Diversicare Healthcare Services, Inc. (Form: 10-K, Received: 02/28/2019 16:09:56)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-K

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CHECK ONE:



ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file No.: 1-12996

________________________________

Diversicare Healthcare Services, Inc.

(exact name of registrant as specified in its charter)

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Delaware		62-1559667
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)



1621 Galleria Boulevard, Brentwood, TN	37027
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (615) 771-7575

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Name of each Exchange on which registered
Common Stock, $0.01 par value per share	The Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act :

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

Emerging growth company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	¨

The aggregate market value of Common Stock held by non-affiliates on June 30, 2018 (based on the closing price of such shares on the Nasdaq Capital Market) was approximately $28,398,000 . For purposes of the foregoing calculation only, all directors, named executive officers and persons known to the registrant to be holders of 5% or more of the registrant's Common Stock have been deemed affiliates of the registrant.

On February 15, 2019 , 6,518,568 shares of the registrant's $0.01 par value Common Stock were outstanding.

Documents Incorporated by Reference

Registrant's definitive proxy materials for its 2019 annual meeting of shareholders are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.



Table of Contents
		Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	24
Item 4.	Mine Safety Disclosures	25

Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
Item 6.	Selected Consolidated Financial Data	26
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 8.	Financial Statements and Supplementary Data	47
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	47
Item 9A.	Controls and Procedures	47
Item 9B.	Other Information	48

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	48
Item 11.	Executive Compensation	48
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	48
Item 13.	Certain Relationships and Related Transactions, and Director Independence	48
Item 14.	Principal Accountant Fees and Services	48

Part IV
Item 15.	Exhibits and Financial Statement Schedules	48
Item 16.	Form 10-K Summary	48

PART 1

ITEM 1. BUSINESS

Introductory Summary.

Diversicare Healthcare Services, Inc. provides post-acute care services to skilled nursing facilities, referred to as "skilled nursing centers," "nursing centers," or "centers," patients and residents in ten states, primarily in the Southeast, Midwest, and Southwest United States. Unless the context indicates otherwise, references herein to “Diversicare,” “the Company,” “we,” “us” and “our” include Diversicare Healthcare Services, Inc. and all of our consolidated subsidiaries. Diversicare Healthcare Services, Inc. was incorporated as a Delaware corporation in 1994.

The post-acute care profession encompasses a broad range of non-institutional and institutional services. For those among the aging, infirmed, or disabled requiring temporary or limited special services, a variety of home care options exist. As the need for assistance in activities of daily living develop, assisted living centers become the most viable and cost effective option. For those amongst the aging, disabled, or infirmed requiring more extensive assistance and intensive care, skilled nursing center care may become the only viable option. We have chosen to focus our business primarily on the skilled nursing centers sector and to specialize in this aspect of the post-acute care continuum.

Principal Address and Website.

Our principal executive offices are located at 1621 Galleria Boulevard, Brentwood, Tennessee 37027. Our telephone number at that address is 615.771.7575, and our facsimile number is 615.771.7409. Our website is located at www.dvcr.com. The information on our website does not constitute part of this Annual Report on Form 10-K.

Operating and Growth Strategy.

Our operating objective is to optimize market position in the delivery of health care and related services to the patients and residents in need of post-acute care in the communities in which we operate. Our strategic operations development plan focuses on (i) providing a broad range of high quality, cost-effective post-acute care services; (ii) improving skilled mix in our nursing centers via enhanced capabilities for rehabilitation and transitional care; (iii) building clinical competencies and programs consistent with marketplace needs; and (iv) clustering our operations on a regional basis. Interwoven into our objectives and operating strategy is our mission:

• Improve Every Life We Touch

• Provide Exceptional Healthcare

• Exceed Expectations

• Increase Shareholder Value

Strategic operating initiatives. Our key strategic operating initiatives include improving skilled mix in our nursing centers by enhancing our staffing complement to address the increased medical complexity of certain patients, increasing clinical competencies, and adding clinical programs. Our investments in nursing and clinical care have been implemented in concert with additional investments in nursing center-based sales representatives to cultivate referral and Managed Care relationships. These investments have positioned us and are expected to continue to position us to be a destination for patients covered by Medicare and Managed Care as well as certain private pay individuals. These enhancements and investments have positioned us to admit higher acuity patients.

To achieve our objectives, we:

Provide a broad range of quality cost-effective services. Our objective is to provide a variety of services to meet the needs of the increasing post-acute care population requiring skilled nursing and rehabilitation care. Our service offerings currently include skilled nursing, comprehensive rehabilitation services, programming for Life Steps and Memory Care units (described below) and other specialty programming. By addressing varying levels of acuity, we work to meet the needs of the population we serve. We seek to establish a reputation as the provider of choice in each of our markets. Furthermore, we believe we are able to deliver quality services cost-effectively, compared to other healthcare providers along the spectrum of care, thereby expanding the population base that can benefit from our services.

Improve skilled mix in our nursing centers . By enhancing our registered nurse coverage and adding specialized clinical care, we believe we can admit patients with more medically complex conditions, thereby improving skilled mix and reimbursement. The investments in nursing and clinical care are being conducted in concert with additional investments in nursing center-based sales representatives to develop referral and Managed Care relationships. These investments will better attract quality payor sources for patients covered by Medicare, Managed Care and Medicare replacement payors as well as certain private

pay individuals. We will also continue our program for the renovation and improvement of our nursing centers to attract and retain patients and residents.

Cluster operations on a regional basis. We have developed regional concentrations of operations in order to achieve operating efficiencies, generate economies of scale and capitalize on marketing opportunities created by having multiple operations in a regional market area.

Key elements of our strategy are to:

Increase revenues and profitability at existing nursing centers. Our strategy includes increasing center revenues and profitability through improving payor mix, providing an increasing level of higher acuity care, obtaining appropriate reimbursement for the care we provide, and providing high quality patient care. Ongoing investments are being made in expanded nursing and clinical care. We continue to enhance center-based marketing initiatives to promote higher occupancy levels and improved skilled mix at our nursing centers.

Development of additional specialty services . Our strategy includes the development of additional specialty units and programming in nursing centers that could benefit from these services. The specialty programming will vary depending on the needs of the specific market, and may include complex medical and rehabilitation services, as well as memory care units and other specialty programming. These services allow our centers to meet market needs while improving census and payor mix. A center specific assessment of the market and the current programming being offered is conducted related to specialty programming to determine if unmet needs exist as a predictor of the success of particular niche offerings and services.

Strategic management of our portfolio of centers. We continue to pursue and investigate opportunities to acquire and lease new centers, focusing primarily on opportunities that can leverage our existing infrastructure. We routinely evaluate the performance of our existing centers within the markets in which we operate in order to determine whether continuing operations within certain centers or markets aligns with our strategic objectives.

Nursing Centers and Services.

Diversicare provides a broad range of post-acute care services to patients and residents including skilled nursing, ancillary health care services and assisted living. In addition to the nursing and social services usually provided in long-term care centers, we offer a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services. As of December 31, 2018 , our continuing operations consist of 72 nursing centers with 8,214 licensed skilled nursing beds. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 429 licensed assisted living beds. Our continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.

The following table summarizes certain information with respect to the nursing centers we own or lease as of December 31, 2018 :



	Number of Centers	Licensed Nursing Beds ⁽¹⁾	Available Nursing Beds ⁽¹⁾
Operating Locations:
Alabama	20	2,385	2,318
Florida	1	79	79
Indiana	1	158	158
Kansas	6	464	464
Kentucky	10	885	881
Mississippi	9	1,039	1,004
Missouri	3	339	339
Ohio	4	403	393
Tennessee	5	617	551
Texas	13	1,845	1,662
	72	8,214	7,849
Classification:
Owned	15	1,365	1,250
Leased	57	6,849	6,599
Total	72	8,214	7,849

____________

(1)

The number of Licensed Nursing Beds is based on the regulatory licenses for the nursing center. The Company reports its occupancy based on licensed nursing beds. The number of Available Nursing Beds represents Licensed Nursing Beds reduced by beds removed from service. Available Nursing Beds is subject to change based upon the needs of the centers, including configuration of patient rooms, common usage areas and offices, status of beds (private, semi-private, ward, etc.) and renovations. The number of Licensed and Available Nursing Beds does not include 429 Licensed Assisted Living/Residential Beds, all of which are also available. These beds are excluded from the bed counts as our operating statistics such as occupancy are calculated using Nursing Beds only.

Our nursing centers provide skilled nursing health care services, including nutrition services, recreational therapy, social services, housekeeping and laundry services. Skilled nursing care is provided for post-acute patients and residents with comorbidities. This care includes assessment using evidence based tools; individualized care plan development based on identified areas of risk and care needs; and skilled interventions such as IV services. We also provide for the delivery of ancillary medical services at the nursing centers we operate. These specialty services include rehabilitation therapy services, such as audiology, speech, occupational and physical therapies, which are provided through licensed therapists and registered nurses, and the provision of medical supplies, nutritional support, infusion therapies and related clinical services. The majority of these services are provided using our internal resources and clinicians.

Within the framework of a nursing center, we may provide other specialty care, including:

Transitional Care Unit . Many of our nursing centers have units designated as transitional care units, our designation for patients requiring transitional care following an acute stay in the hospital. These units specialize in short-term nursing and rehabilitation with the goal of returning the patient to their highest potential level of functionality. These units provide enhanced services with emphasis on upgraded amenities. The design and programming of the units generally appeal to the clinical and hospitality needs of individuals as they progress to the next appropriate level of care. Specialized therapeutic treatment regimens include orthopedic rehabilitation, neurological rehabilitation and complex medical rehabilitation. While these patients generally have a shorter length of stay, the intensive level of nursing and rehabilitation required by these patients typically results in higher levels of reimbursement.

Memory Care Unit . Like our transitional care units, many of our nursing centers have memory care units, our designation for advanced care for dementia-related disorders including Alzheimer's disease. The goal of the units is to provide a safe, homelike and supportive environment for cognitively impaired patients, utilizing an interdisciplinary team approach. Family and community involvement complement structured programming in the secure environment instrumental in fostering as much resident independence and purposeful quality of life as long as possible despite diminished capacity.

Enhanced Therapy Services. We have complemented our traditional therapy services with programs that provide electrotherapy, vital stimulation, ultrasound and shortwave diathermy therapy treatments that promote pain management, wound healing,

muscle strengthening, and/or contractures management, improving outcomes for our patients and residents receiving therapy treatments.

Other Specialty Programming. We implement other specialty programming based on a center's specific needs. We have developed two adult day care centers on nursing center campuses. We have developed specialty programming for bariatric patients (generally, patients weighing more than 350 pounds) at one of these centers as these individuals have unique psychosocial and equipment needs.

Quality Assurance and Performance Improvement . We have in place a Quality Assurance and Performance Improvement (“QAPI”) program, which is focused on monitoring and improving all aspects of the care provided in a center by identifying outcomes and acting on areas of improvement. The QAPI program in our centers addresses all systems of care and management practices. Key quality indicators are determined and performance goals and benchmarks are established based on industry research standards via a Balanced Scorecard. Gaps and opportunities in performance versus benchmarks are addressed with analysis and performance improvement plans. Outcomes from each center in the areas of quality, employee workplace, customer satisfaction, and stewardship are collected monthly and overseen by regional and company quality committees.

Utilization of Electronic Medical Records . Electronic Medical Records (“EMR”) improves our ability to accurately record the care provided to our patients and quickly respond to areas of need. We now implement the use of EMR near the time of acquisition for new centers. EMR improves customer and employee satisfaction, nursing center regulatory compliance and provides real-time monitoring and scheduling of care delivery. We believe our EMR system supports our quality initiatives and positions us for higher acuity service offerings. Our EMR system is comprehensive in its functionality, providing key components, such as:


•	Tracking Activities of Daily Living (“ADLs”) . ADLs are the functions that each person must perform on a daily basis including, but not limited to, getting dressed, bathing, and eating. ADL tracking allows us to capture the provision of care provided by our nursing, dietary and housekeeping staff in assisting with ADLs quickly, efficiently and electronically.

•

Progress Notes . Progress notes are an important component of our medical records. Licensed nursing professionals provide documentation reflecting assessment of each patient's condition and intervention of skilled care provided. The EMR system provides means for a comprehensive chronological record resulting in improved capture, monitoring and review of documentation of condition and care provided.


•	Medications . Our patients receive a number of daily medications. This module assists with electronic tracking and documenting of required medications and treatments. This provides a more accurate and efficient care system for our nurses and patients.


•	Wound Module. This allows for an evidence-based risk assessment to drive patient specific interventions to prevent skin breakdown. When skin abnormalities are present, it provides for accurate depiction of anatomical location and description which drives individualized care treatments.


•	Incident Module. Allows for capturing any event, such as a fall, and provides quality assurance steps for root cause and patient-specific care plans.

For all modules, the EMR system provides a dashboard that can be reviewed at a number of kiosks throughout the nursing center, allowing our staff to securely access a list of upcoming patient care tasks and providing supervisors a tool to help manage and monitor staff performance. We believe the EMR system provides better support, efficiency, and improves the quality of care for our patients.

Organization . Our nursing centers are currently organized into eight regions, each of which is supervised by a regional vice president. The regional vice president is generally supported by specialists in several functions, including clinical, human resources, marketing, revenue cycle management and administration, all of whom are employed by us. The day-to-day operations of each of our nursing centers are led by an on-site, licensed administrator. The administrator of each nursing center is supported by other professional personnel, including a medical director, who assists in the medical management of the nursing center, and a director of nursing, who supervises a team of registered nurses, licensed practical nurses and nurse aides. Other personnel include those providing therapy, dietary, activities and social service, housekeeping, laundry, maintenance and office services. The majority of personnel at our nursing centers, including the administrators, are our employees.

Marketing.

We believe that skilled nursing care is fundamentally a local business in which both patients and their referral sources are typically based in the immediate geographic area in which the nursing center is located. Our marketing plan and related support activities emphasize the role and contributions of the administrators, admissions coordinators and clinical liaisons of each nursing center, all of whom are responsible for developing relationships with various referral sources such as doctors, hospitals, hospital case managers and discharge planners, and various healthcare and community organizations. Training, sales tools and job aids are provided for the sales and marketing teams for the product knowledge, market knowledge, and selling skills necessary to support their efforts in the field. As part of our business strategy, we have dedicated sales and marketing personnel who develop strong partnerships with physicians and hospital executives as well as Accountable Care Organizations ("ACO"), Bundled Payments for Care Improvement ("BPCI"), and Managed Care organizations. We believe these relationships will be mutually beneficial, providing the community with high quality healthcare while helping customers to navigate choices, manage transitions, and control costs.

