Long- Term Debt and Interest Rate Swap

9 Months Ended

Sep. 30, 2011

Long-Term Debt, Interest Rate Swap And Capitalized Lease Obligations [Abstract]

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

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

On March 1, 2011, the Company entered into an agreement with a syndicate of banks to refinance the Company’s mortgage loan that was scheduled to mature in August 2011 and to extend the maturity of the Company’s revolving credit facility.

Under the terms of the new agreement, the syndicate of banks provided mortgage debt (“Mortgage Loan”) of $23 million and the proceeds were used to retire the Company’s previous mortgage loan and will fund approximately $2.4 million in capital improvements at the Company’s owned centers. The Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 year amortization. Interest is based on LIBOR plus 4.5%, but is fixed at 7.07% based on the interest rate swap transaction described below. The new mortgage loan is secured by four owned nursing centers, related equipment and a lien on the accounts receivable of these centers.

The new agreement extended the maturity of the Company’s $15 million revolving credit facility (“Revolver”) from March 2013 to March 2016. As amended, the Revolver has an interest rate of LIBOR plus 4.5%. The Revolver 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. As of September 30, 2011, the Company has no borrowings outstanding under the revolving credit facility. Annual fees for letters of credit issued under this revolver are 3.0% of the amount outstanding. The Company has a letter of credit of $4,551,000 to serve as a security deposit for certain of the Company’s leases. Considering the balance of eligible accounts receivable at September 30, 2011, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $15,000,000, the balance available for borrowing under the revolving credit facility is $10,449,000. The Mortgage Loan and the Revolver are cross-collateralized.

The Company’s lending agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. The Company is in compliance with all such covenants at September 30, 2011.

Interest Rate Swap Transaction-

As part of the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date, maturity date and notional amounts as the Mortgage Loan. 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 7.07% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amounts. The Company entered into the interest rate swap agreement to mitigate the variable interest rate risk on its outstanding mortgage borrowings. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company’s balance sheets. In accordance with this guidance, the Company designated its interest rate swap as a cash flow hedge and the earnings component of the hedge, net of taxes, is reflected as a component of other comprehensive income.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at September 30, 2011, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $1,532,000 at September 30, 2011. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The balance of accumulated other comprehensive loss at September 30, 2011, is $950,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $582,000. 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 Financial Accounting Standards Board’s (“FASB”) guidance on Fair Value Measurements and Disclosures.

Capitalized Lease Obligations

During the third quarter of 2011, the Company entered into a lease agreement to finance the purchase of certain equipment required for the implementation of Electronic Medical Records (“EMR”) in its nursing centers. The Company determined the lease was capital in nature and has recorded both the asset and capitalized lease obligation of $452,000 as of September 30, 2011. The lease agreement provides a three year term.

In October 2011, the Company completed a sale and leaseback transaction for certain equipment purchased in the implementation of EMR in its nursing centers. The lease transaction, involving $1,219,000 in assets purchased by the Company during 2010 and 2011, is capital in nature, and the Company will record the cash from the sale and the capitalized lease obligation under the financing during the fourth quarter of 2011. The lease agreement provides a three year term.