims as well as the costs required to prosecute such claims in light of the limited resources available for the distribution to creditors. Subject to the Class 4 Creditor Trust Agreement, the Class 4 Creditor Trustees may seek to retain counsel on a contingency basis to prosecute some or all of such claims, may seek to finance any costs relating to the prosecution of such litigation or may decide not to pursue such claims at all \DOCS_LA:

54 VII. OTHER PLAN PROVISIONS A. Exculpation and Release In consideration for the New Value Contribution made by the New Value Contributors, the Debtor on behalf of the Estate hereby fully and unconditionally releases and forever discharges each of the New Value Contributors and their attorneys, agents, advisors, professionals, representatives and assigns (the New Value Releasees ) from and against any and all Claims, causes of action, PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA damages, losses, liabilities, obligations, expenses, debts, dues, sums of money, accounts, reckonings, contracts, controversies, known or unknown, fixed or contingent, direct or indirect, accrued or not accrued, liquidated or unliquidated or suspected or unsuspected, in contract or in tort or otherwise, that the Debtor or the Estate ever had, now have or hereafter can, shall or may have, or may claim to have, whether directly or indirectly, or by assignment or succession, against the New Value Releasees, or any of them, for, upon, or by reason of any matter relating to the ownership, management or operation of the Debtor through the Effective Date. This release shall be effective as of the Effective Date. The New Value Contributors acknowledge that they are aware of and have read Section 1542 of the California Civil Code, which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor Except to the extent arising from willful misconduct or gross negligence, any and all Claims, liabilities, causes of action, rights, damages, costs and obligations held by any party against the Debtor, ASG, the Committee (collectively, the Exculpated Parties ) and their respective attorneys, accountants, agents and other professionals, and their officers, directors and employees, whether known or unknown, matured or contingent, liquidated or unliquidated, existing, arising or accruing, \DOCS_LA:

55 whether or not yet due in any manner related to the post-petition Date administration of the Case or the formulation, negotiation, prosecution or implementation of the Plan, shall be deemed fully waived, barred, released and discharged in all respects, except as to rights, obligations, duties, claims and responsibilities preserved, created or established by terms of the Plan; provided, however, that, notwithstanding the foregoing, this provision does not limit the nature of any objection to the allowance and compensation of any Professional Fees or any insider compensation. Pursuant to section 1125(e), the Exculpated Parties and their present and former members, PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA officers, directors, employees, agents, advisors, representatives, successors or assigns, and any Professionals (acting in such capacity) employed by any of the foregoing entities will neither have nor incur any liability to any Person for any act or omission occurring after the Petition Date and in connection with, relating to or arising out of the Case, formulation, negotiation or implementation of the Plan, solicitation of acceptances of the Plan, the pursuit of confirmation of the Plan, the consummation of the Plan, confirmation of the Plan or the administration of the Plan or the property to be distributed under the Plan. Nothing in this section shall be construed to exculpate any entity from liability for their willful misconduct or gross negligence. Any Holder of a Class 4 Claim that votes for the Plan and does not object to the Plan shall be deemed an Exculpated Party B. Exemption from Stamp, Transfer and Other Taxes Pursuant to section 1146(a), the issuance, transfer, or exchange of assets under this Plan by the Debtor, the creation of any mortgage, deed of trust, or other security interest, the making or assignment of any lease or sublease, or the making or delivery of any deed or instrument of transfer under, in furtherance of, or in connection with this Plan, shall not be subject to any stamp, real estate transfer, mortgage recording, or other similar tax \DOCS_LA:

56 C. Injunction Enjoining Holders of Claims Against Debtor The Plan is the sole means for resolving, paying or otherwise dealing with Claims and Interests. To that end, except as expressly provided herein, at all times on and after the Effective Date, all Persons who have been, are, or may be Holders of Claims against or Interests in the Debtor PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA arising prior to the Effective Date, shall be permanently enjoined from taking any of the following actions, on account of any such Claim or Interest, against the Debtor, its Estate, or its property (other than actions brought to enforce any rights or obligations under the Plan): (i) commencing, conducting or continuing in any manner, directly or indirectly any suit, action, or other proceeding of any kind against the Debtor and its Estate, its successors, or its respective property or assets (including, without limitation, all suits, actions, and proceedings that are pending as of the Effective Date which shall be deemed to be withdrawn or dismissed with prejudice); (ii) enforcing, levying, attaching, executing, collecting, or otherwise recovering by any manner or means whether directly or indirectly any judgment, award, decree, or order against the Debtor and its Estate, its successors, or its respective property or assets; (iii) creating, perfecting, or otherwise enforcing in any manner, directly or indirectly, any lien, security interest or encumbrance against the Debtor and its Estate, its successors, or its respective property or assets; and (iv) proceeding in any manner in any place whatsoever against the Debtor and its Estate, its successors, or its respective property or assets, that does not conform to or comply with the provisions of the Plan D. Discharge of the Debtor This Plan provides that upon the Effective Date the Debtor shall be discharged of liability for payment of debts incurred before confirmation of the Plan, to the extent specified in section Entry of the Confirmation Order acts as a discharge, effective as of the Effective Date, of all debts of or Claims against the Debtor, or liens on the Debtor s assets, or properties, which debts, Claims or \DOCS_LA:

