Borrowings and Capital Lease Obligations

6 Months Ended

Jun. 30, 2016

Borrowings and Capital Lease Obligations

Note 9 – Borrowings and Capital Lease Obligations

The Company’s short-term debt obligations are as of June 30, 2016 and December 31, 2015 are as follows:

Rate (1)

June 30,

2016

December 31,

2015

Insurance premium financings

4.8 - 5.0%

425,653

308,769

(1) Effective rate as of June 30, 2016

The Company has various insurance premium financing notes payable that bear interest rates ranging from 4.8% to 5.0%. The insurance notes mature in October 2016 and the Company is required to make monthly principal and interest payments totaling $134,051.

The Company’s long-term debt obligations at June 30, 2016 and December 31, 2015 are as follows:

	Rate (1)		Maturity Date	June 30, 2016			December 31, 2015
Senior Lender:
Note payable		4.3%	Dec. 2020	$	27,361,606		$	28,375,000
Line of credit		4.3%	Dec. 2018		14,500,000			10,500,000
Unamortized loan origination costs					(579,962	)		(644,403	)
Other Lenders:
Note payable - subordinated note		3.0%	Dec. 2019		7,900,000			7,900,000
Total					49,181,644			46,130,597
Less: Current portion of long-term debt					(9,028,572	)		(4,601,320	)
Long-term debt				$	40,153,072		$	41,529,277
(1) Effective rate as of June 30, 2016

Senior Credit Facility

Effective December 31, 2015, the Company entered into a Credit Agreement (the “Senior Credit Facility”) with Texas Capital Bank, National Association, serving as the lead bank for two other banks (collectively “Senior Lenders”). The Senior Credit Facility replaced and consolidated all of the Company’s and the Company’s subsidiaries’ debt in the original principal amount of $28.4 million, which is referred to as the Term Loan, and provides for an additional revolving loan in the amount of $15.5 million, which is referred to as the Revolving Loan. The Company has also entered into a number of ancillary agreements in connection with the Senior Credit Facility, including deposit account control agreements, subsidiary guarantees, security agreements and promissory notes.

Maturity Dates. The Term Loan matures on December 30, 2020 and the Revolving Loan matures on December 30, 2018.

Interest Rates. Borrowings under the Senior Credit Facility are made, at the Company’s option, as either Base Rate loans or LIBOR loans. “Base Rate” for any day is the highest of (i) the Prime Rate, (ii) the Federal Funds Rate plus one half of one percent (0.5%), and (iii) Adjusted LIBOR plus one percent (1.00%). LIBOR loans are based on either the one month, two month or three month LIBOR rate at the Company’s option. From August 19, 2016 to June 30, 2017, all outstanding amounts under the Senior Credit Facility shall bear interest based on the Base Rate and the Base Rate shall not at be less than 3.5%. The interest rate is either a Base Rate or LIBOR plus the Applicable Margins based on our Senior Debt to EBITDA Ratio, as defined.

The Applicable Margins are as follows:

Pricing Level	Senior Debt to EBITDA Ratio	Base Rate Portion		LIBOR Portion and Letter of Credit Fee		Commitment Fee
1	< 2.0 : 1.0		2.75%		3.75%		0.375%
2	≥ 2.0 : 1.0 but < 2.5 : 1.0		3.00%		4.00%		0.375%
3	≤ 2.5 : 1.0		3.25%		4.25%		0.375%

The Applicable Margin in effect will be adjusted within 45 days following the end of each quarter based on the Company’s Senior Debt to EBITDA ratio. The Senior Debt to EBITDA Ratio is calculated by dividing all of our senior indebtedness (excluding capital lease obligations for Foundation Surgical Hospital of Houston), that is by the Company’s EBITDA for the preceding four fiscal quarters. EBITDA is defined in the Senior Credit Facility as the Company’s net income plus (b) the sum of the following: interest expense; income taxes; depreciation; amortization; extraordinary losses determined in accordance with GAAP; cash and noncash stock compensation expense; and other non‑recurring expenses reducing such net income which do not represent a cash item in such period or any future period, minus (c) the sum of the following: income tax credits; extraordinary gains determined in accordance with GAAP; and all non‑recurring, non‑cash items increasing net income.

Interest and Principal Payments. The Company is required to make quarterly payments of principal and interest on the Term Loan. The first four quarterly payments on the Term Loan will be $1,013,393, on the first day of each April, July, October, and January during the term hereof, commencing April 1, 2016. The Company is required to make quarterly payments on the Revolving Loan equal to the accrued and unpaid interest. All unpaid principal and interest on the Term Loan and Revolving Loan must be paid on the respective maturity dates of each Loan.