At the local level, our sales and marketing efforts are designed to:

• Identify and develop strong healthcare partnerships

• Help facilitate smooth transitions between care settings

• Promote collaboration with ACOs, BPCIs, and healthcare organizations

• Educate referral sources and community on our key differentiators and capabilities

• Position ourselves as a valuable resource and healthcare partner

• Enhance the customer experience

• Contribute to a strong community presence

• Promote higher occupancy levels

• Foster optimal payor mix

In addition to soliciting admissions from current and potential referral sources, we emphasize involvement in community and healthcare events and opportunities to promote a public awareness of our nursing centers and services. Activities include ongoing family councils and community based “family night” functions, providing the opportunity to educate the public on various topics such as Medicare benefits, powers of attorney, and other topics of interest. We also promote a positive customer experience, best practices, strong surveys, and a high Star Rating; we seek feedback through third-party resident and family surveys. We host tour and “open house” opportunities, where members of the local community are invited to visit the center to see any improvements or to better understand our environment and services. We look for ways to offer increased clinical capabilities and services to better meet the needs of the community and referral sources. In addition, we have regional oversight to support the overall marketing strategies in each local center, in order to promote higher occupancy levels and improved payor and case mixes at our nursing centers. We offer the resources and metrics for strong healthcare partnerships with our referral sources, including ACOs and other Managed Care partners. Our support center marketing personnel support regional and local marketing personnel and efforts.

We have monthly marketing programs and ongoing marketing initiatives, developed internally, that focus on educating and meeting the needs of our customers while growing our business. Resources are also available to assist each nursing center administrator in analysis of local demographics and competition with a view toward complementary service development. We consider the primary referral area in long-term care to generally lie within a five-to-fifteen-mile radius of each nursing center depending on population density; consequently, we focus on local marketing efforts rather than broad-based advertising.

Acquisitions, Divestitures and Significant Transactions.

Acquisitions

Disposals

a discontinued operation. The carrying value of these centers' assets were $13.3 million , and resulted in a gain of $4.8 million . The proceeds were used to relieve debt, as required under the terms of the Company's debt agreements.

Lease Agreements

On October 1, 2018, the Company entered into a New Master Lease Agreement (the "Lease") with Omega Healthcare Investors (the "Lessor") to lease 34 centers currently owned by Omega and operated by Diversicare. The old Master Lease with Omega provided for its operation of 23 skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and Ohio. Additionally, Diversicare operated 11 centers owned by Omega under separate leases in Missouri, Kentucky, Indiana, and Ohio. The Lease entered into by Diversicare and Omega consolidated the leases for all 34 centers under one New Maser Lease. The Lease has an initial term of twelve years with two 10 year extensions, each at our option. The Lease has fixed annual rent escalators of 2.15% beginning on October 1, 2019.

Lease Terminations

On July 8, 2018, the Company entered into a membership interest purchase agreement with ALS Ontario Operating, Inc. to transfer all of the issued and outstanding membership units of Ontario Pointe, a stand-alone 50 bed assisted living facility located in Ontario, Ohio. The transfer of operations and termination of this lease was effective on October 1, 2018.

Effective September 30, 2017, the Company entered into an Agreement with Trend Health and Rehab of Carthage, LLC ("Trend Health") to terminate the lease and the Company's right of possession of the center in Carthage, Mississippi. In consideration of the early termination of the lease, Trend Health provided the Company with a $0.3 million cash termination payment.

Effective May 31, 2016, the Company entered into an Agreement with Avon Ohio, LLC to amend the original lease agreement, thus terminating the Company's right of possession of the center located in Avon, Ohio. As a result, the Company incurred lease termination costs of $2.0 million in the second quarter of 2016. Under the amended agreement, the Company is required to pay $0.3 million per year through the term of the original lease agreement, July 31, 2024.

Under current accounting guidance, these transactions were not reported as discontinued operations, as the disposals did not represent a strategic shift that has (or will have) a major effect on the Company's operations and financial results.

Pharmacy Partnership

Effective October 28, 2016, the Company and its partners entered into an asset purchase agreement to sell the pharmacy joint venture. The sale resulted in a $1.4 million gain in the fourth quarter of 2016. Subsequently, the Company recognized additional gains of $0.3 million and $0.7 million for the years end December 31, 2018 and 2017, respectively, related to the continuing liquidation of remaining net assets affiliated with the partnership.

Nursing Center Industry.

We believe there are a number of significant trends within the post-acute care industry that will support the continued growth of the nursing center profession. These trends are also likely to impact our business. These factors include:

Demographic trends. The primary market for our post-acute health care services is comprised of persons aged 75 and older. This age group is one of the fastest growing segments of the United States population. As the number of persons aged 75 and over continues to grow, we believe that there will be corresponding increases in the number of persons who need skilled nursing care.

Cost containment pressures. In response to rapidly rising health care costs, governmental and other third-party payors have adopted cost-containment measures to reduce admissions and encourage reduced lengths of stays in hospitals and other acute care settings. As a result, hospitals are discharging patients earlier and referring elderly patients, who may be too sick or frail to manage their lives without assistance, to nursing centers where the cost of providing care is typically lower than hospital care.

Limited supply of centers. As the nation's population of seniors continues to grow, life expectancy continues to expand, there continue to be limitations on granting Certificates of Need (“CON”) in most states for new skilled nursing centers, we believe that there will be continued demand for skilled nursing beds in the markets in which we operate. CON laws generally require a state agency to determine public need for any construction or expansion of healthcare facilities. We believe that the CON process tends to restrict the supply and availability of licensed skilled nursing center beds. High construction costs, limitations on state and federal government reimbursement for the full costs of construction, and start-up expenses also act to restrict growth in the supply for such centers.

Reduced reliance on family care. Historically, the family has been the primary provider of care for seniors. We believe that the increase in the percentage of dual income families, the reduction of average family size and the increased mobility in society

will reduce the role of the family as the traditional care-giver for aging parents. We believe that this trend will make it necessary for many seniors to look outside the family for assistance as they age.

Competition.

The post-acute care business is highly competitive. We face direct competition for additional centers, and our centers face competition for employees and patients. Some of our present and potential competitors for acquisitions are significantly larger and have or may obtain greater financial and marketing resources. Competing companies may offer new or more modern centers or new or different services that may be more attractive to patients than some of the services we offer.

The nursing centers operated by us compete with other centers in their respective markets, including rehabilitation hospitals and other skilled and personal care residential centers. In the few urban markets in which we operate, some of the long-term care providers with which our centers compete are significantly larger and have or may obtain greater financial and marketing resources than our centers. Some of these providers are not-for-profit organizations with access to sources of funds not available to our centers. Construction of new long-term care centers near our existing centers could adversely affect our business. We believe that the most important competitive factors in the long-term care business are: a nursing center's local reputation with referral sources, such as acute care hospitals, physicians, religious groups, other community organizations, Managed Care organizations, and a patient's family and friends; physical plant condition; the ability to identify and meet particular care needs in the community; the availability of qualified personnel to provide the requisite care; and the rates charged for services. There is limited, if any, price competition with respect to Medicaid and Medicare patients, since revenues for services to such patients are strictly controlled and are based on fixed rates and cost reimbursement principles. Although the degree of success with which our centers compete varies from location to location, we believe that our centers generally compete effectively with respect to these factors.

Revenue Sources

We classify our revenues earned from patients and residents into four major categories: Medicaid, Medicare, managed care, and private pay and other. Medicaid revenues are those received under the traditional Medicaid program, which provides benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B. Managed Care revenues are received from insurance entities, including third-party plans that administer Medicare benefits, known as Medicare Advantage plans. The private pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the private pay and other category are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.

The following table sets forth net patient revenues related to our continuing operations by payor source for the periods presented (dollar amounts in thousands): The amounts as reported for revenue in 2018 differ from the method of accounting in prior years due to the implementation of Accounting Standards Codification 606, the new revenue recognition standard. A comparison of reported revenues to legacy GAAP revenues has been provided below. Refer to Note 3, "Revenue Recognition and Receivables" to the consolidated financial statements.



	Year Ended December 31,
	2018				2018				2017				2016
	As Reported				As Adjusted to Legacy GAAP				As Reported				As Reported
Medicaid	$	267,015	47.4	%	$	303,412	52.5	%	$	300,926	52.4	%	$	215,381	50.6	%
Medicare	110,794		19.7	%	143,104		24.8	%	149,020		25.9	%	117,143		27.5	%
Managed Care	53,242		9.4	%	46,988		8.1	%	42,673		7.4	%	29,066		6.8	%
Private Pay and other	132,411		23.5	%	84,153		14.6	%	82,175		14.3	%	64,473		15.1	%
Total	$	563,462	100.0	%	$	577,657	100.0	%	$	574,794	100.0	%	$	426,063	100.0	%

The following table sets forth average daily skilled nursing census, or average number of patients per day, by payor source for our continuing operations for the periods presented:



	Year Ended December 31,
	2018			2017			2016
Medicaid	4,634	69.2	%	4,681	69.1	%	3,448	68.1	%
Medicare	709	10.6	%	760	11.2	%	591	11.7	%
Managed Care	278	4.1	%	265	3.9	%	178	3.5	%
Private Pay and other	1,076	16.1	%	1,072	15.8	%	844	16.7	%
Total	6,697	100.0	%	6,778	100.0	%	5,061	100.0	%

Consistent with the nursing center industry in general, changes in the mix of a center's patient population among Medicaid, Medicare, Managed Care, and private pay and other can significantly affect the profitability of the center's operations. However, private payors, including managed care payors, are increasingly demanding that providers accept discounted fees or assume all or a portion of the financial risk for the delivery of health care services. Such measures may include capitated payments, which can result in significant losses to health care providers if patients require expensive treatment not adequately covered by the capitated rate.

Medicare and Medicaid Reimbursement

A significant portion of our revenues are derived from government-sponsored health insurance programs, primarily Medicare and Medicaid. We employ third-party specialists in reimbursement and also use these services to monitor regulatory developments to comply with reporting requirements and to ensure that proper payments are made to our operated nursing centers.

Medicare

Medicare is a federally-funded and administered health insurance program for the aged and for certain chronically disabled individuals. Part A of the Medicare program covers certain services furnished by skilled nursing centers and other institutional providers and inpatient hospital services. Part B covers physician services, durable medical equipment, various outpatient services and certain ancillary services. Medicare generally covers skilled nursing center services for beneficiaries who require nursing care or rehabilitation services after a qualifying hospital stay. Medicare pays a per diem rate for each beneficiary, adjusted for patient acuity and additional factors such as geographic differences in wage rates. The payment rates are set forth under a prospective payment system that uses nursing and therapy indexes to assign a payment rate to each beneficiary. The Centers for Medicare & Medicaid Services (“CMS”) updates the rates annually. The payment rates cover all services to be provided to a beneficiary, including room and board, skilled nursing care, therapy, and medications.

Skilled nursing facilities. In a final rule issued in July 2018, CMS set forth Medicare payment rates for skilled nursing facilities for federal fiscal year 2018 and updated the skilled nursing facility (“SNF”) market basket percentage to 2.4%, as required by the Bipartisan Budget Act of 2018. In addition, CMS replaced the existing Resource Utilization Group (“RUG-IV”) case-mix classification system with the Patient-Driven Payment Model (“PDPM”). The PDPM classifies residents in Part A-covered stays into payment groups based on clinically relevant factors using diagnosis codes, rather than by the volume of services. The PDPM case-mix classification system will be effective October 1, 2019. CMS has stated that it does not intend for the new model to change the aggregate amount of Medicare payments to SNFs. Rather, it intends the new model to more accurately reflect resource utilization.

In addition to the adjustments described above, payment rates are reduced pursuant to ongoing sequestration. The Budget Control Act of 2011 (“BCA”) requires automatic spending reductions to reduce the federal deficit, including Medicare spending reductions of up to 2% per fiscal year, with a uniform percentage reduction across all Medicare programs. CMS began imposing a 2% reduction on Medicare claims in April 2013, and these reductions have been extended through 2027.

CMS has increasingly introduced policies intended to shift Medicare to value-based payment methodologies, tying reimbursement to quality of care rather than quantity. For example, CMS has implemented the Quality Reporting Program, under which skilled nursing centers are required to report quality data. Beginning in federal fiscal year 2018, skilled nursing centers that fail to submit required data are subject to a 2% reduction to the annual market basket update. Beginning in federal fiscal year 2019, the Skilled Nursing Facility Value-Based Purchasing (“SNF VBP”) Program makes incentive payments available to skilled nursing centers based on their past performance on a specified quality measure related to hospital readmissions. CMS funds the SNF VPB Program incentive payment pool by withholding 2% of skilled nursing center payments and then redistributing the withheld payments. Data from the calendar year 2017 performance period will be used to calculate incentive payments for federal fiscal year 2019. Going forward, data collected from each performance period will affect Medicare payments two years later.

CMS publishes rankings based on performance scores on the Nursing Home Compare website, which is intended to assist the public in finding and comparing skilled care providers. The Nursing Home Compare website also publishes for each nursing home a rating between 1 and 5 stars as part of CMS’s Five-Star Quality Rating System. An overall star rating is determined based on three components (information from the last three years of health inspections, staffing information, and quality measures), each of which also has its own five-star rating. The ratings are based, in part, on the quality data nursing centers are required to report. For example, nursing centers must report the percentage of short-stay residents who are successfully discharged into the community and the percentage who had an outpatient emergency department visit. We remain diligent in continuing to provide outstanding patient care to achieve high rankings for our centers, as well as assuring that our rankings are correct and appropriately reflect our quality results.

Therapy Services . Reimbursement for physical therapy, occupational therapy, and speech-language pathology services covered under Medicare Part B is determined according to the Medicare Physician Fee Schedule (“MPFS”), which is updated annually. For 2019, CMS updated the conversion factor based on the 0.25% increase required by the Bipartisan Budget Act of 2018 and a budget neutrality adjustment. If a beneficiary receives multiple therapy treatments in one day, Medicare Part B pays the full rate for the therapy unit of service that has the highest Practice Expense (“PE”) component. A multiple procedure payment reduction is applied to the second and subsequent therapy units, reducing reimbursement to 50% of the applicable PE component.

The Bipartisan Budget Act of 2018 repealed the annual per-beneficiary payment limits on therapy services covered under Medicare Part B for services provided after December 31, 2017. Instead, targeted medical reviews are performed when expenses for a beneficiary exceed a threshold of $3,000 for physical and speech therapy services combined or $3,000 for occupational therapy services alone. Deductible and coinsurance amounts paid by the beneficiary for therapy services count toward the amount applied to the limit. Claims above the threshold may be subject to post-payment review of medical necessity documentation by Supplemental Medical Review Contractors.

CMS has implemented value-based programs that affect Medicare payments for physician and other clinician services. Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) required the establishment of the Quality Payment Program (“QPP”), a payment methodology intended to reward high-quality patient care. Beginning in 2017, physicians and certain other clinicians, including therapists beginning in 2019, are required to participate in one of two QPP tracks. Under both tracks, performance data collected in each performance year will affect Medicare payments two years later. The Advanced Alternative Payment Model (“Advanced APM”) track makes incentive payments available for participation in specific innovative payment models approved by CMS. A provider with sufficient participation in an Advanced APM is exempt from the reporting requirements and payment adjustments imposed under the second track, the Merit-Based Incentive Payment System (“MIPS”). Providers electing to participate in MIPS will receive either payment incentives or be subject to payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities, and meaningful use of electronic health records. MIPS consolidates components of previously established incentive programs, including the Value-Based Payment Modifier program and the Physician Quality Reporting System.