57 liens arose at any time before the entry of the Confirmation Order. In accordance with section 524, the discharge provided by this section and section 1141, among other things, acts as an injunction against the commencement or continuation of any action, employment of process, or act to collect, offset, or recover the Claims and liens treated and provided for under the Plan. The discharge of the Debtor shall be effective as to each Claim, regardless of whether a proof of claim therefor was filed, whether the Claim is an Allowed Claim or whether the Holder thereof votes to accept the Plan. On the Effective Date, as to every discharged Claim, any Holder PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA of such Claim shall be precluded from asserting against the Debtor, Reorganized Debtor, or the assets or properties of any of them, any other or further Claim based upon any document, instrument, act, omission, transaction, or other activity of any kind or nature that occurred before the Effective Date. However, the discharge will not discharge any liability imposed by the Plan. E. Entry of a Final Decree Promptly following the payment of Allowed Non-Class 4 Claims and the funding of the Class 4 Creditor Trust, the Reorganized Debtor will file a motion with the Bankruptcy Court to obtain entry of a final decree closing the Case. The Reorganized Debtor shall preserve its post- Effective Date books and records, subject to further Court order. F. Post-Effective Date Quarterly Fees After the Effective Date, the Reorganized Debtor and the Class 4 Creditor Trustees on behalf of the Class 4 Creditor Trust, as applicable, shall pay all U.S. Trustee Fees G. Post-Effective Date Status Reports The Reorganized Debtor shall file status reports regarding the status of implementation of the Plan and the review, prosecution and resolution of Causes of Action and Avoidance Actions every 120 days following the entry of the Confirmation Order through entry of a final decree closing the Case, or as otherwise ordered by the Bankruptcy Court \DOCS_LA:

58 H. Withholding and Reporting Requirements In connection with the consummation of the Plan, the Class 4 Creditor Trust shall comply with all withholding and reporting requirements imposed by any federal, state, local or foreign taxing authority and all Distributions hereunder shall be subject to any such withholding and reporting requirements. The Class 4 Creditor Trust may reasonably request tax reporting information from persons entitled to receive Distributions under the Plan and may withhold the payment of such Distributions pending the receipt of such tax reporting information. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA I. Evidence of Claims As of the Effective Date, notes and any other evidence of Claims will represent only the right to receive the Distributions contemplated under the Plan. J. Cancellation of Interests On the Effective Date, all Existing Stock will be cancelled, annulled, and extinguished, and any issued and outstanding shares of common stock, preferred stock, stock options, warrants, membership interests, or other evidence of Existing Stock in securities of the Debtor will be deemed to be cancelled and of no further force or effect without any further action by the Debtor or any other entity. Holders of Allowed Interests will retain no rights and receive no consideration on account of these Interests, and entities holding any evidence of Interests in the Debtor will have no rights arising from or relating to such evidence of their Interests or their cancellation K. Injunctions or Stays Unless otherwise provided, all injunctions or stays arising under or entered during the Case under sections 105 or section 362, or otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the Effective Date. L. No Admissions Except as specifically provided in the Plan, nothing contained in the Plan shall be deemed or construed in any way as an admission by the Debtor or its Estate with respect to any matter set forth \DOCS_LA:

59 in the Plan, including the amount or allowability of any claim, or the value of any property of the Estate. Notwithstanding anything to the contrary in the Plan, if the Plan is not confirmed or the Effective Date does not occur, the Plan will be null and void, and nothing contained in the Plan or Disclosure Statement will: (a) be deemed to be an admission by the Debtor with respect to any matter discussed in the Plan, including liability on any Claim or the propriety of any Claim s classification; (b) constitute a waiver, acknowledgement, or release of any Claims, Interests, or any PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA claims held by the Debtor; or (c) prejudice in any manner the rights of the Debtor or the Estate in any further proceedings. M. Revocation of the Plan The Debtor reserves the right to withdraw the Plan before the Confirmation Date. N. Retention of Jurisdiction The Bankruptcy Court will retain and have exclusive jurisdiction over any matter arising under the Bankruptcy Code, arising in or related to the Case or the Plan, or that relates to the matters set forth in Section VIII.P of the Plan O. Successors and Assigns The rights, benefits, and obligations of any entity referred to in this Plan will be binding on, and will inure to the benefit of, any heir, executor, administrator, successor, or assign of that entity. P. Nonconsensual Confirmation In the event that the Classes entitled to vote to accept or reject this Plan fail to accept the Plan in accordance with section 1129(a)(8), the Debtor reserves the right to modify the Plan in accordance with section 1127(a). In accordance with section 1127, the Debtor reserves the right to alter, amend, modify, revoke or withdraw the Plan or any Plan exhibit or schedule, including amending or modifying it to satisfy the requirements of the Bankruptcy Code \DOCS_LA:

60 Q. Saturday, Sunday, or Legal Holiday If any payment or act under the Plan should be made or performed on a day that is not a Business Day, then the payment or act may be completed on the next succeeding day that is a Business Day, in which event the payment or act will be deemed to have been completed on the PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA required day. R. No Waiver Neither the failure to list a Claim in the Schedules filed by the Debtor, the failure of any Person to object to any Claim for purposes of voting, the failure of any Person to object to a Claim or Administrative Expense Claim prior to Confirmation or the Effective Date, the failure of any Person to assert a Right of Action prior to Confirmation or the Effective Date, the absence of a proof of Claim having been Filed with respect to a Claim, nor any action or inaction of any Person with respect to a Claim, Administrative Expense Claim, or Right of Action other than a legally effective express waiver or release shall be deemed a waiver or release of the right of the Debtor, the Reorganized Debtor or the Class 4 Creditor Trust, or their successors or representatives, before or after solicitation of votes on the Plan or before or after Confirmation or the Effective Date to (a) object to or examine such Claim or Administrative Expense Claim, in whole or in part or (b) retain and either assign or exclusively assert, pursue, prosecute, utilize, otherwise act or otherwise enforce any Right of Action S. Plan Modification Subject to the restrictions set forth in section 1127, the Debtor reserves the right to alter, amend, or modify the Plan before it is substantially consummated. T. Post-Effective Date Notice From and after the Effective Date, any Person who desires notice of any pleading or document filed in the Case, or of any hearing in the Court, or of any matter as to which the Bankruptcy Code requires notice to be provided, shall file a request for post-confirmation notice \DOCS_LA:

61 and shall serve the request on counsel for the Reorganized Debtor and counsel for the Class 4 Creditor Trust; provided however, the U.S. Trustee and the Class 4 Creditor shall be deemed to have requested post-confirmation notice. VIII. CERTAIN RISK FACTORS TO BE CONSIDERED Holders of Impaired Claims entitled to vote on the Plan should read and consider carefully the factors set forth below, as well as other information set forth in this Disclosure Statement and the documents delivered together herewith and/or incorporated by reference herein, prior to voting to accept or reject the Plan. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA A. Risk that the Debtor Will Have Insufficient Cash for the Plan to Become Effective The Plan cannot be confirmed by the Bankruptcy Court unless the Debtor has sufficient funds by the Effective Date to pay or reserve for all Allowed Administrative Claims, Allowed Priority Tax Claims and Allowed Priority Non-Tax Claims, unless particular Holders of such Claims agree to a deferred payment of their Claims. The Debtor believes that at the time of Confirmation it will have sufficient Cash to satisfy or reserve for all such Claims B. Risk Regarding the Distributions to Be Made to Creditors While the Debtor has endeavored to project what it believes are likely to be the distributions, if any, to be made to parties holding Allowed Claims, there can be no certainty that the Debtor s projections will be accurate, and that Creditors will receive the distributions described in the Plan. The Debtor s projections will necessarily be affected by, among other things: (1) recoveries that the Class 4 Creditor Trust generates from the Causes of Action and Avoidance Actions; (2) the outcome of objections to Claims; and (3) the cost and expenses of such actions. C. Bankruptcy Risks Section 1122 provides that a plan may place a Claim or an Interest in a particular Class only if such Claim or Interest is substantially similar to the other Claims or Interests of such Class. The \DOCS_LA:

62 Debtor believes that the classification of Claims and Interests under the Plan complies with the requirements set forth in the Bankruptcy Code. However, there can be no assurance that the Bankruptcy Court would reach the same conclusion. Even if all Classes of Claims and Interests that are entitled to vote accept the Plan, the Plan might not be confirmed by the Bankruptcy Court. Section 1129 sets forth the requirements for confirmation and requires, among other things, that the value of distributions to dissenting creditors and equity security holders not be less than the value of distributions such creditors and equity PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA security holders would receive if the debtor were liquidated under chapter 7 of the Bankruptcy Code. The Debtor believes that the Plan satisfies all of the requirements for confirmation of a plan under section D. Risks Related to New Common Stock The New Common Stock that New Value Contributors will receive is subject to the following risks: 1. Lack of Market/Volatility of Stock Price The New Common Stock is a new security for which there is no market. The Reorganized Debtor does not intend to register any of its securities under the Securities Act or to list the New Common Stock on any of the national securities exchanges or have it quoted on an inter-dealer quotation system. Accordingly, there is no assurance that there will ever be any market for the New Common Stock or that the Holders of New Common Stock will have any ability to sell or otherwise liquidate their New Common Stock. If the Reorganized Debtor does register the New Common Stock under the Securities Act and a trading market does develop, any such market may be discontinued at any time or cease for other reasons, in which case the Holders of the New Common Stock may not be able to sell or otherwise liquidate their investments. Additionally, the New Common Stock may decline in value for a number of reasons, including, for example, general \DOCS_LA:

63 business and economic conditions, industry performance, the Reorganized Debtor s performance, competition and unanticipated events. There is no guarantee the New Common Stock will have any realizable value. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Transfer Restrictions for Holders of New Common Stock The New Common Stock will be issued under the Plan pursuant to section There is no public market for the New Common Stock, and none is expected to develop in the foreseeable future. Recipients of the New Common Stock should be prepared to hold the New Common Stock for an indefinite period of time. In principle, in the event there is a public market for the New Common Stock, the New Common Stock distributed under the Plan pursuant to the exemption provided under Bankruptcy Code section 1145 may be eligible for resale by the Holders thereof, except for any such Holder that is deemed to be an underwriter as defined in section 1145(b)(1). In addition, the Reorganized Debtor s Articles of Incorporation and Bylaws, pursuant to which the New Common Stock will be issued, will provide certain restrictions on transferring the New Common Stock. BECAUSE OF THE RESTRICTIONS ON TRANSFER THAT WILL BE PLACED ON THE NEW COMMON STOCK, THE FACT THAT NO PUBLIC MARKET EXISTS FOR THE NEW COMMON STOCK, AND BECAUSE OF THE COMPLEX, SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON MAY BE AN UNDERWRITER, THE DEBTOR MAKES NO REPRESENTATION CONCERNING THE ABILITY OF ANY PERSON TO DISPOSE OF THE NEW COMMON STOCK TO BE DISTRIBUTED UNDER THE PLAN. THE DEBTOR RECOMMENDS THAT RECIPIENTS OF NEW COMMON STOCK CONSULT WITH THEIR OWN LEGAL COUNSEL CONCERNING THE LIMITATIONS ON THEIR ABILITY TO DISPOSE OF THE NEW COMMON STOCK. PLEASE ALSO REFER TO THE SECURITIES LAWS MATTERS SECTION XIII BELOW \DOCS_LA:

64 Risk of Dilution/Impairment of Value to Holders of New Common Stock The Reorganized Debtor may require capital infusions in the future and may seek to raise capital by issuing additional New Common Stock, which issuance shall be made in accordance with the Reorganized Debtor s Articles of Incorporation and Bylaws and applicable state law. In the event that the Reorganized Debtor determines to issue additional New Common Stock, such issuance would result in the dilution of the interests of the New Value Contributors. Thus, the New Value Contributors should take into account that the New Common Stock issued to them in respect of their PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA New Value Contribution may be affected by future events or capital requirements of the Reorganized Debtor and that their equity ownership in the Reorganized Debtor may be subsequently diluted. IX. VOTING PROCEDURES AND REQUIREMENTS IT IS IMPORTANT THAT HOLDERS OF CLAIMS AND INTERESTS EXERCISE THEIR RIGHT TO VOTE TO ACCEPT OR REJECT THE PLAN. All known Holders of Claims and Interest Holders entitled to vote on the Plan have been sent a Ballot together with this Disclosure Statement. Such Persons should read the Ballot carefully and follow the instructions contained therein. Please use only the Ballot (or Ballots) that accompanies this Disclosure Statement. BALLOTS FOR ACCEPTANCE OR REJECTION OF THE PLAN ARE BEING PROVIDED ONLY TO HOLDERS OF CLAIMS AND INTERESTS IN CLASSES WHICH ARE ENTITLED TO VOTE TO ACCEPT OR REJECT THE PLAN. If you are the Holder of a Claim and/or Interest in a Class entitled to vote, and (a) did not receive a Ballot, (b) received a damaged or illegible Ballot, or (c) lost your Ballot, please contact Pachulski Stang Ziehl & Jones LLP, Attn: Felice Harrison, Santa Monica Boulevard, Suite 1100, Los Angeles, California 90067; Telephone: (310) ; fharrison@pszjlaw.com \DOCS_LA:

65 FOR YOUR VOTE TO COUNT, YOUR BALLOT MUST BE ACTUALLY RECEIVED BY COUNSEL FOR THE DEBTOR NO LATER THAN 5:00 P.M., PACIFIC TIME, ON, ANY BALLOT THAT IS EXECUTED AND RETURNED BUT WHICH DOES NOT INDICATE AN ACCEPTANCE OR REJECTION OF THE PLAN WILL BE DEEMED AN ACCEPTANCE OF THE PLAN. A. Parties Entitled to Vote Subject to the provisions of the Disclosure Statement Order, any Holder of a Claim against, or Interest in, the Debtor as of the Petition Date, which Claim or Interest has not been disallowed by order of the Bankruptcy Court and is not disputed, is entitled to vote to accept or reject the Plan if (1) PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA such Claim or Interest is Impaired under the Plan and is not of a Class that is deemed to have accepted the Plan pursuant to sections 1126(f), and (2) either (a) such Holder s Claim or Interest has been scheduled by the Debtor (and such Claim is not scheduled as disputed, contingent, or unliquidated), or (b) such Holder has filed a proof of Claim or Interest on or before the Claims Bar Date. Unless otherwise permitted in the Plan, the Holder of any Disputed Claim or Disputed Interest is not entitled to vote on the Plan on account of such Disputed Claim or Disputed Interest unless the Bankruptcy Court, upon application by such Holder, temporarily allows such Disputed Claim or Disputed Interest for the limited purpose of voting to accept or reject the Plan. A vote on the Plan may be disregarded if the Bankruptcy Court determines, after notice and a hearing, that such vote was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code. A LIST OF ALL FILED CLAIMS AND SCHEDULED CLAIMS WHICH WERE NOT SCHEDULED AS CONTINGENT, UNMATURED OR UNLIQUIDATED IS ATTACHED HERETO AS EXHIBIT H. The following chart summarizes which Classes of Claims and Interests are Impaired and which Classes of Claims are Unimpaired under the Plan \DOCS_LA:

66 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA CLASS None DESCRIPTION Administrative Claims and Priority Tax Claims IMPAIRED/ UNIMPAIRED Unimpaired VOTING STATUS Not Entitled to Vote Class 1 Secured Claims Unimpaired Not Entitled to Vote - Deemed to Accept Plan Class 2 Priority Non-Tax Claims Unimpaired Not Entitled to Vote - Deemed to Accept Plan Class 3 General Unsecured Claims Impaired Entitled to Vote on Plan Class 4 Other Unsecured Claims Impaired Entitled to Vote on Plan Class 5 Interests Impaired Not Entitled to Vote - Deemed to Reject Plan If you are a Holder of a Claim in Class 3 or Class 4, accompanying this Disclosure Statement is a Ballot for casting your vote(s) on the Plan and a pre-addressed envelope for the return of the Ballot. B. Standards for Acceptance of a Class The Bankruptcy Code defines acceptance of a Plan by a class of claims as acceptance by Holders of at least two-thirds in dollar amount and more than one-half in number of the claims of that class that actually cast ballots for acceptance or rejection of the Plan. Thus, acceptance by a Class of Claims occurs only if at least two-thirds in dollar amount and a majority in number of the Holders of such Claims voting cast their Ballots in favor of acceptance. CREDITORS, INTEREST HOLDERS AND OTHER PARTIES IN INTEREST ARE CAUTIONED TO REVIEW THE DISCLOSURE STATEMENT ORDER FOR A FULL UNDERSTANDING OF VOTING REQUIREMENTS, INCLUDING, WITHOUT LIMITATION, COMPLETION AND SUBMISSION OF BALLOTS. X. CONFIRMATION OF THE PLAN Under the Bankruptcy Code, the following steps must be taken to confirm the Plan \DOCS_LA:

67 A. Confirmation Hearing Section 1128(a) requires the Bankruptcy Court, after notice, to hold a hearing on confirmation of a Plan. By order of the Bankruptcy Court, the Confirmation Hearing has been scheduled for, 2009 at :00 _.m. (Pacific Time) at the United States Bankruptcy Court PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA for the Central District of California, 255 East Temple Street, Courtroom 1675, Los Angeles, California, before the Honorable Samuel L. Bufford. The Confirmation Hearing may be adjourned from time to time by the Bankruptcy Court without further notice except for an announcement made at the Confirmation Hearing or any adjournment thereof. Section 1128(b) provides that any party in interest may object to confirmation of a plan. Any objection to confirmation of the Plan must be in writing, conform to the Federal Rules of Bankruptcy Procedure and the Local Rules of the Bankruptcy Court, set forth the name of the objecting party, the nature and amount of the Claim or Interest held or asserted by the objecting party against the Debtor s Estate, the basis for the objection, and the specific grounds therefor. The objection, together with proof of service thereof, must then be filed no later than, 2009 at 5:00 p.m. (Pacific Time) with the Bankruptcy Court, and served upon: (1) counsel to the Debtor, Pachulski Stang Ziehl & Jones LLP, Santa Monica Boulevard, 11 th Floor, Los Angeles, California 90067, Attn: Teddy Kapur, Esq.; (2) Office of the United States Trustee, 725 S. Figueroa Street, Suite 2600, Los Angeles, CA 90017, Attn: Russell Clementson, Esq.; and (3) counsel to the Official Committee of Unsecured Creditors, Buchalter Nemer, PC, 1000 Wilshire Blvd., Suite 1500, Los Angeles, CA 90017, Attn: Benjamin Seigel, Esq. Objections to confirmation of the Plan are governed by Bankruptcy Rule UNLESS AN OBJECTION TO CONFIRMATION IS TIMELY AND PROPERLY SERVED AND FILED, IT MAY NOT BE CONSIDERED BY THE BANKRUPTCY COURT \DOCS_LA:

68 B. Requirements for Confirmation of the Plan At the Confirmation Hearing, the Bankruptcy Court will confirm the Plan only if all of the requirements of section 1129 of the Bankruptcy Code are met. Among the requirements for confirmation are that the Plan (1) is accepted by all Impaired Classes of Claims and Interests or, if rejected by an Impaired Class, that the Plan does not discriminate unfairly and is fair and equitable as to such Class, (2) is feasible, and (3) is in the best interests of Holders of Claims and Interests Impaired under the Plan. PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Acceptance Claims in Class 3 and Class 4 are Impaired, the Holders of such Claims are entitled to vote on the Plan and, therefore, these Classes must accept the Plan in order for the Plan to be confirmed without application of the fair and equitable test, described below, to such non-accepting Class. As stated above, a Class of Claims will have accepted the Plan if at least two-thirds in dollar amount and a majority in number of the Claims of each such Class (other than any Claims of creditors designated under section 1126(e)) have voted to accept or reject the Plan. An Impaired Class of Interests that votes will have accepted the Plan if Holders (other than those designated under section 1126(e)) of at least two-thirds in amount of the Allowed Interests actually voting in such Class have voted to accept the Plan. Claims in Classes 1 and 2 are Unimpaired by the Plan, and the Holders thereof are conclusively presumed to have accepted the Plan. Interests in Class 5 are deemed to have rejected the Plan. 2. Fair and Equitable Test The Debtor will seek to have the Plan confirmed notwithstanding the rejection or deemed rejection of the Plan by any Impaired Class of Claims or Interests. To obtain such confirmation, it must be demonstrated to the Bankruptcy Court that the Plan does not discriminate unfairly and is fair and equitable with respect to such dissenting Impaired Class. A plan does not discriminate \DOCS_LA:

69 unfairly if the legal rights of a dissenting class are treated in a manner consistent with the treatment of other classes whose legal rights are substantially similar to those of the dissenting class, and if no class receives more than it is entitled to for its claims or interests. The Debtor believes that the Plan satisfies this requirement. The Bankruptcy Code establishes different fair and equitable tests for secured claims, unsecured claims and interests, as follows: a. Secured Claims Either the Plan must provide (i) that the Holders of such Claims retain the liens securing such PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA claims, whether the property subject to such liens is retained by the Debtor or transferred to another entity, to the extent of the Allowed amount of such Claims, and each Holder of a Claim receives deferred cash payments totaling at least the Allowed amount of such Claim, of a value, as of the Effective Date of the Plan, of at least the value of such Holder s interest in the Estate s interest in such property; (ii) for the sale of any property that is subject to the liens securing such Claims, free and clear of such liens, with such liens to attach to the proceeds of such sale; or (iii) for the realization by such Holders of the indubitable equivalent of such Claims. b. Unsecured Claims Either (i) each Holder of an Impaired Unsecured Claim receives or retains under the Plan property of a value equal to the amount of its Allowed Claim, or (ii) the Holders of Claims and Interests that are junior to the Claims of the dissenting Class will not receive any property under the Plan c. Interests Either (i) each Interest Holder will receive or retain under the Plan property of a value equal to the greater of (y) the fixed liquidation preference or redemption price, if any, of such Interests; (z) the value of the Interests, or (ii) the Holders of Interests that are junior to the Interests will not receive any property under the Plan \DOCS_LA:

70 THE DEBTOR BELIEVES THAT THE PLAN MAY BE CONFIRMED ON A NONCONSENSUAL BASIS (PROVIDED AT LEAST ONE IMPAIRED CLASS OF CLAIMS VOTES TO ACCEPT THE PLAN). ACCORDINGLY, THE DEBTOR WILL DEMONSTRATE AT THE CONFIRMATION HEARING THAT THE PLAN SATISFIES THE REQUIREMENTS OF SECTION 1129(b) AS TO ANY NON-ACCEPTING CLASS. 3. Feasibility The Bankruptcy Court must also determine that the Plan is feasible and is not likely to be followed by liquidation or further reorganization of the Debtor. To determine whether the Plan meets this requirement, the Debtor has analyzed the ability of the Reorganized Debtor to meet its PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA post-confirmation obligations; the Reorganized Debtor does not have any obligations under the Plan. With respect to the Reorganizing Debtor, based on the projections described in Exhibit E attached hereto and the operational, business and other assumptions set forth therein, the Debtor believes that it will have the financial capability to satisfy its obligations following the Effective Date. Based on the analysis and related information set forth in Exhibit E attached hereto, the Debtors will seek a ruling that the Plan is feasible in connection with the Confirmation of the Plan. 4. Best Interests Test With respect to each Impaired Class of Claims and Interests, confirmation of the Plan requires that each such Holder either (a) accepts the Plan, or (b) receives or retains under the Plan property of a value, as of the Effective Date of the Plan, that is not less than the value such Holder would receive or retain if the Debtor were liquidated under chapter 7 of the Bankruptcy Code. This analysis requires the Bankruptcy Court to determine what the Holders of Allowed Claims and Allowed Interests in each Impaired Class would receive from the liquidation of the Debtor s Assets in the context of a chapter 7 liquidation case. In a chapter 7 liquidation, it is highly unlikely that there would be more money available for distribution to Creditors than under the Plan \DOCS_LA:

71 First, in a chapter 7 case the New Value Contributors would not contribute the $1.5 million New Value Contribution and, accordingly, in a chapter 7 case there would be $1.5 million less available to pay Allowed Claims. Second, in a liquidation setting there is a high risk that collections of the Debtor s account receivables will materially deteriorate. Third, as further discussed below, distributions to Creditors in a chapter 7 case would likely be materially delayed, given the substantial time that a chapter 7 trustee would require to become PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA familiar with the Avoidance Actions. Third, as further set forth below, the Estate s administrative costs would likely be higher if the Case were converted to a chapter 7 proceeding because, among other things, (i) the chapter 7 trustee and his or her professionals and agents would incur substantial fees and costs in getting up to speed regarding the Debtor, and (ii) under section 326(a), a chapter 7 trustee is entitled to compensation based upon a percentage of all monies disbursed or turned over in the case to parties in interest (excluding the Debtor) and thus, recovery to Creditors would also be decreased by such cost. More specifically, in a chapter 7 case, the trustee would be entitled to seek a sliding scale commission based upon the funds distributed by such trustee to Creditors, even though the Debtor has already accumulated a significant amount of monies and has already incurred the expense associated with generating those funds. Pursuant to the Bankruptcy Code s guidelines for compensation to chapter 7 trustees, based on certain assumptions, a trustee could be entitled to seek significant sums in compensation for distribution of funds in a chapter 7 case, as set forth more fully in Exhibit D. Although under section 326, the trustee s compensation is capped by this sliding scale, and a trustee would be required to demonstrate the reasonableness of commissions in relation to work actually performed or results obtained, the Debtor cannot predict whether the trustee will seek \DOCS_LA:

72 or obtain a straight commission based solely on distributions or some lesser amount. Nonetheless, whatever the amount of compensation for a trustee, there is a reasonable likelihood that Creditors would pay again for the funds accumulated by the Debtor because the chapter 7 trustee would be entitled to receive a commission in some amount for distributing the funds handed over to the trustee by the Debtor. In addition, a chapter 7 trustee would employ legal counsel and other professionals and advisors such as accountants. If the Debtor s current counsel and advisors were not retained by the PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA chapter 7 trustee or they decided not to take on such engagements, the chapter 7 trustee would employ new professionals who would have to expend significant time and resources to get up to speed. These additional administrative expenses would in likelihood be substantial and would be paid ahead of general unsecured creditors. Fourth, it is also anticipated that a chapter 7 liquidation would result in a significant delay in the payments to Creditors. Among other things, pursuant to Bankruptcy Rule 3002(c), a chapter 7 case would trigger a new bar date for filing Claims that would be more than ninety days following conversion of the Case to chapter 7. Hence, a chapter 7 liquidation would not only delay distribution but also raise the prospect of additional claims that were not asserted in the Case. The Debtor has prepared the hypothetical Plan Distribution Analysis and Chapter 7 Liquidation Analysis attached as Exhibit D to the Disclosure Statement to assist Holders of Impaired Claims and Interests to reach their determination as to whether to accept or reject the Plan. The liquidation analysis indicates the estimated values which may be obtained by Classes of Claims and of Interests if the assets of the Debtor are liquidated pursuant to chapter 7, as an alternative to the scenario proposed by the Plan. The liquidation analysis is provided solely to disclose the effects of a hypothetical liquidation of the Debtor under chapter 7 of the Bankruptcy Code, subject to the assumptions set forth in Exhibit D \DOCS_LA:

73 The Debtor consulted its accountants, Pope & Associates, ASG, and the valuation reports prepared by Medical Development Specialists, Inc. ( MDS ) dated July 28, 2008 and June 5, 2009 in preparing Exhibit D. In particular, MDS determined the realization, present value and cost of collection adjustments reflected in Schedule 1 to Exhibit D after examining the Debtor s historical collections records and meeting with management. Underlying the analyses set forth in Exhibit D are a number of estimates and assumptions that, although developed and considered reasonable by management of the Debtor, are inherently subject to economic and business uncertainties and PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA contingencies beyond the control and knowledge of the Debtor. Accordingly, there can be no assurance that the values assumed in the Plan Distribution Analysis and/or Chapter 7 Liquidation Analysis would be realized. In addition, any liquidation that would be undertaken would necessarily take place in future circumstances which cannot currently be predicted. While the liquidation analysis is necessarily presented with numerical specificity, if the Debtor were liquidated under chapter 7, the actual liquidation proceeds could vary, perhaps substantially, from the amounts set forth in Exhibit D. No representation or warranty can be or is being made with respect to the actual proceeds that could be received in a chapter 7 liquidation and/or under the Plan. Nothing contained in the analyses set forth in Exhibit D is intended or may constitute a concession or admission of the Debtor for any other purpose. Accordingly, the Debtor believes that if Creditors could or would receive anything in a chapter 7 liquidation, such Persons may be expected to receive smaller distributions pursuant to a chapter 7 liquidation than under the Plan, as set forth more fully in Exhibit D XI. ALTERNATIVES TO CONFIRMATION OF THE PLAN The Debtor has evaluated all alternatives to the Plan. After studying these alternatives, the Debtor has concluded that the Plan is the best alternative, and will maximize recoveries by parties in interest, assuming confirmation of the Plan \DOCS_LA:

74 XII. CERTAIN U.S. FEDERAL TAX CONSEQUENCES OF THE PLAN A. Introduction The following discussion summarizes certain federal income tax consequences of the implementation of the Plan to the Holders of General Unsecured Claims. The following summary PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA does not address the federal income tax consequences to Holders of any other Claims and Claims that are not Impaired by the Plan, or to Interest Holders. The following summary is based on the Internal Revenue Code of 1986, as amended (the Code ), Treasury Regulations promulgated and proposed thereunder, judicial decisions and published administrative rules and pronouncements of the Internal Revenue Service ( IRS ) as in effect on the date hereof. Changes in such rules or new interpretations thereof may have retroactive effect and could significantly affect the federal income tax consequences described below. Further, any discussion of the Class 4 Creditor Trust and the powers, obligations and/or actions of the Class 4 Creditor Trustees that may be set forth below is subject to the applicable provisions of the Plan and the Class 4 Creditor Trust Agreement; if and to the extent that there is any inconsistency between such discussion on the one hand and the Plan and the Class 4 Creditor Trust Agreement on the other hand, the terms of the latter documents shall control. Creditors and Interest Holders should read the Plan and the Class 4 Creditor Trust Agreement in their entirety The federal income tax consequences of the Plan are complex and are subject to significant uncertainties. The Debtor has not requested a ruling from the IRS or an opinion of counsel with respect to any of the tax aspects of the Plan. Thus, no assurance can be given as to the interpretation that the IRS or a reviewing court might adopt. In addition, this summary does not address foreign, state or local tax consequences of the Plan, nor does it purport to address the federal income tax consequences of the Plan to special classes of taxpayers (such as foreign taxpayers, broker-dealers, banks, mutual funds, insurance companies, financial institutions, small business investment \DOCS_LA:

75 1 companies, regulated investment companies, tax-exempt organizations, investors in pass-through PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA entities, Holders that hold Claims as part of a hedge, straddle or conversion, Holders who acquired their Claims as compensation, and Holders who do not hold their Claims as capital assets). Accordingly, the following summary of certain federal income tax consequences is for informational purposes only and is not a substitute for careful tax planning and advice based upon the individual circumstances pertaining to a Holder of a Claim or Interest. All Holders of Claims or Interests are urged to consult their own tax advisors for the federal, state, local and other tax consequences applicable under the Plan. IRS Circular 230 notice: to ensure compliance with requirements imposed by the IRS, please be advised that any written U.S. tax advice contained in this Disclosure Statement (including any attachment) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein. B. Consequences to the Debtor In general, the Code provides that a debtor in a bankruptcy case is not taxable on cancellation of debt ( COD ) income, but must reduce certain of its tax attributes (such as its net operating loss (NOL) carryforwards and its tax basis in its assets) by the amount of COD income. COD income results when the amount of debt discharged exceeds the consideration given in exchange therefor, and is equal to such excess amount. It is likely that a cancellation of debt will be deemed to have occurred on the Effective Date. Any reduction in tax attributes does not occur, however, until the end of the taxable year or, in the case of asset basis reduction, the first day of the taxable year following the taxable year in which the COD is incurred. XIII. SECURITIES LAW MATTERS The securities law considerations detailed below pertain to the issuance of New Common Stock under the Plan. The following discussion relates to certain securities laws that restrict \DOCS_LA:

76 transfers of New Common Stock and that may be applicable to transfers of New Common Stock subsequent to their issuance under the Plan. The Debtor does not intend to file a registration statement under the Securities Act or any other federal or state securities laws with respect to the issuance or resale of any New Common Stock. To the extent set forth herein, the Debtor and the Reorganized Debtor will rely on Bankruptcy Code section 1145(a) to exempt from registration under the Securities Act and any applicable state securities laws the offer, sale and issuance of the New Common Stock pursuant to PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA the Plan. Generally, Bankruptcy Code section 1145(a)(1) exempts the offer and sale of securities pursuant to a plan of reorganization from such registration requirements if the following conditions are satisfied: (i) the securities are issued by a debtor (or its affiliate or successor to the debtor) under a plan of reorganization, (ii) the recipients of the securities hold a claim against, an interest in, or a claim for an administrative expense against, the debtor, and (iii) the securities are issued entirely in exchange for the recipient s claim against or interest in the debtor, or are issued principally in such exchange and partly for cash or property. There is no public market for the New Common Stock, and none is expected to develop in the foreseeable future. Recipients of the New Common Stock should be prepared to hold the New Common Stock for an indefinite period of time and must be able to afford the complete loss of their investment. In principal, in the event there is a public market for the New Common Stock, the New Common Stock distributed under the Plan pursuant to the exemption provided under Bankruptcy Code section 1145 may be eligible for resale by the holders thereof, except for any such holder that is deemed to be an underwriter as defined in Bankruptcy Code section 1145(b)(1) with respect to the New Common Stock. Generally, Bankruptcy Code section 1145(b)(1) defines an underwriter \DOCS_LA:

77 as any person who (i) purchases a claim against, or an interest in, a debtor with a view towards distribution of any security to be received in exchange for such claim or interest, (ii) offers to sell securities issued pursuant to a bankruptcy plan for the holders of such securities, (iii) offers to buy securities issued pursuant to a bankruptcy plan from persons receiving such securities, if the offer to buy is made with a view towards distribution of such securities, or (iv) is an issuer within the meaning of Section 2(11) of the Securities Act. Section 2(11) of the Securities Act provides that the term issuer includes all persons who, directly or indirectly, through one or more intermediaries, PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA control, or are controlled by, or are under common control with, an issuer of securities. Under Rule 405 of Regulation C under the Securities Act, the term control means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. Accordingly, an officer or director of a reorganized debtor (or its affiliate or successor) under a plan of reorganization may be deemed to control such debtor (and therefore be an underwriter for purposes of Bankruptcy Code section 1145), particularly if such management position is coupled with the ownership of a significant percentage of a debtor s (or its affiliate s or successor s) voting securities. Holders of New Common Stock who are deemed to be underwriters within the meaning of Bankruptcy Code section 1145(b)(1) or who may otherwise be deemed to be underwriters of, or to exercise control over, the Reorganized Debtor within the meaning of Rule 405 of Regulation C under the Securities Act should, assuming all other conditions of Rule 144A are met, be entitled to avail themselves of the safe harbor resale provisions thereof. Rule 144A, promulgated under the Securities Act, provides a non-exclusive safe harbor exemption from the registration requirements of the Securities Act for resale to certain qualified institutional buyers of securities which are not securities of the same class of securities then listed on a national securities exchange (registered as such under Section 6 of the Exchange Act) or quoted in a U.S. automated interdealer quotation \DOCS_LA:

78 system (e.g., NASDAQ). Under Rule 144A, a qualified institutional buyer is defined to include, among other persons (e.g., dealers registered as such pursuant to Section 15 of the Exchange Act and banks as defined in Section 3(a)(2) of the Securities Act), any Entity which purchases securities for its own account or for the account of another qualified institutional buyer and which (in the aggregate) owns and invests on a discretionary basis at least $100 million in the securities of unaffiliated issuers. At the Confirmation Hearing, the Debtor will request that the exemption from the PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA requirements of Section 5 of the Securities Act, 15 U.S.C. 77e, and any state or local law requiring registration or qualification for the offer or sale of a security, provided under Bankruptcy Code section 1145 will apply to the issuance by the Reorganized Debtor of the New Common Stock and the distribution of such New Common Stock pursuant to the Plan. Because no public market will exist for the New Common Stock, and because of the complex, subjective nature of the question of whether a particular person may be an underwriter, the Debtor makes no representation concerning the ability of any person to dispose of the New Common Stock. Therefore, a recipient of New Common Stock should consult with legal counsel concerning the eventual disposition of the New Common Stock. XIV. RECOMMENDATION The Debtor recommends that all Creditors receiving a Ballot vote in favor of the Plan. The Debtor believes that the Plan is feasible and maximizes recoveries to all Creditors and, thus, is in their best interests. The Plan as structured, among other things, allows said parties to participate in distributions in excess of those that would be available if the Debtor were liquidated under chapter 7 of the Bankruptcy Code, and minimizes delays in recoveries to all Creditors Dated: August 25, 2009 S&B SURGERY CENTER, \DOCS_LA:

79 1 Chapter 11 Debtor and Debtor In Possession 2 /s/ John Seitz John Seitz President, Ambulatory Surgical Group, LLC, Financial and operational manager to the Debtor 6 PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA Respectfully submitted by, Pachulski Stang Ziehl & Jones LLP BY: /s/ Samuel R. Maizel Samuel R. Maizel Jeffrey L. Kandel Teddy M. Kapur Attorneys for S&B Surgery Center, Debtor and Debtor in Possession \DOCS_LA:

80 1 EXHIBITS EXHIBIT A - The Plan EXHIBIT B Disclosure Statement Order PACHULSKI STANG ZIEHL & JONES LLP A TTORNEYS A T LAW LOS A NGELES, CALIFORNIA EXHIBIT C - Creditor Trust Agreement Estates Assets EXHIBIT D - Liquidation Analysis EXHIBIT E Feasibility Analysis EXHIBIT F List of Assets EXHIBIT G - Potential Parties to Causes of Action EXHIBIT H - List of Claims filed as Not Contingent, Unliquidated or Disputed EXHIBIT I - List of Executory Contracts and Leases to be Assumed EXHIBIT J Historical Financial Statements \DOCS_LA:

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