Borrowing Base. The Company’s ability to borrow money under the Revolving Loan is limited to the Company’s Borrowing Base. The Company’s Borrowing Base is equal to the sum of (i) 80% of the eligible account of Foundation Surgical Hospital of San Antonio, not to exceed the outstanding principal balance of the intercompany note payable by the San Antonio Hospital to the Company, (ii) 80% of the eligible account of Foundation Surgical Hospital of El Paso, not to exceed the outstanding principal balance of the intercompany note payable by the El Paso Hospital to the Company, and (iii) 80% of the eligible account of Foundation Surgical Hospital of Houston, not to exceed the outstanding principal balance of the intercompany note payable by the Houston Hospital to the Company.

Mandatory Prepayments. The Company must make mandatory prepayments of the Term Loans in the following situations, among others:

The Company must apply 100% of the net proceeds from the sale of worn out and obsolete equipment not necessary or useful for the conduct of the Company’s business;

Commencing with the fiscal year ending December 31, 2016, the Company must apply 50% of our Excess Cash Flow for such fiscal year to the installment payments due on the Company’s Term Loan;

The Company must apply 50% of the net cash proceeds from the issuance of equity interests to the installment payments due on the Company’s Term Loan; provided that no prepayment need to be made for the year ended December 31, 2016 once the Company has made mandatory prepayments in excess of $10,000,000;

The Company must apply 100% of the net cash proceeds from the issuance of debt (other than certain permitted debt) to the prepayment of the Term Loan;

The Company must prepay 100% of the net cash proceeds paid to the Company other than in the ordinary course of business; and

The Company must prepay 100% of the net cash proceeds the Company receives from the prepayment of intercompany notes.

Voluntary Prepayments. The Company may prepay amounts under the Term Loan or Revolving Loan at any time provided that the Company is required to pay a prepayment fee of 2% of the amount prepaid if payment is made prior to the first anniversary, 1.5% if the prepayment is made after the first anniversary but prior to the second anniversary and 1% if the prepayment is made after the second anniversary but prior to the third anniversary.

Guaranties. Each of the Company’s direct or indirect wholly-owned subsidiaries jointly and severally and unconditionally guaranty payment of the Company’s obligations owed to Lenders.

Financial Covenants:

Debt to EBITDA Ratio. As of December 31, 2015, the Company must maintain a Debt to EBITDA Ratio, not in excess of 3.50 to 1.00. Thereafter, the Company must maintain a Debt to EBITDA Ratio as of the last day of any fiscal quarter, not in excess of (a) 3.25 to 1.00 for the fiscal quarters ending December 31, 2015, March 31, 2016 and June 30, 2016; (b) 2.75 to 1.00 for the fiscal quarters ending June 30, 2017 and September 30, 2017; (c) 2.50 to 1.00 for the fiscal quarters ending December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018; and (d) 2.25 to 1.00 for the fiscal quarter ending December 31, 2018 and at the end of each fiscal quarter thereafter. As of June 30, 2016, the Company’s Debt to EBITDA Ratio was 7.21.

Senior Debt to EBITDA Ratio. As of December 31, 2015, the Company must maintain a Senior Debt to EBITDA Ratio not in excess of 3.00 to 1.00. Thereafter, the Company must maintain a Senior Debt to EBITDA Ratio as of the last day of any fiscal quarter, not in excess of (a) 3.00 to 1.00 for the fiscal quarters ending December 31, 2015, March 31, 2016 and June 30, 2016; (b) 2.50 to 1.00 for the fiscal quarters ending June 30, 2017 and September 30, 2017; (c) 2.25 to 1.00 for the fiscal quarters ending December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018; and (d) 2.00 to 1.00 for the fiscal quarter ending December 31, 2018 and at the end of each fiscal quarter thereafter. As of June 30, 2016, the Company’s Senior Debt to EBITDA Ratio was 6.23.

Pre-Distribution Fixed Charge Coverage Ratio. The Company must maintain as of the last day of any fiscal quarter (excluding the fiscal quarters ending September 30, 2016, December 31, 2016 and March 31, 2017) a Pre-Distribution Fixed Charge Coverage Ratio in excess of 1.30 to 1.00. As of June 30, 2016, the Company’s Pre-Distribution Fixed Charge Coverage Ratio was 0.63.

Post-Distribution Fixed Charge Coverage Ratio. The Company must maintain as of the last day of any fiscal quarter (excluding the fiscal quarters ending September 30, 2016, December 31, 2016 and March 31, 2017), a Post-Distribution Fixed Charge Coverage Ratio in excess of 1.05 to 1.00. As of June 30, 2016, the Company’s Post-Distribution Fixed Charge Coverage Ratio was 0.48.

EBITDA. The Company must have EBITDA of at least $1,750,000 for the fiscal quarter ending September 30, 2016 and $4,250,000 for the fiscal quarter ending December 31, 2016 and each quarter thereafter.

Capital Expenditures. The Company shall not make capital expenditures in excess of $5,000,000 during any fiscal year.

As of June 30, 2016, the Company was not in compliance with the Senior Credit Facility financial covenants; however the Senior Lenders have waived the financial covenant violations. As described above, the Senior Lenders have modified the financial covenants for the remainder of 2016.