Medicaid

Medicaid is a medical assistance program for the indigent that is funded jointly by the federal and state governments and administered by the states. Federal law requires states to cover certain nursing center services for Medicaid-eligible individuals when other payment options are unavailable. However, Medicaid eligibility requirements and benefits vary by state, and states may impose limitations on nursing services. States may also establish levels of service or payment methodologies by acuity or specialization of a nursing center.

The Affordable Care Act, as currently structured, requires states to expand Medicaid coverage by adjusting eligibility requirements such as income thresholds. However, the Presidential administration and certain members of Congress continue to attempt to repeal or significantly modify the Affordable Care Act, which may result in changes to Medicaid. Further, states may opt out of the Medicaid expansion. Some states use or have applied to use waivers granted by CMS to implement expansion, impose different eligibility or enrollment restrictions, or otherwise implement programs that vary from federal standards.

For example, effective February 1, 2015, the Company began participating in Indiana's Upper Payment Limit (“UPL”) supplemental payment program, which provides supplemental Medicaid payments for skilled nursing centers that are licensed to non-state government entities such as county hospital districts. One skilled nursing center previously operated by the Company entered into a transaction with one such hospital district participating in the UPL program, providing for the transfer of the license from the Company to the hospital district. The Company’s operating subsidiary retained the management of the center on behalf of the hospital district. The agreement between the hospital district and the Company is terminable by either party.

We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in 2018 and 2017 , along with increased Medicaid acuity in our acuity based states, were the primary contributor to our 1.9% increase in average rate per day for Medicaid patients in 2018 compared to 2017 . Based on the rate changes received during the third

quarter of 2018 , we expect a favorable impact to our rate per day for Medicaid patients as we move into 2019 due to modest rate increases in many of the states within which we operate.

Several states in which we operate face budget shortfalls, which could result in reductions in Medicaid funding for nursing centers. Pressures on state budgets are expected to continue in the future. Certain of the states in which we operate are actively seeking ways to reduce Medicaid spending for nursing center care by such methods as capitated payments and substantial reductions in reimbursement rates. Some states are promoting alternatives such as community and home-based services. CMS administrators have indicated that they intend to increase state flexibility in the administration of Medicaid programs. We are unable to predict what, if any, reform proposals or reimbursement limitations will be implemented in the future, or the effect such changes would have on our operations. For the year ended December 31, 2018 , we derived 24.8 % and 52.5% (as adjusted to Legacy GAAP) of our total patient revenues related to continuing operations from the Medicare and Medicaid programs, respectively. Any health care reforms that significantly limit rates of reimbursement under these programs could, therefore, have a material adverse effect on our financial position and profitability.

Employees.

As of February 8, 2019 , we employed approximately 8,500 employees, referred to as "team members," in connection with our continuing operations, approximately 6,000 of which are considered full-time team members. We believe that our team member relations are good. Approximately 740 of our team members are represented by a labor union.

Although we believe we are able to employ sufficient nurses and therapists to provide our services, a shortage of health care professional personnel in any of the geographic areas in which we operate could affect our ability to recruit and retain qualified team members and could increase our operating costs. We compete with other health care providers for both professional and non-professional team members and with non-health care providers for non-professional team members. This competition continues to contribute to a consistent increase in the salaries that we have to pay to hire and retain these team members. As is common in the health care industry, we expect the salary and wage increases for our skilled healthcare providers will continue to be higher than average salary and wage increases nationally.

Supplies and Equipment.

We purchase drugs, solutions and other materials and lease certain equipment required in connection with our business from many suppliers. We have not experienced, and do not anticipate that we will experience, any significant difficulty in purchasing supplies or leasing equipment from current suppliers. In the event that such suppliers are unable or fail to sell us supplies or lease equipment, we believe that other suppliers are available to adequately meet our needs at comparable prices. National purchasing contracts are in place for all major supplies, such as food, linens and medical supplies. These contracts assist in maintaining quality, consistency and efficient pricing. Based on contract pricing for food and other supplies, we expect cost increases in 2019 to be relatively the same or slightly lower than the increases we experienced in 2018 .

Government Regulation.

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of patient care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of a number of statutes and regulations, including those regulating fraud and abuse, false claims, patient privacy and quality of care issues. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation, as well as regulatory actions in which government agencies seek to impose fines and penalties. The Company is involved in regulatory actions of this type from time to time.

Licensure and Certification.

All our nursing centers must be licensed by the state in which they are located in order to accept patients, regardless of payor source. In most states, nursing centers are subject to CON laws, which require us to obtain government approval for the construction of new nursing centers or the addition of new licensed beds to existing centers. Our nursing centers must comply with detailed statutory and regulatory requirements on an ongoing basis in order to qualify for licensure, as well as for certification as a provider eligible to receive payments from the Medicare and Medicaid programs. Generally, the requirements for licensure and Medicare/Medicaid certification are similar and relate to quality and adequacy of personnel, quality of medical care, record keeping, dietary services, patient rights, and the physical condition of the nursing center and the adequacy of the equipment used therein. Failure

to comply with applicable laws and regulations could result in exclusion from the Medicare and Medicaid programs, which could have an adverse impact on our business, financial condition, or results of operations.

In 2016, CMS published a comprehensive update to the health and safety standards applicable to long-term care facilities participating in the Medicare or Medicaid programs. These revisions are aimed at improving quality of life, care and services in long-term care facilities, optimizing resident safety, and reflecting current professional standards. For example, CMS added requirements related to infection prevention and control, compliance and ethics programs, staff training, and QAPI programs. To allow facilities time to achieve compliance, CMS is implementing the requirements in three phases, over a three year period. We are in substantial compliance with the Phase 1 and Phase 2 requirements, and expect to be in substantial compliance with the Phase 3 requirements by the November 28, 2019 deadline. The total costs associated with implementing the requirements is not known at this time.

Each center is subject to periodic inspections, known as “surveys” by health care regulators, to determine compliance with all applicable licensure and certification standards. Such requirements are both subjective and subject to change. If the survey concludes that there are deficiencies in compliance, the center is subject to various sanctions, including but not limited to monetary fines and penalties, suspension of new admissions, non-payment for new admissions and loss of licensure or certification. Generally, however, once a center receives written notice of any compliance deficiencies, it may submit a written plan of correction and is given a reasonable opportunity to correct the deficiencies. There can be no assurance that, in the future, we will be able to maintain such licenses and certifications for our centers or that we will not be required to expend significant sums in order to comply with regulatory requirements.

Health care and health insurance reform.

In recent years, the U.S. Congress and some state legislatures have considered and enacted significant legislation concerning health care and health insurance. The most prominent of these efforts, The Affordable Care Act, affects how health care services are covered, delivered and reimbursed. As currently structured, the Affordable Care Act expands coverage through a combination of public program expansion and private sector reforms, provides for reduced growth in Medicare program spending, and promotes initiatives that tie reimbursement to quality and care coordination. Some of the provisions, such as the requirement that large employers provide health insurance benefits to full-time employees, have increased our operating expenses. The Affordable Care Act expands the role of home-based and community services, which may place downward pressure on our sustaining population of Medicaid patients. Reforms that we believe may have a material impact on the long-term care industry and on our business include, among others, possible modifications to the conditions of qualification for payment, bundling of payments to cover both acute and post-acute care and the imposition of enrollment limitations on new providers. However, there is considerable uncertainty regarding the future of the Affordable Care Act. The Presidential administration and certain members of Congress have made significant changes to the law, its implementation or its interpretation. For example, effective January 1,2019, Congress eliminated the financial penalty associated with the individual mandate. In addition, final rules issued in 2018 expand the availability of association health plans and allow the sale of short-term, limited-duration health plans, neither of which are required to cover all of the essential health benefits mandated by the Affordable Care Act. Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the entire law was unconstitutional. However, the law remains in place pending appeal.

Skilled nursing centers are required to bill Medicare on a consolidated basis for certain items and services that they furnish to patients, regardless of the cost to deliver these services. This consolidated billing requirement essentially makes the skilled nursing center responsible for billing Medicare for all care services delivered to the patient during the length of stay. CMS has instituted a number of test programs designed to extend the reimbursement and financial responsibilities under consolidated billing beyond the traditional discharge date to include a broader set of bundled services. Such examples may include, but are not exclusive to, home health, durable medical equipment, home and community based services, and the cost of re-hospitalizations during a specified bundled period. Currently, these test programs for bundled reimbursement are confined to a small set of clinical conditions, but CMS has indicated that it is developing additional bundled payment models. This bundled form of reimbursement could be extended to a broader range of diagnosis related conditions in the future. The potential impact on skilled nursing center utilization and reimbursement is currently unknown. The process for defining bundled services has not been fully determined by CMS and therefore is subject to change during the rule making process.

Health Insurance Portability and Accountability Act of 1996 .

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) has mandated an extensive set of regulations to standardize electronic patient health, administrative and financial data transactions and to protect the privacy and security of individually identifiable health information (“protected health information”). We have a HIPAA compliance committee and designated privacy and security officers.

The HIPAA transaction standards are intended to simplify the electronic claims process and other healthcare transactions by encouraging electronic transmission rather than paper submission. These regulations provide for uniform standards for data reporting, formatting and coding that we must use in certain transactions with health plans. The HIPAA security regulations establish requirements for safeguarding protected health information that is electronically transmitted or electronically stored. Some of the security regulations are technical in nature, while others are addressed through policies and procedures.

The HIPAA privacy regulations establish comprehensive federal standards relating to the use and disclosure of protected health information. The privacy regulations establish limits on the use and disclosure of protected health information, provide for patients' rights, including rights to access, to request amendment of, and to receive an accounting of certain disclosures of protected health information, and require certain safeguards for protected health information. In addition, each covered entity must contractually bind individuals and entities that furnish services to the covered entity or perform a function on its behalf, and to which the covered entity discloses protected health information, to restrictions on the use and disclosure of that protected health information. Covered entities must report breaches of unsecured protected health information to affected individuals without unreasonable delay, but not to exceed 60 calendar days from the discovery of the breach. Notification must also be made to the Department of Health and Human Services and, in certain cases involving large breaches, to the media. In general, the HIPAA regulations do not supersede state laws that are more stringent or grant greater privacy rights to individuals. Thus, we must reconcile the HIPAA regulations and other state privacy laws.

Although we believe that we are in material compliance with these HIPAA regulations, inadvertent violations of these regulations may occur in the course of our business. For this and other reasons, the HIPAA regulations are expected to continue to impact us operationally and financially and may pose increased regulatory risk.

Self-Referral and Anti-Kickback Legislation.

The health care industry is subject to state and federal laws that regulate the relationships of providers of health care services, physicians and other clinicians. These self-referral laws impose restrictions on physician referrals to any entity with which they have a financial relationship, which is a broadly defined term. We believe our relationships with physicians are in compliance with the self-referral laws. Failure to comply with self-referral laws could subject us to a range of sanctions, including civil monetary penalties and possible exclusion from government reimbursement programs. There are also federal and state laws making it illegal to offer anyone anything of value in return for referral of patients. These laws, generally known as “anti-kickback” laws, are broad and subject to interpretations that are highly fact dependent. Given the lack of clarity of these laws, there can be no absolute assurance that any health care provider, including us, will not be found in violation of the anti-kickback laws in any given factual situation. Strict sanctions, including fines and penalties, exclusion from the Medicare and Medicaid programs and criminal penalties, may be imposed for violation of the anti-kickback laws.

Secondary Coverage Reporting Obligations

As required by the Medicare Secondary Reporting Act and related laws and regulations, we report to CMS specific information regarding all claimants and claim settlements involving Medicare participants so CMS can recover Medicare funds expended to provide healthcare treatment to the claimant. The requirements are to ensure that CMS is notified so that it may recoup the amounts paid for services from the settlement proceeds. The requirements do not result in us making additional payments to CMS for these services provided and does not result in an incremental cost to us. Strict sanctions, including fines and penalties, exclusion from the Medicare and Medicaid programs and criminal penalties, may be imposed for non-compliance with these reporting obligations.

Available Information.

We file reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The SEC also maintains electronic versions of the Company's reports on its website at www.sec.gov . We also make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other materials filed with the SEC as soon as reasonably practical after such material is electronically filed with or furnished to the SEC via a link to the SEC's EDGAR system. Our website address is www.dvcr.com . The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

In addition, copies of the Company's annual report will be made available, free of charge, upon written request.

Corporate Governance Principles.

The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on the Company's website ( www.dvcr.com ) and are available in print to any stockholder who requests a copy.

Committee Charters.

The Board of Directors has an Audit Committee, Compensation Committee, Corporate Governance Committee, Risk Management Committee, and Executive Committee. The Board of Directors has adopted written charters for each committee, except for the Executive Committee, which are posted on the Company's website ( www.dvcr.com ) and are available in print to any stockholder who requests a copy.

ITEM 1A. RISK FACTORS

There have been a number of material developments both within the Company and the long-term care industry. These developments have had and are likely to continue to have a material impact on us. This section summarizes these developments, as well as other risks that should be considered by our shareholders and prospective investors.

Risks Related to our Operations

We are substantially self-insured and have significant potential professional liability exposure.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to an increasing number of lawsuits alleging malpractice, negligence, product liability or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. We expect to continue to be subject to such suits as a result of the nature of our business. We have professional liability insurance coverage for our nursing centers that, based on historical claims experience, is likely to be substantially less than the amount required to satisfy claims that are expected to be incurred. See “Item 3. Legal Proceedings” for further descriptions of pending claims and see “Item 7. Management's Discussion and Analysis of Financial Condition - Accounting Policies and Judgments - Professional Liability and Other Self-Insurance Reserves” for discussion of our reserve for self-insured claims and of our ability to meet our anticipated cash needs.

We may have substantial adjustments to our accrual for professional liability claims which could cause significant changes in our net earnings.

Each year, we record adjustments to our accrual for self-insured risks associated with professional liability claims. While these adjustments to the accrual result in changes to reported expenses and income, they are not directly related to changes in cash because the accrual is not funded. These self-insurance reserves are assessed on a quarterly basis, with changes in estimated losses being recorded in the consolidated statements of operations in the period identified. Any increase in the accrual decreases income in the period, and any reduction in the accrual increases income during the period. Our actual professional liabilities may vary significantly from the accrual due to an increase in the number of claims asserted or claim costs in excess of estimates, and the amount of the accrual has and may continue to fluctuate by a material amount in any given quarter. For the years ended December 31, 2018 , 2017 and 2016 , we recorded professional liability expense of $ 11.8 million , $ 10.8 million and $ 8.5 million , respectively.

Our outstanding indebtedness is subject to various financial covenants and floating rates of interest which could be subject to fluctuations based on changing interest rates.

