Business Development

9 Months Ended

Sep. 30, 2012

Business Development [Abstract]

BUSINESS DEVELOPMENT

BUSINESS

Advocat Inc. (together with its subsidiaries, “Advocat” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. The Company’s centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company’s nursing centers offer a variety of comprehensive rehabilitation services as well as nutritional support services.

As of September 30, 2012, the Company’s continuing operations consist of 48 nursing centers with 5,538 licensed nursing beds. The Company owns eight and leases 40 of its nursing centers. The nursing center and licensed nursing bed count includes 90 beds at the Company’s recently opened West Virginia nursing center. This new nursing center is licensed to operate by the state of West Virginia and was recently certified by Medicare and Medicaid. During the Medicare and Medicaid certification process the nursing center had limited the number of patients it accepted. The nursing center and licensed nursing bed count also includes the 88-bed skilled nursing center in Clinton, Kentucky for which the Company entered into a lease agreement in April 2012. The Company has limited its number of patients while it completes the Medicare and Medicaid certification process. The nursing center and licensed nursing bed count also includes the recently leased 154-bed skilled nursing center in Louisville, Kentucky the Company has operated since September 24, 2012. The Company's continuing operations include centers in Alabama, Arkansas, Florida, Kentucky, Ohio, Tennessee, Texas and West Virginia.

BUSINESS DEVELOPMENT AND DISCONTINUED OPERATIONS

Lease Agreements

In April 2012, the Company entered into a lease agreement to operate an 88-bed skilled nursing center in Clinton, Kentucky. The center is subject to a mortgage insured through the United States Department of Housing and Urban Development. The current annual lease payments are approximately $373,000. The lease has an initial ten year term with twofive year renewal options and contains an option to purchase the property for $3.3 million during the first five years. The center has not had residents since April 2011 after being de-certified by Medicare and Medicaid. The lease may be terminated if the center does not obtain certifications under the Medicare and Kentucky Medicaid programs in a timely manner. The lease agreement called for a $125,000 lease commencement fee and the transaction is considered a lease agreement.

Separate from the above lease transaction, in September 2012, the Company announced it entered into a lease agreement to operate a 154 bed skilled nursing center in Louisville, Kentucky. The nursing center is owned by a real estate investment trust and the lease provides for an initial fifteen-year lease term with a five-year renewal option. The nursing center has annual revenues of approximately $10 million and the Company began operating the skilled nursing center on September 24, 2012. This additional skilled nursing center increases the Company's footprint in Kentucky to eight nursing centers and was already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement for this skilled nursing center.

Pharmacy Partnership

The investment in unconsolidated affiliate reflected on the interim consolidated balance sheet relates to a pharmacy joint venture partnership in which the Company owns a 50 percent interest. The joint venture partnership is accounted for using the equity method. An equity method investment is the Company’s investment in an entity over which the Company lacks control but otherwise has the ability to exercise significant influence over operating and financial policies. Under the equity method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of the net earnings or losses of the affiliate as they occur. During the second quarter of 2012 the Company and its partner provided the initial funding and the joint venture began operations. The pharmacy joint venture will initially provide pharmacy services to certain of the Company’s nursing centers and eventually expand to nursing centers not affiliated with the Company.

Discontinued operations

Effective September 1, 2012 the Company sold an owned skilled nursing center in Arkansas to an unrelated party and has reclassified the operations of this facility as discontinued operations for all periods presented in the accompanying interim consolidated financial statements. The operating margins and the long term business prospects of the nursing center did not meet the Company's strategic goals. This skilled nursing center contributed revenues of $3,744,000 and $3,895,000 and net income of $88,000 and $175,000 during the nine months ended September 30, 2012 and 2011, respectively.  The net income for the nursing center included in discontinued operations does not reflect any allocation of regional or corporate general and administrative expense or any allocation of corporate interest expense. The Company considered these additional costs along with the centers future prospects when determining the contribution of the skilled nursing center to its operations.

The gain on disposal, net of taxes, of $170,000 was primarily the amount of sales price in excess of the net carrying value of the fixed assets sold. The assets and liabilities of the disposed skilled nursing center have been reclassified and are segregated in the interim consolidated balance sheets as assets and liabilities of discontinued operations. The current asset amounts are primarily composed of net accounts receivable of $132,000 and $563,000 and the current liabilities are primarily composed of accrued payroll and employee benefits of $95,000 and $218,000 at September 30, 2012 and December 31, 2011, respectively. The Company expects to collect the balance of the accounts receivable and pay the remaining accrued payroll and trade payables in the ordinary course of business. The Company did not transfer the accounts receivable or liabilities to the new owner. In addition, the property, equipment and related accumulated depreciation of the sold skilled nursing center have been reclassified, resulting in a net reclassification of fixed assets of $3,467,000 at December 31, 2011. Along with the $1,053,000 in real estate the Company owns in North Carolina, discontinued fixed assets totaled $1,053,000 and $4,520,000 at September 30, 2012 and December 31, 2011, respectively.