Collateral. Payment and performance of the Company’s obligations under the Senior Credit Facility are secured in general by all of the Company and the Company’s guarantors’ assets.

Negative Covenants. The Senior Credit Facility has restrictive covenants that, among other things, limits or restricts the Company’s ability to do the following without the consent of the Senior Lenders:

Incur additional indebtedness;

Create or incur additional liens on the Company’s assets;

Engage in mergers or acquisitions;

Pay dividends or make any other payment or distribution in respect of the Company’s equity interests;

Make loans and investments;

Issue equity, except for stock compensation awards to employees;

Engage in transaction with affiliates;

Dispose of the Company’s assets, except for certain approved assets;

Engage in any sale and leaseback arrangements; and

Prepay debt to debtors other than the Senior Lenders.

Defaults and Remedies. In addition to the general defaults of failure to perform our obligations under the Loan Agreement, events of default also include the occurrence of a change in control, as defined, and the loss of our Medicare or Medicaid certification, collateral casualties, entry of a uninsured judgment of $500,000 or more, failure of first liens on collateral and the termination of any of the Company’s management agreements that represent more than 10% of the Company’s management fees for the preceding 18 month period. In the event of a monetary default, all of the Company’s obligations due under the Senior Credit Facility shall become immediately due and payable. In the event of a non-monetary default, the Company has 10 days or in some cases three days to cure before the Senior Lenders have the right to declare the Company’s obligations due under the Senior Credit Facility immediately due and payable.

Modification and Waiver. On May 11, 2016, the Company entered into a Loan Modification Agreement and Waiver with its Senior Lenders (“Senior Credit Modification One”). Under the Senior Credit Modification One, the Company’s Revolving Loan was increased from $12.5 million to $15.5 million. The $3.0 million of borrowing represents a temporary advance that must be repaid by July 31, 2016 (the “Temporary Advance”). In addition, the Senior Lenders consented to the sale of certain of the Company’s assets and waived certain technical defaults in the Senior Credit Facility related to timing deadlines for certain financial information provided by the Company to the Senior Lenders for the UGH Acquisition. On August 19, 2016, the Company entered into a Loan Modification Agreement and Waiver with its Senior Lenders (“Senior Credit Modification Two”). Under the Senior Credit Modification Two, the Senior Lenders waived the financial covenant violations for the fiscal quarter ended June 30, 2016 and modified the financial covenants for the fiscal quarters ending September 30, 2016 and December 31, 2016 by replacing the Debt to EBITDA Ratio, Senior Debt to EBITDA Ratio, and Pre and Post Distribution Fixed Charge Coverage Ratios with the EBITDA covenant. In addition, the Senior Lenders extended the due date for the repayment of the Temporary Advance to January 15, 2017. During the period from August 19, 2016 to June 30, 2017, the Senior Credit Modification Two prohibits the Company from making any interest or redemption payments to its preferred noncontrolling interest holders (see Note 10 – Preferred Noncontrolling Interests) and prohibits the Company from making any payments on the $7.9 million subordinated note payable. Under the Senior Credit Modification Two, the Company must also maintain total cash balances in excess of $2 million (“Minimum Cash Balances”) and the Company’s total accounts payable past due by 91 days or more must be less than $6.3 million.

At June 30, 2016, future maturities of long-term debt were as follows:

Years ended June 30:
2017	$	9,028,572
2018		5,883,582
2019		17,383,582
2020		4,073,786
2021		12,812,122
Thereafter		—

The Company’s capital lease obligations as of June 30, 2016 and December 31, 2015 are as follows:

	Rate (1)		Maturity Date	June 30, 2016			December 31, 2015
Building		7.5%	Jul. 2036	$	24,168,540		$	24,424,341
Equipment	5.1 - 9.1%		Mar. 2017 - Dec. 2020		8,276,219			9,185,320
Total					32,444,759			33,609,661
Less: Current portion of capital leases					(4,071,318	)		(4,478,968	)
Capital leases obligations				$	28,373,441		$	29,130,693
(1) Effective rate as of June 30, 2016

The Company has entered into a capital lease covering the FSH Houston hospital facility, see Note 4 - Acquisition. The capital lease bears an interest at fixed rate of 7.5%. The Company is required to make monthly principal and interest payments under the capital lease totaling $193,611. The Company is also required to maintain a $1.0 million letter of credit payable to the lessor in the event of a default on the lease.

The Company has entered into various capital leases that are collateralized by certain computer and medical equipment used by the Company. The capital leases bear interest at fixed rates ranging from 5.1% to 9.1%. The Company is required to monthly principal and interest payments under the capital leases totaling $278,142.

At June 30, 2016, future maturities of capital lease obligations were as follows:

Years ended June 30:
2017	$	4,071,318
2018		2,942,345
2019		1,560,415
2020		1,630,374
2021		1,227,285
Thereafter		21,013,022

Foundation Healthcare, Inc. 10-Q