We have long-term indebtedness of $73.6 million at December 31, 2018 . Certain of our debt agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. As of December 31, 2018 , we were in compliance with these financial covenants. Our failure to comply with those covenants could result in an event of default, which, if not cured or waived, could result in the acceleration of some or all of our debts. Such non-compliance could result in a material adverse impact to our financial position, results of operations and cash flows. See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for additional discussion of our covenants.

In connection with the refinancing transaction in February 2016 discussed in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” we entered into an interest rate swap with respect to a portion of the mortgage loan to mitigate the floating interest rate risk of such borrowing. The interest rate swap converted the variable rate on our mortgage indebtedness to a fixed interest rate for the five year term of this indebtedness, decreasing our exposure to risks of variable rates of interest. While limiting our risk to increases

in interest rates by utilizing the interest rate swap, we forgo benefits that might result from downward fluctuations in interest rates. We also are exposed to the risk that our counterpart to the swap agreement will default on its obligations.

Our accrual for professional liability claims is not funded, and if a material judgment is entered against us in any lawsuit, we may lack adequate cash to pay the judgment.

As of December 31, 2018 , we are engaged in 78 professional liability lawsuits. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our being unable to meet all of our cash needs as they become due.

The U.S. Department of Justice has commenced an investigation of our practices related to the provision of therapy and the completion of certain resident admission forms, which could adversely affect our operations and financial condition.

Our business is currently under investigation for potential civil and criminal violations of the federal False Claims Act ("FCA") and other laws related to governmental health care benefit programs. See Legal Proceedings for further information regarding this investigation. Any finding that we are not in compliance with these laws could require us to change our operations or could subject us to treble damages, penalties and/or make us ineligible to participate in certain government funded healthcare programs, any of which could in turn significantly harm our business and financial condition.

Our operational and strategic flexibility is limited due to the number of our centers that are leased from third parties.

A substantial majority of our centers are leased from third parties including 34 centers leased from Omega and 20 centers leased from Golden Living. The loss or deterioration of our relationship with either of these landlords may adversely affect our business. The terms of such leases generally require us to operate such centers as skilled nursing centers, and generally do not allow us to assign the lease to a third party without the applicable landlord’s consent. Therefore, our ability to divest such leased properties is limited, and we may be forced to continue operating such centers as skilled nursing centers even if doing so becomes unprofitable.

While we expect to renew or extend our leases in the normal course of business, there can be no assurance that these rights will be exercised in the future or that we will be able to satisfy the conditions precedent to exercising any such renewal or extension, to the extent that such provisions exist in our leases. In addition, if we are unable to renew or extend any of our master leases, we may lose all of the facilities subject to that master lease agreement. If we are not able to renew or extend our leases at or prior to the end of the existing lease terms, or if the terms of such options are unfavorable or unacceptable to us, our business, financial condition and results of operation could be adversely affected.

Our failure to pay rent or otherwise comply with the provisions of any of our Master Lease Agreements could materially adversely affect our business, financial position, results of operations, and liquidity.

Many of our facilities are under a Master Lease Agreement. Our failure to pay the rent or otherwise comply with the provisions of any of our lease agreements could result in an “event of default” under such lease agreement and also could result in a cross default under other master lease agreements and the agreements for our indebtedness. Upon an event of default, remedies available to our landlords generally include, without limitation, terminating such lease agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such lease agreement, including the difference between the rent under such lease agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such lease agreement. The exercise of such remedies would have a material adverse effect on our business, financial position, results of operations and liquidity. An event of default under any of our Master Lease Agreements could result in a default under the Credit Facilities and, if repayment of the borrowings under the Credit Facilities were accelerated, the payments under the indentures governing our outstanding notes could also be accelerated. The exercise of remedies by any of our landlords could have a material adverse effect on our business, financial position, results of operations, and liquidity.

We are highly dependent on reimbursement by third-party payors and delays in reimbursement for any reason may cause liquidity problems.

Substantially all of our nursing center revenues are directly or indirectly dependent upon reimbursement from third-party payors, including the Medicare and Medicaid programs and private insurers. For the year ended December 31, 2018 , our patient revenues from continuing operations derived from Medicaid, Medicare, Managed Care and private pay (including private insurers) sources were approximately 52.5% , 24.8 %, 8.1 %, and 14.6 %, respectively, as adjusted to Legacy GAAP). Changes in the mix of our patients among Medicare, Medicaid, Managed Care and private pay categories and among

different types of private pay sources may affect our net revenues and profitability. Our net revenues and profitability are also affected by the continuing efforts of all payors to contain or reduce the costs of health care. Efforts to impose reduced payments, greater discounts and more stringent cost controls by government and other payors are expected to continue.

The federal government makes frequent changes to the reimbursement provided under the Medicare program. For example, in July 2018, CMS finalized a rule that will change the case-mix model used under the skilled nursing facility prospective payment system effective October 2019. The new model, known as the Patient-Driven Payment Model, intends to shift the focus to the patient’s condition and resulting care needs rather than the amount of care provided in order to determine Medicare reimbursement. Future changes to payment rates or methodology could significantly reduce the reimbursement we receive. Also, a number of state governments, including several of the states in which we operate, face projected budget shortfalls and/or deficit spending situations. Because Medicaid is typically a substantial part of a state’s budget, many states are considering or have implemented strategies to reduce Medicaid spending or decrease spending growth. Some states are exploring or implementing alternatives to traditional long-term care, including community and home-based nursing services.

Any changes in reimbursement levels or in the timing of payments under Medicare, Medicaid or private pay programs and any changes in applicable government regulations could have a material adverse effect on our net revenues, net income (loss) and cash flows. We are limited in our ability to reduce the direct costs of providing care. We are unable to predict the nature and success of future financial or delivery system reforms or the effect such changes will have on our operations. No assurance can be given that such reforms will not have a material adverse effect on us. See “Item 1. Business - Government Regulation and Reimbursement.”

If we have problems with our information systems that affect payment or if other issues arise with Medicare, Medicaid or other payors that affect the amount or timeliness of reimbursements, we may encounter delays in our payment cycle. Any significant payment timing delay could cause us to experience working capital shortages. Working capital management, including prompt and diligent billing and collection, is an important factor in our consolidated results of operations and liquidity. Our working capital management procedures may not successfully mitigate the effects of any delays in our receipt of payments or reimbursements. Accordingly, such delays could have an adverse effect on our liquidity and financial condition.

We operate in an industry that is highly competitive .

The long-term care industry generally, and the nursing home business particularly, is highly competitive. We face direct competition for the acquisition of centers. In turn, our centers face competition for patients. Our ability to compete is based on several factors including, but not limited to, building age and appearance, reputation, relationships with referral sources, availability of patients, survey history and CMS rankings. Some of our present and potential competitors are significantly larger and have or may obtain greater financial and marketing resources than we can. In addition, some competitors are implementing vertical alignment strategies. For example, some hospitals provide long-term care services and some providers are aligned or are pursuing alignment strategies with payors. Certain of our competitors are operated by not-for-profit, non-taxpaying or governmental agencies that can finance capital expenditures on a tax exempt basis and receive funds and charitable contributions unavailable to us. In addition, we may encounter substantial competition from new market entrants. Consequently, there can be no assurance that we will not encounter increased competition in the future, which could limit our ability to attract patients or expand our business, and could materially and adversely affect our business or decrease our market share.

We may have difficulty attracting and retaining qualified nurses, therapists, healthcare professionals and other key personnel, which, along with a growing number of minimum wage and compensation related regulations, may increase our costs related to these employees.

Our team members are essential to our business. We rely on our ability to attract and retain qualified nurses, therapists and other healthcare professionals. The market for these key personnel is highly competitive, and we could experience significant increases in our operating costs due to shortages in their availability. Like other healthcare providers, we have at times experienced difficulties in attracting and retaining qualified personnel. We may continue to experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to manage them through wage freezes and similar means may have limited effectiveness and may lead to increased turnover and other challenges.

Tight labor markets and high demand for such team members can contribute to high turnover among clinical professional staff. A shortage of qualified personnel at a facility could result in significant increases in labor costs and increased

reliance on overtime and expensive temporary staffing agencies, and could otherwise adversely affect operations at the affected centers. If we are unable to attract and retain qualified professionals, our ability to adequately provide services to our residents and patients may decline and our ability to grow may be constrained.

Our cost of labor may be influenced by unanticipated factors in certain markets or, with respect to collective bargaining agreements that we are a party to, we may experience above-market increases. A substantial number of our team members are hourly team members whose wage rates are affected by increases in the federal or state minimum wage rate. As collective bargaining agreements are renegotiated or minimum wage rates increase we may need to increase the wages paid to team members. This may be applicable to not only minimum wage team members but also to team members at wage rates which are currently above the minimum wage.

The Department of Labor issued rule changes to the Fair Labor Standards Act that increased the minimum salary threshold for team members exempt from overtime along with an automatic annual increase to this salary threshold. The future of these rule changes, as well as other potential changes, remains uncertain given the recent change in Presidential administrations. However, these rule changes could increase our cost of services provided.

Because we are largely funded by government programs according to predetermined, nonnegotiable rates, we do not have an ability to pass such wage increases through to revenue sources. Any such mandated wage increases could have a material adverse effect on our results of operations, liquidity and financial condition.

Possible changes in the acuity of residents and patients, as well as payor mix and payment methodologies, may significantly affect our profitability.

The sources and amount of our revenues are determined by a number of factors, including the occupancy rates of our facilities, the length of stay, the payor mix of residents and patients, rates of reimbursement, and patient acuity. Changes in patient acuity as well as payor mix among private pay, Medicare, and Medicaid may significantly affect our profitability. In particular, any significant decrease in our population of high-acuity patients or any significant increase in our Medicaid population could have a material adverse effect on our business, financial position, results of operations, and liquidity, especially if state Medicaid programs continue to limit, or more aggressively seek limits on, reimbursement rates or service levels.

The industry trend toward value-based purchasing may negatively impact our revenues.

There is a growing trend in the healthcare industry among both government and commercial payors toward value-based purchasing of healthcare services. Value-based purchasing programs emphasize quality and efficiency of services, rather than volume of services. For example, the SNF VBP program makes incentive payments available based on past performance on specified quality measures related to hospital readmissions. Failure to report quality data or poor performance may negatively impact the amount of reimbursement received.

Other initiatives aimed at improving quality and cost of care include alternative payment models, such as ACOs and bundled payment arrangements. It is unclear whether alternative models will successfully coordinate care and reduce costs or whether they will decrease overall reimbursement. Additionally, commercial payors have expressed intent to shift toward value-based reimbursement arrangements.

We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. While we believe we are adapting our business strategies to compete in a value-based reimbursement environment, we are unable at this time to predict how this trend will affect our results of operations. If we are unable to meet or exceed quality performance standards under any applicable value-based purchasing program, perform at a level below the outcomes demonstrated by our competitors, or otherwise fail to effectively provide or coordinate the efficient delivery of quality healthcare services, our reputation in the industry may be negatively impacted, we may receive reduced reimbursement amounts, and we may owe repayments to payors, causing our revenues to decline.

Our systems are subject to security breaches and other cybersecurity incidents.

While we maintain information technology security and safeguards, complex medical systems have been and may continue to be targeted for cyber attacks, which may result in unauthorized parties obtaining access to our computer systems and networks. Cyber attacks could result in the misappropriation of our patient information that is protected by law, private employee information, proprietary business information and technology or result in interruptions to our business. The reliability and security of our information technology infrastructure is critical to our business. To the extent that any disruptions or security breaches result in significant loss or damage to our data, or inappropriate use or disclosure of

patient, employee or proprietary information, we could be required to notify affected individuals, state and federal agencies and the media of the breach, could experience damage to our reputation and patient relationships and be subject to civil and/or criminal fines and penalties or related class action litigation, any of which could have a material adverse effect on our business, results of operations and financial condition.

The success of previous and future acquisitions cannot be guaranteed and such acquisitions may consume substantial capital and other resources and could expose us to unforeseen liabilities and integration risks.

We have in the past and plan to in the future make investments in additional centers, whether by opening new centers or acquiring existing centers. Such acquisitions may involve significant cash expenditures, debt incurrence, operating losses and additional expenses that could have a material adverse effect on our financial position, results of operations and liquidity. Acquisitions involve numerous risks, including:


•	difficulties integrating acquired operations, personnel and accounting and information systems, or in realizing projected efficiencies and cost savings;


•	diversion of management's attention from other business concerns;


•	potential loss of key team members or customers of acquired companies;


•	entry into markets in which we may have limited or no experience;


•	increased indebtedness and reduced ability to access additional capital when needed;


•	assumption of unknown liabilities or regulatory issues of acquired companies, including failure to comply with healthcare regulations or to establish internal financial controls; and


•	straining of our resources, including internal controls relating to information and accounting systems, regulatory compliance, logistics and others.

Furthermore, certain of the foregoing risks could be exacerbated when combined with other growth measures that we may pursue.

Investing in our business initiatives and development could adversely impact our results of operations and financial condition.

We plan to invest in business initiatives and development that will increase our operating expenses. These initiatives may or may not be successful in growing our census or revenues. A part of our business initiative is to emphasize our skilled nursing facilities' care on patients with shorter stays but higher acuities. Shorter stays may result in decreased census during certain periods. In addition, there is typically a time delay between incurring such expenses and the attaining of revenues and cash flows expected from these initiatives and development. As a result, our revenue and operating cash flow may not increase enough during a reporting period to cover these increased expenses. Such additional revenues may not materialize to the level we anticipate, if at all.

We may be unable to reduce costs to offset decreases in our patient census levels or other expenses completely.

We depend on implementing adequate cost management initiatives in response to fluctuations in levels of patient census in our centers in order to maintain our current cash flow and earnings levels. Fluctuation in our patient census levels may become more common as we continue our emphasis in our skilled nursing facilities on patients with shorter stays but higher acuities. A decline in patient census levels would likely result in decreased revenue. If we are unable to put in place corresponding reductions in costs in response to decreases in our patient census or other revenue shortfalls, our financial condition and operating results would be adversely affected. There are limits in our ability to reduce the costs of our centers because we must maintain required staffing levels.

Disasters and similar events may seriously harm our business.

Natural and man-made disasters and similar events, including terrorist attacks and acts of nature such as hurricanes, tornados, earthquakes and wildfires, may cause damage or disruption to us, our employees and our centers, which could have an adverse impact on our patients and our business. In order to provide care for our patients, we are dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our centers, and the availability of employees to provide services at our centers. If the delivery of goods or the ability of employees to reach our centers were interrupted in any material respect due to a natural disaster or other reasons, it would have a significant impact on our centers and our business. Furthermore, the impact, or impending threat, of a natural disaster has in the past and may in the future require that we evacuate one or more centers, which would be costly and would involve risks, including potentially fatal risks, for the patients. The impact of disasters and similar events is inherently uncertain. Such events could harm our patients and employees, severely damage or destroy one or more of our centers, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 (the “Exchange Act”), and is required to evaluate the effectiveness of these controls and procedures on a periodic basis and publicly disclose the results of these evaluations and related matters in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. However, testing and maintaining our internal control over financial reporting can be expensive and divert our management's attention from other business matters. Any failure to implement and maintain effective internal controls could result in material weaknesses or material misstatements in our consolidated financial statements.

