Long-Term Debt, Interest Rate Swap and Capitalized Lease Obligations

12 Months Ended

Dec. 31, 2011

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

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

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

Long-term debt consists of the following:

	December 31,
	2011			2010
Mortgage loan with a syndicate of banks; issued in March 2011; payable monthly, interest at 4.5% above LIBOR but fixed at 7.07% based on the interest rate swap described below.	$	22,715,000		$	—
Mortgage loan payable to a commercial finance company; issued in August 2006; refinanced in March 2011 as described below; payable monthly, interest at 3.75% above LIBOR (4.01% at December 31, 2010).		—			20,551,000
Revolving credit facility borrowings payable to a bank; entered into in March 2010; amended in March 2011 as described below; secured by receivables of the Company; interest at 4.5% above LIBOR (6.5% at December 31, 2010).		—			3,463,000
Commercial loan of consolidated VIE, payable by VIE landlord to a bank; issued in January 2011; payable monthly, fixed interest rate of 5.3%.		5,240,000			—
		27,955,000			24,014,000
Less current portion		(576,000	)		(442,000	)
	$	27,379,000		$	23,572,000

As of December 31, 2011, the Company’s weighted average interest rate on long-term debt, including the impact of the interest rate swap, was approximately 6.74%.

On March 1, 2011, the Company entered into an agreement with a syndicate of banks to refinance the Company’s mortgage loan scheduled to mature in August 2011 and extend 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 with a five year maturity and extended the maturity of the Company’s $15 million revolving credit facility (“revolver”) from March 2013 to March 2016. The proceeds of these new loans were used to retire the Company’s mortgage loan and provided funding for capital improvements at the Company’s owned homes. 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 described below. The new mortgage loan is secured by four owned nursing centers, related equipment and a lien on the accounts receivable of these facilities. The Mortgage Loan and the revolver are cross-collateralized.

The March 2011 debt agreement extended the maturity of the Company’s $15 million revolving credit facility (“revolver”) entered into in March 2010 with a member of the bank syndicate to March 2016. The extension also removes the 3.0% floor on LIBOR and changes the LIBOR spread to 4.5%. The March 2010 agreement replaced the Company’s previous revolving credit facility which was to expire in August 2010. As part of the March 2010 agreement, the Company used $3,463,000 in proceeds from the facility to retire the Company’s existing term loan and pay certain transaction costs. The March 2010 revolver had an interest rate of LIBOR (with a floor of 3.0%) plus 3.5% and was to expire in March 2013.

In connection with the Company’s 2011 and 2010 financing agreements the Company recognized the following debt retirement costs related to the write off of deferred financing on the existing financing agreements and recorded new deferred loan costs related the new financing agreements as follows:

	2011		2010
Write-off of deferred financing costs	$	112,000	$	127,000
Deferred financing costs capitalized	$	776,000	$	432,000

Under both agreements, 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 December 31, 2011, the Company had no borrowings outstanding under the revolving credit facility. Annual fees for letters of credit issued under this revolver are 3.00% of the amount outstanding. The Company has a letter of credit of $4,551,000 to serve as a security deposit for the Company’s leases. Considering the balance of eligible accounts receivable at December 31, 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.

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

2012	$	576,000
2013		608,000
2014		645,000
2015		686,000
2016		25,440,000
Thereafter		—
Total	$	27,955,000

The Company’s debt 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 December 31, 2011. The Company has consolidated $5,240,000 in debt that was added by the entity that owns the West Virginia nursing center. The borrower is subject to covenants concerning total liabilities to tangible net worth as well as current assets compared to current liabilities. The borrower is in compliance with all such covenants at December 31, 2011. The borrower’s liabilities do not provide creditors with recourse to the general assets of the Company.

Interest Rate Swap Cash Flow Hedge

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 December 31, 2011, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $1,524,000 at December 31, 2011. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s consolidated balance sheet. The balance of accumulated other comprehensive loss at December 31, 2011, is $945,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $579,000. 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

During 2011 and 2010, the Company entered into a series of lease agreements to finance the purchase of certain equipment primarily for the implementation of Electronic Medical Records (“EMR”) in its nursing centers. The Company determined the leases were capital in nature and recorded both assets and capitalized lease obligations of $527,000 and $387,000 during 2011 and 2010, respectively. These lease agreements provide three year terms.

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 recorded 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.

Scheduled payments of the capitalized lease obligations are as follows:

2012	$	812,000
2013		784,000
2014		491,000
Total		2,087,000
Amounts related to interest		(142,000	)
Principal payments on capitalized lease obligation	$	1,945,000