LONG-TERM DEBT, INTEREST RATE SWAP AND CAPITALIZED LEASE OBLIGATIONS

Long-term debt consists of the following:



	December 31,
	2016			2015
Mortgage loan with a syndicate of banks; issued in March 2011, amended May 2013; and further amended February 2016; payable monthly, interest at 4.0% above LIBOR, a portion of which is fixed at 5.79% based on the interest rate swap described below.	$	58,792,000		$	47,401,000
Acquisition loan with The PrivateBank, issued in February 2016, interest at 4.75% above LIBOR.	6,289,000			—
Revolving credit facility borrowings payable to a bank; entered into in March 2010; amended in March 2011 and further amended May 2013, March 2014, February 2016 and October 2016; secured by receivables of the Company; interest at 4.0% above LIBOR.	15,000,000			12,900,000
	80,081,000			60,301,000
Less current portion	(6,663,000		)	(6,276,000		)
	$	73,418,000		$	54,025,000

As of December 31, 2016, the Company's weighted average interest rate on long-term debt, including the impact of the interest rate swap, was approximately 5.17%.

The Company has agreements with a syndicate of banks for a mortgage term loan ("Original Mortgage Loan") and the Company’s revolving credit agreement ("Original Revolver"). On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") which modified the terms of the Original Mortgage Loan and the Original Revolver Agreements dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to $100,000,000 allocated between a $72,500,000 Mortgage Loan ("Amended Mortgage Loan") and a $27,500,000 Revolver ("Amended Revolver"). The Amended Mortgage Loan consists of $60,000,000 term and $12,500,000 acquisition loan facilities. Loan acquisition costs associated with the Amended Mortgage Loan and the Amended Revolver were capitalized in the amount of $2,162,000 and are being amortized over the five-year term of the agreements. Additionally, the Glasgow term loan balance of $5,000,000 was consolidated into the new Credit Agreement.

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72,500,000 with a five-year maturity through February 26, 2021, and a $27,500,000 Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities are based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000,000. As of December 31, 2016, the interest rate related to the Amended Mortgage Loan was 4.75%. The Amended Mortgage Loan is secured by 17 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

Effective October 3, 2016, the Company entered into the Second Amendment to the Third Amended and Restated Revolver ("Second Amendment"). The Second Amendment increased the Amended Revolver capacity from the $27,500,000 in the original Amended Revolver to $52,250,000; provided that the maximum revolving facility be reduced to $42,250,000 on August 1, 2017. The change to the borrowing capacity is a result of the increase in receivables related to new centers that continue to progress through the change in ownership process.

On December 29, 2016, the Company executed a Third Amendment to the Third Amended and Restated Revolver ("Third Amendment"). The Third Amendment modifies the terms of the Loan Agreement by increasing the Company’s letter of credit sublimit from $10,000,000 to $15,000,000.

As of December 31, 2016, the Company had $15,000,000 in borrowings outstanding under the Amended Revolver compared to $12,900,000 outstanding as of December 31, 2015. The outstanding borrowings on the Amended Revolver primarily reflect the Company's approach to accumulated Medicaid and Medicare receivables at recently acquired centers as these centers proceed through the change in ownership process with CMS. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has 12 letters of credit with a total value of $10,230,000 outstanding as of December 31, 2016. Considering the balance of eligible accounts receivable, the letter of credit, the amounts outstanding under the Amended Revolver and the maximum loan amount of $42,674,000, the balance available for borrowing under the Amended Revolver is $14,443,000 at December 31, 2016.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. The Company is in compliance with all such covenants at December 31, 2016.

In connection with the Company's 2016 and 2015 financing agreements, the Company recorded the following deferred loan costs related to the new financing agreements as a reduction of the debt balances discussed above:



	2016		2015
Write-off of deferred financing costs	$	351,000	$	—
Deferred financing costs capitalized	$	2,162,000	$	160,000

The deferred financing costs included in the current and long-term balances were $2,273,000 at December 31, 2016 and $967,000 at December 31, 2015.

Scheduled principal payments of long-term debt are as follows:



2017	$	6,663,000
2018	6,740,000
2019	6,820,000
2020	8,196,000
2021	$	51,662,000
Total	$	80,081,000

Interest Rate Swap Cash Flow Hedge

As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company entered into the interest rate swap agreement to mitigate the variable interest rate risk on its outstanding mortgage borrowings. The Company designated its interest rate swap as a cash flow hedge and the effective portion of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction with the aforementioned amendment to the Credit Agreement that occurred in February 2016, the Company retained the previously agreed upon interest rate swap modifying the terms of the swap to reflect the amended Credit Agreement. The Company redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and has an amortizing notional amount that was $29,329,000 as of December 31, 2016. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amounts. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at December 31, 2016, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $129,000 at December 31, 2016. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company's consolidated balance sheets. The liability related to the change in the interest rate swap included in accumulated other comprehensive income at December 31, 2016 is $80,000, net of income tax benefit of $49,000. As the Company's interest rate swap is not traded on a market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The fair value of the Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB's guidance on Fair Value Measurements and Disclosures.

Capitalized Lease Obligations

Upon acquisition of some centers, we assumed certain leases, primarily related to equipment, that constitute capital leases. As a result, we have recorded the underlying lease assets and capitalized lease obligations of $2,052,000 and $566,000 as of December 31, 2016 and 2015, respectively. These lease agreements provide three to five year terms.

Scheduled payments of the capitalized lease obligations are as follows:



2017	$	1,133,000
2018	955,000
2019	75,000
Total	2,163,000
Amounts related to interest	(111,000		)
Principal payments on capitalized lease obligation	$	2,052,000