If we fail to maintain effective internal control over financial reporting, we may be required to take corrective measures or restate the affected historical financial statements. In addition, we may be subjected to investigations and/or sanctions by federal and state securities regulators, and/or civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our company and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.

Increasing costs of being publicly owned could impact our future consolidated financial position and results of operations

Significant regulatory changes, including the Sarbanes-Oxley Act and rules and regulations promulgated as a result of the Sarbanes-Oxley Act, have increased, and in the future, are likely to further increase general and administrative costs. In order to comply with the Sarbanes-Oxley Act of 2002, the listing standards of the Nasdaq exchange, and rules implemented by the Securities and Exchange Commission (“SEC”), we have had to hire additional personnel and utilize additional outside legal, accounting and advisory services, and may continue to require such additional resources. Moreover, in the rapidly changing regulatory environment in which we operate, there is significant uncertainty as to what will be required to comply with many of the regulations. As a result, we may be required to spend substantially more than we currently estimate, and may need to divert resources from other activities, as we develop our compliance plans.

New accounting pronouncements or new interpretations of existing standards could require us to make adjustments in our accounting policies that could affect our financial statements.

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Financial Accounting Standards Board, the SEC, or other accounting organizations or governmental entities frequently issue new pronouncements or new interpretations of existing accounting standards. Changes in accounting standards, how the accounting standards are interpreted, or the adoption of new accounting standards can have a significant effect on our reported results, and could even retroactively affect previously reported transactions, and may require that we make significant changes to our systems, processes and controls.

Changes resulting from these new standards may result in materially different financial results and may require that we change how we process, analyze and report financial information and that we change financial reporting controls. Such changes in accounting standards may have an adverse effect on our business, financial position, and income, which may negatively impact our financial results.

Changes in lease accounting standards may materially and adversely affect us .

The Financial Accounting Standards Board, or FASB, adopted new accounting rules to be effective for reporting periods beginning after December 15, 2018 which generally will require companies to capitalize long term leases on their balance sheets by recognizing lessees’ rights and obligations. When the rules are effective, we will be required to account for the leases for our centers, including those with Omega and Golden Living, in the assets and liabilities on our balance sheet,. As a result, a significant amount of lease related assets and liabilities will be recorded on our balance sheet and we may be required to make other changes to the recording and classification of our lease related expenses. Though these changes will not have any direct impact on our overall financial condition, these changes could cause investors or others to believe that we are highly leveraged and could change the calculations of financial metrics and covenants, as well as third party financial models regarding our financial condition.

Certain events or circumstances could result in the impairment of our assets that result in material charges to earnings.

We review the carrying value of certain long-lived assets, finite-lived intangible assets and indefinite-lived intangible assets with respect to any events or circumstances that indicate an impairment or an adjustment to the amortization period may be necessary. If circumstances suggest that the recorded amounts of any of these assets cannot be recovered based upon estimated future cash flows, the carrying values of such assets are reduced to fair value. If the carrying value of any of these assets is impaired, we may incur a material charge to earnings. Any such impairment charges could have a material adverse effect on our business, financial position and results of operations.

Risks Related to Government Regulations

We are subject to significant government regulation.

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, protection of patient health information, reimbursement for patient services, quality of patient care, Medicare and Medicaid fraud and abuse, debt collection and communications with consumers. Various federal and state laws regulate relationships among providers of services, including employment or service contracts and investment relationships. The operation of long-term care centers and the provision of services are also subject to extensive federal, state, and local laws relating to, among other things, the adequacy of medical care, distribution of pharmaceuticals, equipment, personnel, operating policies, environmental compliance, compliance with the Americans with Disabilities Act, fire prevention and compliance with building codes.

Long-term care facilities are subject to periodic inspection to assure continued compliance with various standards and licensing requirements under state law, as well as with Medicare and Medicaid conditions of participation. The failure to obtain or renew any required regulatory approvals or licenses could prevent us from offering our existing or additional services, subject us to penalties, and adversely affect our growth. In addition, health care is an area of extensive and frequent regulatory change. Changes in the laws or new interpretations of existing laws can have a significant effect on methods and costs of doing business and amounts of payments received from governmental and other payors. Our operations could be adversely affected by, among other things, regulatory developments such as mandatory increases in the scope and quality of care to be afforded patients and revisions in licensing and certification standards. We attempt at all times to comply with all applicable laws; however, there can be no assurance that we will remain in compliance at all times with all applicable laws and regulations or that new legislation or administrative or judicial interpretation of existing laws or regulations will not have a material adverse effect on our operations or financial condition. Federal or state proceedings seeking to impose fines and penalties for violations of applicable laws and regulations, as well as federal and state changes in these laws and regulations, may negatively impact us. See “Item 1. Business - Government Regulation.” See also “Item 3. Legal Proceedings.”

We are the subject of governmental audits, investigations, claims and litigation, which could have an adverse effect on our business or financial position.

Healthcare companies are subject to high levels of regulatory scrutiny. Various government agencies and their agents may conduct audits of our operations, including the Department of Health and Human Services (“HHS”) Office of Inspector General (“OIG”), which is tasked with combating fraud, waste and abuse within the Medicare and Medicaid programs. The OIG’s enforcement priorities are outlined in a work plan that is updated monthly. These priorities include life safety reviews, compliant billing, quality of care, poorly performing nursing facilities, hospitalizations, criminal background checks, Medicare part B services, accuracy of clinical data collected by nursing facilities , transparency of ownership, and civil monetary penalty funds. We cannot predict the likelihood, scope or outcome of any OIG investigations of our centers.

The costs associated with potential litigation or the public announcement that we are being investigated, even if a dispute is resolved in our favor, or any determination that we have violated laws or regulations could have an adverse effect on our business, financial position or results of operations. In particular, government investigations, as well as qui tam lawsuits, may lead to significant penalties, including fines, damages payments or exclusion from government healthcare programs. Settlements of lawsuits involving Medicare and Medicaid issues routinely involve both financial penalties and corporate integrity agreements, either of which could have an adverse effect on our business, financial position or results of operations.

Payments we receive from Medicare and Medicaid are subject to audits. Such audits could result in an obligation to refund amounts previously paid to us.

Payments we receive from Medicare and Medicaid can be retroactively adjusted after examination during the claims settlement process or as a result of post-payment audits. Private pay sources also reserve the right to conduct audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because either adequate or additional documentation was not provided or because certain services were not covered or deemed to not be medically necessary. We believe that billing and reimbursement errors and disagreements are common in our industry. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue could adversely affect our business, financial condition or results of operations.

We are subject to claims under false claims, self-referral and anti-kickback prohibitions.

We are subject to numerous federal and state laws intended to prevent fraud, waste and abuse within the healthcare industry. Violations of these laws may result in substantial damage awards, civil or criminal penalties for individuals or entities, including large civil monetary penalties and exclusion from participation in the Medicare or Medicaid programs. Such awards, exclusion or penalties, if applied to us, could have a material adverse effect on our financial position and profitability.

In the United States, various federal laws regulate the relationships between providers of health care services, physicians, and other clinicians. These laws impose restrictions on physician referrals for designated health services to entities with which they have financial relationships. These laws also prohibit the offering, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare or Medicaid patients or patient care opportunities for the purchase, lease or order of any item or service that is covered by the Medicare and Medicaid programs. Many states in which we operate have similar anti-kickback and self-referral laws that may apply to all payors or a broader range of services. To the extent that we, any of our centers through which we do business, or any of the owners or directors have a financial relationship with each other or with other health care entities providing services to long-term care patients, such relationships could be subject to increased scrutiny.

Federal and state laws prohibit the submission of false claims for reimbursement and prohibit the making of false claims or statements. The submission of false claims or false statements may lead to the imposition of significant civil monetary penalties, significant criminal fines and imprisonment, and/or exclusion from participation in state and federally-funded healthcare programs, including the Medicare and Medicaid programs. Under the FCA, actions against a provider can be initiated by the federal government or by a private party on behalf of the federal government. These private parties, who are often referred to as “qui tam relators” or “relators,” are entitled to share in any amounts recovered by the government. Both direct enforcement activity by the government and qui tam relator actions have increased significantly in recent years.

A FCA violation occurs when a provider knowingly submits a claim for items or services not provided. Liability also arises for the knowing failure to report and refund an overpayment received from the government. Some courts have held that providers who allegedly have violated other statutes, such as self-referral or kickback laws, have thereby submitted false claims under the FCA. Allegations of poor quality of care can also lead to FCA actions under a theory of worthless services, which contends that care provided was so deficient that it was tantamount to no service at all.

The implied certification theory expands of the scope of the FCA. Under the implied certification theory, a violation of the FCA occurs when a provider’s request for payment implies a certification of compliance with the applicable statutes, regulations or contract provisions that are preconditions to payment. The recognition of this theory has increased the risk that a healthcare company will have to defend a false claims action, pay fines and treble damages or settlement amounts or be excluded from the federal and state healthcare programs as a result of an investigation arising out of the FCA. Many states have enacted similar laws providing for imposition of civil and criminal penalties for the filing of fraudulent claims.

Because we submit thousands of claims to Medicare each year and there is a relatively long statute of limitations under the FCA, there is a risk that intentional, or even negligent or recklessly submitted claims that prove to be incorrect, or billing errors, cost reporting errors or lapses in statutory or regulatory compliance with regard to the provision of healthcare services (including, without limitation the Anti-Kickback Statue and the self-referral laws discussed above), could result in significant civil or criminal penalties against us. At least one false claims act case is pending against us, and there can be no assurance that our operations will not be subject to review, scrutiny, penalties or enforcement actions under these laws, or that these laws will not change in the future. Any penalties or allegations involving false claims, whether valid or not, could have a significant impact on our business.

We are subject to laws governing the confidentiality of patient health information.

Both federal and state laws impose certain requirements regarding maintaining the confidentiality of patient health information. In particular, HIPAA regulations require us to protect the medical records and other personal health information of our patients, limit our use of and ability to disclose such information, give patients a right to access and amend their personal health information, and notify affected patients, HHS, and, in the case of large breaches, the media of breaches involving unsecure patient health information. A violation of HIPAA or any other federal or state laws regarding the confidentiality or use of such information could subject us to civil or criminal penalties, and could in turn damage our reputation, affect our ability to attract or retain patients, and thereby have a material adverse effect on our revenues, financial position, results of operations and cash flows.

We cannot predict the effects that healthcare reform initiatives, including possible repeal or invalidation of or changes to the Affordable Care Act, and other changes in government programs may have on our business, financial condition or results of operations.

In recent years, there have been initiatives on the federal and state levels for comprehensive reforms affecting the availability, payment and reimbursement of healthcare services in the United States. The most prominent of these efforts is the Affordable Care Act, which affects how healthcare services are covered, delivered and reimbursed. However, there is significant uncertainty regarding the future of the Affordable Care Act. The Presidential administration and Congress have made significant changes to the law, its implementation and interpretation. For example, final rules issued in 2018 expand the availability of association health plans and allow the sale of short-term, limited-duration health plans, neither of which are required to cover all of the essential health benefits mandated by the Affordable Care Act. Effective January 1, 2019, Congress eliminated the penalty associated with the individual mandate to maintain health insurance. These changes may impact the number of individuals that elect to obtain public or private health insurance or the scope of such coverage, if purchased. Because the penalty associated with the individual mandate was eliminated, a federal judge in Texas ruled in December 2018 that the entire law was unconstitutional. However, the law remains in place pending appeal. It is difficult to predict the impact of the Affordable Care Act and related regulations or the impact of its modification on our operations in light of the uncertainty regarding whether, when or how the law will be further changed, the ultimate impact of court challenges, and what alternative reforms, if any, may be enacted. Significant changes to, or invalidation or repeal of, the Affordable Care Act or the adoption of other healthcare legislation or regulations could materially and adversely our business. For example, some members of Congress have proposed significantly expanding the coverage of government-funded programs.

State efforts to regulate or deregulate the healthcare services industry or the construction or expansion of healthcare facilities could impair our ability to expand our operations, or could result in increased competition.

Some states require healthcare providers to obtain prior approval, known as a CON, for:

• the purchase, construction or expansion of healthcare facilities;

• capital expenditures exceeding a prescribed amount; or

• changes in services or bed capacity.

In addition, other states that do not require certificates of need have effectively barred the expansion of existing facilities and the development of new ones by placing partial or complete moratoria on the number of new Medicaid beds they will certify in certain areas or in the entire state. Other states have established such stringent development standards and approval procedures for constructing new healthcare facilities that the construction of new facilities, or the expansion or renovation of existing facilities, may become cost prohibitive or extremely time-consuming. In addition, some states the acquisition of a facility being operated by a non-profit organization requires the approval of the state Attorney General.

Our ability to acquire or construct new facilities or expand or provide new services at existing facilities would be adversely affected if we are unable to obtain the necessary approvals, if there are changes in the standards applicable to those approvals, or if we experience delays and increased expenses associated with obtaining those approvals. We may not be able to obtain licensure, CON approval, Medicaid certification, Attorney General approval or other necessary approvals for future expansion projects. Conversely, the elimination or reduction of state regulations that limit the construction, expansion or renovation of new or existing facilities could result in increased competition to us or result in overbuilding of facilities in some of our markets. If overbuilding in the healthcare industry in the markets in which we operate were to occur, it could reduce the occupancy rates of existing facilities and, in some cases, might reduce the private rates that we charge for our services.

Changes to federal and state income tax laws and regulations could adversely affect our position on income taxes and estimated income liabilities.

We are subject to both state and federal income taxes in the U.S. and our operations, plans and results are affected by tax and other initiatives. On December 22, 2017, a law commonly known as the Tax Cuts and Jobs Act (“Tax Act") was enacted in the United States. Among other things, the Tax Act reduces the U.S. corporate income tax rate to 21 percent, which could result in changes in the valuation of our deferred tax asset and liabilities. Any such change in valuation could have a material impact on our income tax expense and deferred tax balances.

We are also subject to regular reviews, examinations, and audits by the Internal Revenue Service and other taxing authorities with respect to our taxes. There are uncertainties and ambiguities in the application of the Tax Act and it is possible that the IRS could issue subsequent guidance or take positions on audit that differ from our interpretations and assumptions. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liability, including interest and penalties. Our effective tax rate could be adversely affected by changes in the mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and regulations, changes in our interpretations of tax laws, including the Tax Act. Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability. There can be no assurance that payment of such additional amounts upon final adjudication of any disputes will not have a material impact on our results of operations and financial position.

We may be subject to liability for environmental damages.

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at the property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean-up costs incurred by those parties in connection with the contamination. These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants, and liability under these laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation or removal of the substances may be substantial. In addition, under our leases with Omega and Golden Living, we have agreed to indemnify the landlord for any such liabilities related to the properties that we lease from them. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of the substances at the disposal or treatment facility, whether or not the facility is owned or operated by the person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. If we become subject to any of these claims, the costs involved could be significant and could have a material adverse effect on our business, financial condition, cash flows, and results of operations.

Risks Related to our Common Stock

We do not intend to pay dividends on our common stock.

Although we paid cash dividends from the second quarter of 2009 through the third quarter of 2018, we do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently anticipate that we will retain all of our available cash, if any, for use as working capital and for other general purposes, including to service or repay our debt and lease obligations as well as to fund the operations of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, lease obligations, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant.

We have received a notice of delisting of our common stock from Nasdaq’s Listing Qualifications Department indicating that, based upon Nasdaq’s review of the Market Value of Listed Securities (“MVLS”) for the last 30 consecutive business days from November 2, 2018, the Company no longer meets the minimum MVLS of $35 million as set forth in Nasdaq Listing Rule 5550(b)(2). If we fail to raise the MVLS of our common stock to at least $35 million, our common stock may be delisted from trading on the Nasdaq Capital Market.

We are required to meet certain financial criteria in order to maintain our listing on the Nasdaq Capital Market. One such requirement is that we maintain a MVLS of at least $35 million. On December 19, 2018, we received an initial notification letter from the Nasdaq Listing Qualifications Department indicating that the MVLS of our common stock had been below $35 million for the last 30 consecutive business days. In accordance with Nasdaq Listing Rules 5810(c)(3)(C), the

Company has been provided a period of 180 calendar days, or until June 17, 2019, in which to regain compliance with the requirement. In order to regain compliance with the MVLS requirement, the Company must maintain a MVLS of at least $35 million for a minimum of ten consecutive business days during this 180-day period. The Company actively monitors the price of the Common Stock and will consider all available options to regain compliance with the continued listing standards. If at any time during this 180-day period the Company’s MVLS closes at $35 million or more for a minimum of ten consecutive business days, Nasdaq will provide the Company written confirmation of compliance and this matter will be closed. If the Company does not regain compliance with this requirement by June 17, 2019, the Company will receive written notification that its securities are subject to delisting. At that time, the Company may appeal the delisting determination to a Hearing Panel. There can be no assurance that the Company will be successful in maintaining its listing of the Common Stock on the Nasdaq Capital Market.

If we were unable to maintain compliance with the MVLS requirement and our common stock were delisted from Nasdaq, trading of our common stock would most likely take place on an over-the-counter market established for unlisted securities, such as the OTCQB or the Pink Market maintained by OTC Markets Group Inc. An investor would likely find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and many investors would likely not buy or sell our common stock due to difficulty in accessing over-the-counter markets, policies preventing them from trading in securities not listed on a national exchange or other reasons. In addition, as a delisted security, our common stock would be subject to SEC rules as a “penny stock,” which impose additional disclosure requirements on broker-dealers. The regulations relating to penny stocks, coupled with the typically higher cost per trade to the investor of penny stocks due to factors such as broker commissions generally representing a higher percentage of the price of a penny stock than of a higher-priced stock, would further limit the ability of investors to trade in our common stock. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations, including our ability to attract and retain qualified employees, to raise capital, and execute on a strategic alternative.

Our securities are now and have historically been thinly traded. An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common stock, in addition our stock price has been subject to fluctuating prices.

Shares of our common stock are now and have been thinly traded, meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. As a consequence, our stock price may not reflect an actual or perceived value of the business. Also, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to an issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot predict the actions of market makers, investors or other market participants, and can offer no assurances that the market for our securities will be stable. If there is no active trading market in our equity securities, the market price and liquidity of the securities will be adversely affected. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market or the perception that these sales could occur. Due to these conditions, you may not be able to sell your shares at or near ask prices or at all if you need money or otherwise desire to liquidate your shares. These conditions also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

We have a number of policies in place that could be considered anti-takeover protections.

Our Certificate of Incorporation (the “Certificate”) requires the approval of the holders of two-thirds of the outstanding shares to amend certain provisions of the Certificate. Section 203 of the Delaware General Corporate Law restricts the ability of a Delaware corporation to engage in any business combination with an interested shareholder. We are also authorized to issue up to 0.8 million shares of preferred stock, the rights of which may be fixed by our Board without shareholder approval. Provisions in certain of our executive officers' employment agreements provide for post-termination compensation, including payment of amounts up to two times their annual salary, following certain changes in control (as defined in such agreements). Our stock incentive plans provide for the acceleration of the vesting of options in the event of certain changes in control (as defined in such plans). Certain changes in control also constitute an event of default under our bank credit facility. The foregoing matters may, together or separately, have the effect of discouraging or making more difficult an acquisition or change of control of the company.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We own 15 and lease 57 long-term care centers as discussed in “Item 1 Business - Nursing Centers and Services.” See further details below.

Our current operations include 57 nursing centers subject to operating leases, including 34 owned by Omega Health Investors ("Omega"), 20 owned by Golden Living and three owned by other parties. In our role as lessee, we are responsible for the day-to-day operations of all operated centers. These responsibilities include recruiting, hiring and training all nursing and other personnel, and providing patient care, nutrition services, marketing, quality improvement, accounting, and data processing services for each center. The lease agreements pertaining to our 57 leased centers are “triple net” leases, requiring us to maintain the premises, provide insurance, pay taxes and pay for all utilities. See the table below for a summary of owned and leased beds operated by the Company.



State	Centers	Leased Beds	Owned Beds	Total Operational Beds ⁽¹⁾
Alabama	20	2,079	306	2,385
Florida	1	79	—	79
Indiana	1	172	—	172
Kansas	6	—	483	483
Kentucky	10	917	—	917
Mississippi	9	1,039	—	1,039
Missouri	3	455	—	455
Ohio	4	651	—	651
Tennessee	5	497	120	617
Texas	13	1,370	475	1,845
Total	72	7,259	1,384	8,643

____________


(1)	The number of Operational Beds includes 429 Licensed Assisted Living/Residential Beds.

Brentwood Support Center and Regional Offices

We lease approximately 29,000 square feet of office space in Brentwood, Tennessee that houses our executive offices, and centralized management support functions. Lease periods on these centers range up to three years. Regional executives for Kansas work from an office of approximately 922 square feet. We believe that our leased properties are adequate for our present needs and that suitable additional or replacement space will be available as required.

ITEM 3. LEGAL PROCEEDINGS

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, negligence, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our center. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of December 31, 2018 , we are engaged in 78 professional liability lawsuits. Eighteen lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In July 2013, the Company learned that the United States Attorney for the Middle District of Tennessee ("DOJ") had commenced a civil investigation of potential violations of the False Claims Act ("FCA").

In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the two centers that were subject of the original civil investigative demand ("CID"). In connection with this matter, between July 2013 and early February 2016, the Company received three civil investigative demands (a form of subpoena) for documents. The Company has responded to those demands and also provided voluntarily additional information requested by the DOJ. The DOJ has also taken testimony from current and former employees of the Company. In May 2018, the Company learned that a second FCA complaint had been filed in late 2016 relating to the Company’s practices and policies for rehabilitation therapy at some of its facilities. The government’s investigation relates to the Company’s practices and policies for rehabilitation and other services at all of its facilities, for preadmission evaluation forms ("PAEs") required by TennCare and for Pre-Admission Screening and Resident Reviews ("PASRRs") required by the Medicare program.

The Company is engaged in preliminary discussions with the DOJ regarding settlement of this investigation. The Company denies any wrong doing and is prepared to vigorously defend its actions. However, based upon preliminary settlement discussions, the Company believes that it is probable a loss will result from this contingency and has accrued $6.4 million as a contingent liability in connection with this matter during the year ended December 31, 2018. The Company cannot predict whether a settlement can be achieved, the outcome of the litigation if there is no settlement or the length of time necessary to conclude this matter. Accordingly, the contingent liability has been classified as a noncurrent liability in the accompanying consolidated balance sheets. The Company’s ultimate ability to settle this investigation will depend on several factors, including whether the amount and terms of an acceptable settlement can be reached with the DOJ, the Company’s assessment of the risks of litigating this case and the effect of protracted litigation or settlement terms on the Company’s business plans. Because the outcome of this investigation and related settlement discussions remain uncertain, there is a reasonable possibility that the amount ultimately incurred in connection with the resolution of this matter could differ materially from the current accrual, as the Company cannot, at this time, estimate the possible range of loss that may result from either a settlement or litigation of this matter. The ultimate outcome of this litigation could have a materially adverse effect on the Company, including the imposition of treble damages, criminal charges, fines, penalties and/or a corporate integrity agreement.

Additionally, the uncertainty regarding the outcome of this investigation makes it more difficult for the Company to pursue strategic possibilities, longer term initiatives or to make significant financial commitments outside of the normal course of its business.

In June 2016, the Company received an authorized investigative demand (a form of subpoena) for documents in connection with a criminal investigation by the DOJ related to the practices of some of its employees with respect to PAEs and PASRRs, and the Company provided documents responsive to this subpoena and coordinated examinations of certain employees of the Company. The Company understands that this criminal investigation has been closed, subject to re-opening at the discretion of the government. As always, the Company is committed to provide caring and professional services to its patients and residents in compliance with applicable laws and regulations.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The Company answered the original complaint in 2009, and there was no other activity in the case until May 2017. At that time, plaintiff filed an amended complaint asserting new causes of action. The amended complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Center over a multi-year period by failing to meet minimum staffing requirements, failing to otherwise adequately staff the Center and failing to provide a clean and safe living environment in the Center. The Company has filed an answer to the amended complaint denying plaintiffs’ allegations and has asked the Court to dismiss the new causes of action asserted in the amended complaint because the Company was prejudiced by plaintiff’s long delay in filing the amended complaint. The Court has not yet ruled on the motion to dismiss, so the lawsuit remains in its early stages and has not yet be certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. An unfavorable outcome in any of these lawsuits or any of our professional liability actions, any regulatory action, any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act case could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information. Our common stock is traded on the Nasdaq Capital Market and began trading there on September 12, 2006. The Company's Nasdaq ticker symbol is “DVCR.” As previously disclosed in December 2018, the Company received a MVLS Notice regarding the continued listing of the Company's stock on Nasdaq.

Our common stock has been traded since May 10, 1994. On February 15, 2019 , the closing price for our common stock was $ 3.68 , as reported by Nasdaq.com.

Holders . On February 15, 2019 , there were approximately 264 holders of record. Most of our shareholders have their holdings in the street name of their broker/dealer.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data of Diversicare presented in the following table has been derived from our consolidated financial statements, and should be read in conjunction with the annual consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations. This selected financial data for all periods shown has been reclassified to present the effects of certain divestitures as discontinued operations.



	Year Ended December 31,
	2018			2017			2016			2015			2014
Statement of Operations Data				(in thousands, except per share amounts)
REVENUES:
Patient revenues, net	$	563,462		$	574,794		$	426,063		$	387,595		$	344,192
EXPENSES:
Operating	450,686			458,122			342,932			311,035			275,605
Lease and rent expense	57,073			54,988			33,364			28,690			26,151
Professional liability	11,796			10,764			8,456			8,122			7,216
Litigation contingency expense	6,400			—			—			—			—
General and administrative	32,791			33,311			30,271			24,793			22,133
Depreciation and amortization	11,201			10,902			8,292			7,524			7,078
Gain on sale of assets	(4,825		)	—			—			—			—
Lease termination costs (receipts)	—			(180		)	2,008			—			—
	565,122			567,907			425,323			380,164			338,183
OPERATING INCOME (LOSS)	(1,660		)	6,887			740			7,431			6,009
OTHER INCOME (EXPENSE):
Other income	168			—			—			—			—
Equity in net income (losses) of investment in unconsolidated affiliate	—			—			273			339			(5		)
Gain on bargain purchase	—			925			—			—			—
Gain on sale of investment in unconsolidated affiliate	308			733			1,366			—			—
Hurricane costs	—			(232		)	—			—			—
Interest expense, net	(6,653		)	(6,369		)	(4,802		)	(4,102		)	(3,697		)
Debt retirement costs	(267		)	—			(351		)	—			—
	(6,444		)	(4,943		)	(3,514		)	(3,763		)	(3,702		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(8,104		)	1,944			(2,774		)	3,668			2,307
BENEFIT (PROVISION) FOR INCOME TAXES	750			(6,743		)	1,030			(916		)	(857		)
INCOME (LOSS) FROM CONTINUING OPERATIONS	(7,354		)	(4,799		)	(1,744		)	2,752			1,450
DISCONTINUED OPERATIONS, net of taxes	(42		)	(28		)	(67		)	(1,128		)	3,258
NET INCOME (LOSS)	$	(7,396	)	$	(4,827	)	$	(1,811	)	$	1,624		$	4,708
INCOME (LOSS) PER COMMON SHARE:
Basic
Continuing operations	$	(1.15	)	$	(0.76	)	$	(0.28	)	$	0.45		$	0.21
Discontinued operations	(0.01		)	(0.01		)	(0.01		)	(0.18		)	0.54
Net income (loss) per common share	$	(1.16	)	$	(0.77	)	$	(0.29	)	$	0.27		$	0.75
Diluted
Continuing operations	$	(1.15	)	$	(0.76	)	$	(0.28	)	$	0.44		$	0.20
Discontinued operations	(0.01		)	(0.01		)	(0.01		)	(0.18		)	0.52
Net income (loss) per common share	$	(1.16	)	$	(0.77	)	$	(0.29	)	$	0.26		$	0.72
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.17		$	0.22		$	0.22		$	0.22		$	0.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,372			6,279			6,199			6,100			6,011
Diluted	6,372			6,279			6,199			6,315			6,197



	December 31,
	2018			2017		2016		2015		2014
Balance Sheet Data	(in thousands)
Working capital	$	10,192		$	8,391	$	13,521	$	13,052	$	8,797
Total assets	$	159,244		$	167,569	$	163,051	$	137,084	$	129,089
Long-term debt and capitalized lease obligations, less current portion and deferred financing costs, net	$	74,558		$	89,552	$	82,123	$	60,867	$	48,265
Total Equity (deficit)	$	(1,198	)	$	6,462	$	11,420	$	13,267	$	11,754

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Diversicare Healthcare Services, Inc. provides long-term care services to nursing center patients in ten states, primarily in the Southeast, Midwest and Southwest. Our 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, we offer a variety of comprehensive rehabilitation services as well as nutritional support services. As of December 31, 2018 , our continuing operations consist of 72 nursing centers with 8,214 licensed skilled nursing beds and 429 assisted-living and other residential beds. We own 15 and lease 57 of our nursing centers included in continuing operations. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.

Key Performance Metrics

Skilled mix. Skilled mix represents the number of days our Medicare and Managed Care patients are receiving services at the skilled nursing facilities divided by the total number of days (less days from assisted living patients).

Average rate per day. Average rate per day is the revenue by payor source for a period at the skilled nursing facility divided by actual patient days for the revenue source for a given period.

Average daily skilled nursing census. Average daily skilled nursing census is the average number of patients who are receiving skilled nursing care.

Strategic Operating Initiatives

We identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives include: improving our facilities’ quality metrics, improving skilled mix in our nursing centers, improving our average Medicare rate, maintaining Electronic Medical Records to improve Medicaid capture, and completing strategic acquisitions and divestitures. We have experienced success in these initiatives and expect to continue to build on these improvements. In light of challenges facing the industry and the Company specifically, including the unresolved governmental investigation, we believe that now is not the time to attempt to engage in a company-wide strategic transaction.

Improving skilled mix and average Medicare rate:

One of our key performance indicators is skilled mix. Our strategic operating initiatives of improving our skilled mix and our average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center-based marketing representatives to attract these patients. These initiatives developed referral and Managed Care relationships that have attracted and are expected to continue to attract payor sources for patients covered by Medicare and Managed Care. The Company's skilled mix for the years ended December 31, 2018 , 2017 and 2016 was 14.7% , 15.1% and 15.2% , respectively.

Utilizing Electronic Medical Records to improve Medicaid acuity capture:

As another part of our strategic operating initiatives, all of our nursing centers utilize EMR to improve Medicaid acuity capture, primarily in our states where the Medicaid payments are acuity based. By using EMR, we have increased our average Medicaid rate despite rate cuts in certain acuity based states by accurate and timely capture of care delivery.

Completing strategic transactions:

Our strategic operating initiatives include a renewed focus on completing strategic acquisitions and divestitures. We continue to pursue and investigate opportunities to acquire or lease new centers, focusing primarily on opportunities within our existing geographic areas of operation. As part of our strategic efforts, we have also performed thorough analysis on our existing centers in order to determine whether continuing operations within certain markets or regions is in line with the short-term and long-term strategy of the business.

On October 1, 2018, the Company entered into a New Master Lease Agreement (the "Lease") with Omega Healthcare Investors (the "Lessor") to lease 34 centers currently owned by Omega and operated by Diversicare. The old Master Lease with Omega provided for its operation of 23 skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and Ohio. Additionally, Diversicare operates 11 centers owned by Omega under separate leases in Missouri, Kentucky, Indiana, and Ohio. The Lease entered into by Diversicare and Omega consolidates the leases for all 34 centers under one New Master Lease. The Lease has an

initial term of twelve years with two 10 year extensions, each at our option. The Lease has a common date of annual lease fixed escalators of 2.15% beginning on October 1, 2019.

On July 8, 2018, the Company entered into a membership interest purchase agreement with ALS Ontario Operating, Inc. to transfer all of the issued and outstanding membership units of Ontario Pointe, a stand-alone 50 bed assisted living facility in Ontario, OH. The transfer of operations and termination of this lease was effective on October 1, 2018.

Effective July 1, 2017, the Company acquired a 103-bed skilled nursing center in Selma, Alabama, for an aggregate purchase price of $8.8 million, pursuant to an Asset Purchase Agreement with Park Place Nursing and Rehabilitation Center, LLC, Dunn Nursing Home, Inc., Wood Properties of Selma LLC, and Homewood of Selma, LLC. This transaction is further discussed in Note 2 "Business Development and Other Significant Transactions" to the consolidated financial statements.

In September 2017, we ceased operations at our Carthage, Mississippi, facility, thus terminating our lease with Trend Health and Rehab of Carthage, LLC. This transaction was not reported as a discontinued operation as described in Note 2 "Business Development and Other Significant Transactions" to the consolidated financial statements.

Basis of Financial Statements.

Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.

Selected Financial and Operating Data

The following table summarizes the Diversicare statements of continuing operations for the years ended December 31, 2018 , 2017 and 2016 , and sets forth this data as a percentage of revenues for the same year:



	Year Ended December 31,
	(Dollars in thousands)
	2018					2017					2016
Revenues:
Patient revenues, net	$	563,462		100.0	%	$	574,794		100.0	%	$	426,063		100.0	%
Expenses:
Operating	450,686			80.0	%	458,122			79.7	%	342,932			80.5	%
Lease and rent expense	57,073			10.1	%	54,988			9.6	%	33,364			7.8	%
Professional liability	11,796			2.1	%	10,764			1.9	%	8,456			2.0	%
Litigation contingency expense	6,400			1.1	%	—			—	%	—			—	%
General & administrative	32,791			5.8	%	33,311			5.8	%	30,271			7.1	%
Depreciation and amortization	11,201			2.0	%	10,902			1.9	%	8,292			1.9	%
Gain on sale of assets	(4,825		)	(0.9	)%	—			—	%	—			—	%
Lease termination costs (receipts)	—			—	%	(180		)	—	%	2,008			0.5	%
	565,122			100.2	%	567,907			98.9	%	425,323			99.8	%
Operating income (loss)	(1,660		)	(0.2	)%	6,887			1.1	%	740			0.2	%
Other income (expense):
Other income	168			—	%	—			—	%	—			—	%
Equity in net income of unconsolidated affiliate	—			—	%	—			—	%	273			0.1	%
Gain on bargain purchase	—			—	%	925			0.2	%	—			—	%
Gain on sale of investment in unconsolidated affiliate	308			0.1	%	733			0.1	%	1,366			0.3	%
Hurricane costs	—			—	%	(232		)	—	%	—			—	%
Interest expense, net	(6,653		)	(1.2	)%	(6,369		)	(1.1	)%	(4,802		)	(1.1	)%
Debt retirement costs	(267		)	—	%	—			—	%	(351		)	(0.1	)%
	(6,444		)	(1.1	)%	(4,943		)	(0.8	)%	(3,514		)	(0.8	)%
Income (loss) from continuing operations before income taxes	(8,104		)	(1.3	)%	1,944			0.3	%	(2,774		)	(0.6	)%
Benefit (provision) for income taxes	750			0.1	%	(6,743		)	(1.2	)%	1,030			0.2	%
Loss from continuing operations	$	(7,354	)	(1.2	)%	$	(4,799	)	(0.9	)%	$	(1,744	)	(0.4	)%

The following table presents data about the centers we operated as part of our continuing operations as of the dates:



	December 31,
	2018	2017	2016
Licensed Nursing Center Beds:
Owned	1,365	1,607	1,504
Leased	6,849	6,849	6,949
Total	8,214	8,456	8,453
Facilities:
Owned	15	18	17
Leased	57	58	59
Total	72	76	76

Critical Accounting Policies and Judgments

A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often of the need to make estimates about the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income (loss) to vary significantly from period to period. Our accounting policies that fit this definition include the following:

Revenues

Patient Revenues, Net

The fees we charge patients in our nursing centers are recorded on an accrual basis. These rates are contractually adjusted with respect to individuals receiving benefits under federal and state-funded programs and other third-party payors. Medicare intermediaries make retroactive adjustments based on changes in allowed claims. In addition, certain of the states in which we operate require complicated detailed cost reports which are subject to review and adjustments. In the opinion of management, adequate provision has been made for adjustments that may result from such reviews. Retroactive adjustments, if any, are recorded when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits.

Allowance for Doubtful Accounts

We evaluate the collectability of our accounts receivable by reviewing current aging summaries of accounts receivable, historical collections data and other factors. As a percentage of revenue, our provision for doubtful accounts was approximately 0.0% , 1.6% , and 1.7% for 2018 , 2017 , and 2016 , respectively. Subsequent to the adoption of ASC 606, the majority of what was previously presented as allowance for doubtful account related to bad debt expense that has been incorporated as an implicit price concession factored into new revenue and accounts receivable. Historical bad debts have generally resulted from uncollectible private pay balances, some uncollectible coinsurance and deductibles and other factors. Receivables that are deemed to be uncollectible are written off.

Professional Liability and Other Self-Insurance Reserves

Accrual for Professional and General Liability Claims

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, consolidated offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, and several of the Company’s nursing centers in Alabama, Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy include coverage limits of $1.0 million or $3.0 million per medical incident with a sublimit per center of $3.0 million and total annual aggregate policy limits of $5.0 million . All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide coverage limits of $1.0 million per claim and have sublimits of $3.0 million per center, with varying aggregate policy limits and deductibles. The deductibles for these policies are covered through the insurance subsidiary.

Because our actual liability for existing and anticipated professional liability and general liability claims will exceed our limited insurance coverage, we have recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $27.2 million and $5.5 million of estimated insurance recovery receivables as of December 31, 2018 , including $1.5 million for settlements that are expected to be paid in 2019 , estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, and estimates of related legal costs incurred and expected to be incurred. All losses are projected on an undiscounted basis.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company's past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company's ultimate professional liability cost for current periods.

On a quarterly basis, we obtain reports of asserted claims and lawsuits from our insurers and a third party claims administrator. These reports contain information relevant to the liability actually incurred to date with that claim as well as the third-party administrator's estimate of the anticipated total cost of the claim. This information is reviewed by us quarterly and provided to the actuary semi-annually. We use this information to determine the timing of claims reporting and the development of reserves and

compare the information obtained to our previously recorded estimates of liability. Based on the actual claim information obtained, on the semi-annual estimates received from the actuary and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Final determination of our actual liability for claims incurred in any given period is a process that takes years.

The Company's cash expenditures for self-insured professional liability costs from continuing operations were $6.5 million , $6.6 million and $4.5 million for the years ended December 31, 2018 , 2017 and 2016 , respectively.

Although we retain a third-party actuarial firm to assist us, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of our actual liability for claims incurred in any given period is a process that takes years. As a result, our actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given quarter due to the significance of judgments and estimates.

Professional liability costs are material to our financial position, and changes in estimates, as well as differences between estimates and the ultimate amount of loss, may cause a material fluctuation in our reported results of operations. Our professional liability expense was $11.8 million , $10.8 million and $8.5 million for the years ended December 31, 2018 , 2017 and 2016 , respectively. These amounts are material in relation to our reported income (loss) from continuing operations for the related periods of $(7.4) million , $(4.8) million and $(1.7) million , respectively. The total liability recorded at December 31, 2018 was $27.2 million , compared to current assets of $80.5 million and total assets of $159.2 million .

Accrual for Other Self-Insured Claim s

With respect to workers' compensation insurance, substantially all of our employees became covered under either a prefunded deductible policy or state-sponsored programs. We have been and remain a non-subscriber to the Texas workers' compensation system and are, therefore, completely self-insured for employee injuries with respect to our Texas operations. From June 30, 2003 until June 30, 2007, our workers' compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. For the period from July 1, 2007 until June 30, 2008, the Company is completely insured for workers' compensation exposure. For the period from July 1, 2008 through December 31, 2018 , we are covered by a prefunded deductible policy. Under this policy, we are self-insured for the first $0.5 million per claim, subject to an aggregate maximum of $3.0 million . We fund a loss fund account with the insurer to pay for claims below the deductible. We account for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred.

We are self-insured for health insurance benefits for certain employees and dependents for amounts up to $0.2 million per individual annually. We provide reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate, based on known claims and estimates of unknown claims based on historical information. The differences between actual settlements and reserves are included in expense in the period finalized. Our reserves for health insurance benefits can fluctuate materially from one year to the next depending on the number of significant health issues of our covered employees and their dependents.

Asset Impairment

We evaluate our property, equipment and other long-lived assets on a quarterly basis to determine if facts and circumstances suggest that the assets may be impaired or that the estimated depreciable life of the asset may need to be changed for significant physical changes in the property, or significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows or fair values of the property if impairment indicators exist. The need to recognize impairment is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property. If recognition of impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the property.

No impairment of long lived assets was recognized during 2018 , 2017 , or 2016 . If our estimates or assumptions with respect to a property change in the future, we may be required to record additional impairment charges for our assets.

Business Combinations

For business combination transactions, we recognize and measure the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, as well as the goodwill acquired or gain recognized in a bargain purchase, and we make certain valuations to determine the acquisition date fair value of assets acquired and the liabilities assumed. These valuations are subject to adjustments during the measurement period, not to exceed twelve-months from the acquisition date. Such valuations require us to make significant estimates, judgments and assumptions, including projections of future events and operating

performance. Accounting Standards Update ("ASU") No. 2017-01 provides the requirements needed for an integrated set of assets and activities to be a business and also establish a practical way to determine when a set is not a business. The ASU provides a screen to determine when an integrated set of assets and activities is not a business. The more robust framework helps entities to narrow the definition of outputs created by the set and align it with how outputs are described in the new revenue recognition standard.

Stock-Based Compensation

We recognize compensation cost for all share-based payments granted on a straight-line basis over the vesting period. We calculated the recognized and unrecognized stock-based compensation for options and stock-only stock appreciation rights ("SOSARs") using the Black-Scholes-Merton option valuation method, which requires us to use certain key assumptions to develop the fair value estimates. These key assumptions include expected volatility, risk-free interest rate, expected dividends and expected term. For restricted shares, we utilize the market price at the grant date in order to calculate the stock-based compensation expense to be recognized during the vesting period. During the years ended December 31, 2018 , 2017 , and 2016 , we recorded charges of approximately $1.1 million , $1.0 million and $1.0 million in stock-based compensation, respectively. Stock-based compensation expense is a non-cash expense and such amounts are included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees.

Income Taxes

Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. We generally expect to fully utilize our deferred tax assets; however, when necessary, we record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized.

In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, we make certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations, markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in certain fields. Due to certain risks associated with our estimates and assumptions, actual results could differ.

Effective January 1, 2018, the Tax Act reduced the corporate rate from 35% to 21%. The Company has adopted ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows the company to record provisional amounts during the period of enactment. Any change to the provisional amounts are recorded as an adjustment to the provision for income taxes in the period the amounts are determined. During the year ended December 31, 2017, the company recognized a provisional net deferred income tax expense of $5.5 million to reflect the revaluation of the Company’s net deferred tax assets based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed.

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of December 31, 2018 , summarized by the period in which payment is due, as follows (dollar amounts in thousands):



Contractual Obligations	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		After 5 Years
Long-term debt obligations ⁽¹⁾	$	84,866	$	17,408	$	67,327	$	131	$	—
Settlement obligations ⁽²⁾	1,504		1,504		—		—		—
Operating leases ⁽³⁾	624,927		58,291		119,966		124,873		321,797
Required capital expenditures under operating leases ⁽⁴⁾	26,566		2,610		5,221		5,221		13,514
Total	$	737,863	$	79,813	$	192,514	$	130,225	$	335,311

(1)

Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our capital lease obligations. Our long-term debt obligations decreased $18.6 million between December 31, 2017 and December 31, 2018 , which is related to the sale of three Kentucky centers. The proceeds were used to reduce our debt. See Note 2, "Business Developments and Other Significant Transactions" and Note 5, "Long-Term Debt, Interest Rate Swap and Capitalized Lease Obligations" to the consolidated financial statements included in this report for additional information. Included in the $17.4 million of long-term obligations for amounts due in less than one year is $5 million related to the Revolver and $5 million related to the Acquisition Line, which is due on February 26, 2021. These amounts are classified as current because it is management's intent to pay within the next 12 months.


(2)	Settlement obligations relate to professional liability cases that are expected to be paid within the next twelve months. The professional liabilities are included in our current portion of self-insurance reserves.

(3)

Represents minimum annual lease payments (exclusive of taxes, insurance, and maintenance costs) under our operating lease agreements, which does not include renewals. Our operating lease obligations increased $440.7 million between December 31, 2017 and December 31, 2018 . The increase in operating lease obligations is due to the renewal of our Omega Master Lease. See Note 9, "Commitments and Contingencies," to the consolidated financial statements.


(4)	Includes annual expenditure requirements under operating leases. Our required capital expenditures increased $14.7 million between December 31, 2017 and December 31, 2018 . The increase is due to the renewal of our Omega Master Lease. See Note 9, "Commitments and Contingencies," to the consolidated financial statements.

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to two times their annual salary in the event of a termination without cause, a constructive discharge (as defined), or upon a change of control of the Company (as defined). The maximum contingent liability under these agreements is approximately $1.7 million as of December 31, 2018 . The terms of such agreements are for one year and automatically renew for one year if not terminated by us or the employee.

Results of Operations

As discussed in the overview at the beginning of Management's Discussion and Analysis of Financial Condition and Results of Operations, we have completed certain divestitures, acquisitions and entered several new lease agreements. We have reclassified our Consolidated Financial Statements to present certain divestitures as discontinued operations for all periods presented. The following discussion only relates to our continuing operations.



(in thousands)	Year Ended December 31,
	2018			2017			Change			%
PATIENT REVENUES, net	$	563,462		$	574,794		$	(11,332	)	(2.0	)%
EXPENSES:
Operating	450,686			458,122			(7,436		)	(1.6	)%
Lease and rent expense	57,073			54,988			2,085			3.8	%
Professional liability	11,796			10,764			1,032			9.6	%
Litigation contingency expense	6,400			—			6,400			100.0	%
General and administrative	32,791			33,311			(520		)	(1.6	)%
Depreciation and amortization	11,201			10,902			299			2.7	%
Gain on sale of assets	(4,825		)	—			(4,825		)	100.0	%
Lease termination receipts	—			(180		)	180			100.0	%
Total expenses	565,122			567,907			(2,785		)	(0.5	)%
OPERATING INCOME (LOSS)	(1,660		)	6,887			(8,547		)	(124.1	)%
OTHER INCOME (EXPENSE):
Other income	168			—			168			100.0	%
Gain on bargain purchase	—			925			(925		)	(100.0	)%
Gain on sale of investment in unconsolidated affiliate	308			733			(425		)	(58.0	)%
Hurricane costs	—			(232		)	232			100.0	%
Interest expense, net	(6,653		)	(6,369		)	(284		)	(4.5	)%
Debt retirement costs	(267		)	—			(267		)	(100.0	)%
	(6,444		)	(4,943		)	(1,501		)	30.4	%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(8,104		)	1,944			(10,048		)	(516.9	)%
BENEFIT (PROVISION) FOR INCOME TAXES	750			(6,743		)	7,493			111.1	%
LOSS FROM CONTINUING OPERATIONS	$	(7,354	)	$	(4,799	)	$	(2,555	)	(53.2	)%

NET LOSS PER COMMON SHARE:
Continuing operations per common share - basic	$	(1.15	)	$	(0.76	)	$	(0.39	)	(51.3	)%
Continuing operations per common share - dilutive	$	(1.15	)	$	(0.76	)	$	(0.39	)	(51.3	)%

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,372			6,279
Dilutive	6,372			6,279



(in thousands)	Year Ended December 31,
	2017			2016			Change			%
PATIENT REVENUES, net	$	574,794		$	426,063		$	148,731		34.9	%
EXPENSES:
Operating	458,122			342,932			115,190			33.6	%
Lease and rent expense	54,988			33,364			21,624			64.8	%
Professional liability	10,764			8,456			2,308			27.3	%
General and administrative	33,311			30,271			3,040			10.0	%
Depreciation and amortization	10,902			8,292			2,610			31.5	%
Lease termination costs (receipts)	(180		)	2,008			(2,188		)	(100.0	)%
Total expenses	567,907			425,323			142,584			33.5	%
OPERATING INCOME	6,887			740			6,147			830.7	%
OTHER INCOME (EXPENSE):
Equity in net income of investment in unconsolidated affiliate	—			273			(273		)	(100.0	)%
Gain on bargain purchase	925			—			925			100.0	%
Gain on sale of investment in unconsolidated affiliate	733			1,366			(633		)	(46.3	)%
Hurricane costs	(232		)	—			(232		)	(100.0	)%
Interest expense, net	(6,369		)	(4,802		)	(1,567		)	(32.6	)%
Debt retirement costs	—			(351		)	351			100.0	%
	(4,943		)	(3,514		)	(1,429		)	(40.7	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1,944			(2,774		)	4,718			170.1	%
BENEFIT (PROVISION) FOR INCOME TAXES	(6,743		)	1,030			(7,773		)	(754.7	)%
LOSS FROM CONTINUING OPERATIONS	$	(4,799	)	$	(1,744	)	$	(3,055	)	(175.2	)%

NET LOSS PER COMMON SHARE:
Continuing operations per common share - basic	$	(0.76	)	$	(0.28	)	$	(0.48	)	(171.4	)%
Continuing operations per common share - dilutive	$	(0.76	)	$	(0.28	)	$	(0.48	)	(171.4	)%

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,279			6,199
Dilutive	6,279			6,199

Year Ended December 31, 2018 Compared With Year Ended December 31, 2017

Patient Revenues

Patient revenues were $563.5 million in 2018 and $574.8 million in 2017 , a decrease of $11.3 million or 2.0% . The difference between patient revenues for 2018 is primarily due to the implementation of ASC 606. Refer to Note 3, "Revenue Recognition and Receivables" to the consolidated financial statements. The following table summarizes the revenue fluctuations attributable to our portfolio growth (in thousands):



	Year Ended December 31,
	2018				2017
	As reported		As adjusted to Legacy GAAP		As reported		Change
Same-store revenue	$	537,762	$	551,228	$	546,489	$	4,739
2017 acquisition revenue	9,296		9,289		4,553		4,736
2017 disposition revenue	—		—		5,348		(5,348		)
2018 disposition revenue	$	16,404	$	17,140	$	18,404	(1,264		)
Total revenue	$	563,462	$	577,657	$	574,794	2,863

Under legacy GAAP, revenue increased by $2.9 million , which is primarily attributable to revenue contributions from the acquisition of Park Place during the third quarter of 2017 of $4.7 million . The increase from the acquisition activity was offset by a decrease in revenues attributable to the 2017 disposition of Carthage and the 2018 dispositions of Fulton, Clinton and Glasgow of $5.3 million and $1.3 million , respectively. Refer to Note 2, "Business Developments" to the consolidated financial statements. The increase in same store revenue of $4.7 million is explained in more detail below.

The following table summarizes key revenue and census statistics for continuing operations for each period:



	Year Ended December 31,
	2018			2017
	As adjusted to Legacy GAAP			As reported
Skilled nursing occupancy	79.4		%	79.7		%
As a percent of total census:
Medicaid census	69.2		%	69.1		%
Medicare census	10.6		%	11.2		%
Managed Care census	4.1		%	3.9		%
As a percent of total revenues:
Medicaid revenues	52.5		%	52.4		%
Medicare revenues	24.8		%	25.9		%
Managed Care revenues	8.1		%	7.4		%
Average rate per day:
Medicare	$	454.75		$	454.22
Medicaid	$	178.96		$	175.58
Managed Care	$	394.19		$	381.46

The average Medicaid rate per patient day for same-store nursing centers in 2018 increased 2.1% compared to 2017 , resulting in an increase in revenue of $5.9 million . This average rate per day for Medicaid patients is the result of rate increases in certain states and increasing patient acuity levels. The average Managed Care and Hospice rate per patient day for same-store nursing centers in 2018 increased 3.3% and 4.4% , respectively, compared to 2017 , resulting in an increase in revenue of $1.2 million and $1.1 million , respectively.

Our total average daily census decreased by approximately 1.2% for the full portfolio compared to 2017 on a consolidated basis. On a same-store basis, our Medicare, Medicaid and Private average daily census for 2018 decreased compared to 2017 , resulting in decreases in revenue of $7.1 million , $1.2 million and $4.0 million , respectively. Conversely, our Managed Care and Hospice average daily census increased in 2018 compared to 2017 by $1.5 million and $4.1 million, respectively. Additionally, our ancillary revenue increased by $3.2 million in 2018 compared to 2017 .

Operating Expense

Operating expense decreased to $450.7 million in 2018 from $458.1 million in 2017 . Operating expense increased to 80.0% of revenue in 2018 , compared to 79.7% of revenue in 2017 . The following table summarizes the revenue fluctuations attributable to our portfolio growth (in thousands):



	Year Ended December 31,
	2018				2017
	As reported		As adjusted to Legacy GAAP		As reported		Change
Same-store operating expenses	$	431,049	445,004		$	436,926	$	8,078
2017 acquisition operating expenses	6,822		6,814		3,640		3,174
2017 disposition operating expenses	—		—		4,142		(4,142		)
2018 disposition operating expenses	$	12,815	13,550		$	13,414	136
Total operating expenses	$	450,686	$	465,368	$	458,122	7,246

The largest component of operating expenses is wages, which increased to $272.9 million in 2018 from $268.4 million in 2017 , an increase of $4.6 million , or 1.7% .

Under a legacy GAAP comparison and same-store center basis, operating expenses increased $8.1 million , which is primarily attributable to an increase in our same-store operating salaries and related taxes by $4.4 million. Our same-store provider taxes, legal fees and maintenance expenses increased by $2.3 million, $1.2 million and $0.6 million, respectively.

Lease Expense

Lease expense increased to $57.1 million in 2018 from $55.0 million in 2017 , an increase of $2.1 million , or 3.8% . The increase in lease expense was due to rent increases resulting from the New Master Lease Agreement with Omega Healthcare Investors and the impact of straight line rent expense. See Note 9, "Commitments and Contingencies" to the consolidated financial statements for further discussion of the New Master Lease Agreement.

Professional Liability

Professional liability expense was $11.8 million in 2018 compared to $10.8 million in 2017 , an increase of $1.0 million , or 9.6% . We were engaged in 78 professional liability lawsuits as of December 31, 2018 , compared to 72 as of December 31, 2017 . Our cash expenditures for professional liability costs of continuing operations were $6.5 million and $6.6 million for 2018 and 2017 , respectively. Professional liability expense and cash expenditures fluctuate from year to year based respectively on the results of our third-party professional liability actuarial studies, the premium costs of purchased insurance, and on the costs incurred in defending and settling existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.

Litigation Contingency Expense

The Company recorded a contingent liability related to the DOJ investigation for $6.4 million in 2018. The Company denies any wrong doing and is prepared to vigorously defend its actions. The Company's ultimate ability to settle this investigation will depend on several factors, including whether the amount and terms of an acceptable settlement can be reached with the DOJ. Refer to Note 9, "Commitments and Contingencies" to the consolidated financial statements for further discussion of the investigation.

General and Administrative Expense

General and administrative expenses were approximately $32.8 million in 2018 compared to $33.3 million in 2017 , a decrease of $0.5 million , or 1.6% . The overall decrease in general and administrative expenses was attributable to a $0.5 million decrease in salaries and related expenses.

Depreciation and Amortization

Depreciation and amortization expense was approximately $11.2 million in 2018 and $10.9 million in 2017 , an increase of $0.3 million , or 2.7% . The increase in depreciation and amortization expense relates to capital expenditures.

Gain on sale of assets

The Company completed the sale of the assets and transfer of the operations of Diversicare of Fulton, LLC, Diversicare of Clinton, LLC and Diversicare of Glasgow, LLC (the "Kentucky Properties") on December 1, 2018 which resulted in a gain of $4.8 million . See Note 2, "Business Developments and Other Significant Transactions" to the consolidated financial statements.

Gain on sale of investment in unconsolidated affiliate

Gain on the sale of investment in unconsolidated affiliate was $0.3 million and $0.7 million for 2018 and 2017, respectively. The additional gains recognized in 2018 and 2017 are related to the final liquidation of remaining net assets affiliated with the partnership.

Interest Expense, Net

Interest expense has increased to $6.7 million in 2018 compared to $6.4 million in 2017 , an increase of $0.3 million . The increase was primarily attributable to outstanding borrowings on our loan facilities.

Debt retirement costs

Debt retirement costs were $0.3 million in 2018 as a result of a reduction of the debt balances for the Mortgage Loan and Revolver in connection with the latest amendments to our financing agreements. See Note 5, "Long-Term Debt, Interest Rate Swap and Capitalized Lease Obligations" to the consolidated financial statements for further discussion on the amended debt agreement.

Income (loss) from Continuing Operations before Income Taxes; Income (loss) from Continuing Operations per Common Share

As a result of the above, continuing operations reported a loss before taxes of $8.1 million in 2018 , as compared to income before taxes of $1.9 million in 2017 . The benefit for income taxes was $0.8 million in 2018 , resulting in an effective rate of 9.3% . The provision for income taxes was $6.7 million in 2017 , resulting in an effective rate of 346.9% . The higher effective tax rate in 2017 reflects the impact of a revaluation of our net deferred tax assets of $5.5 million as a result of the Tax Act. The basic and diluted loss per common share from continuing operations were $1.15 and $1.15 in 2018 , respectively, compared to a basic and diluted loss per common share from continuing operations of $0.76 and $0.76 in 2017 , respectively.

Year Ended December 31, 2017 Compared With Year Ended December 31, 2016

Patient Revenues

Patient revenues were $574.8 million in 2017 and $426.1 million in 2016, an increase of $148.7 million or 34.9%. This increase is primarily attributable to the acquisition of Golden Living operations in Alabama and Mississippi during the fourth quarter of 2016. The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):



	Year Ended December 31,
	2017		2016		Change
Same-store revenue	$	386,576	$	388,890	$	(2,314	)
2016 acquisition revenue	183,665		37,173		146,492
2017 acquisition revenue	4,553		—		4,553
Total revenue	$	574,794	$	426,063	148,731

The overall increase in revenue of $148.7 million is primarily attributable to revenue contributions from the acquisition of Golden Living operations in Alabama and Mississippi during the fourth quarter of 2016 of $146.5 million and Park Place during the third quarter of 2017 of $4.6 million. The increase from the acquisition activity was partially offset by a decrease in same-store revenue of $2.3 million which is explained in more detail below.

The following table summarizes key revenue and census statistics for continuing operations for each period:



	Year Ended December 31,
	2017			2016
Skilled nursing occupancy	79.7		%	78.1		%
As a percent of total census:
Medicaid census	69.1		%	68.1		%
Medicare census	11.2		%	11.7		%
Managed Care census	3.9		%	3.5		%
As a percent of total revenues:
Medicaid revenues	52.4		%	50.6		%
Medicare revenues	25.9		%	27.5		%
Managed Care revenues	7.4		%	6.8		%
Average rate per day:
Medicare	$	454.22		$	456.30
Medicaid	$	175.58		$	169.91
Managed Care	$	381.46		$	385.71

The average Medicaid rate per patient day for same-store nursing centers in 2017 increased 1.7% compared to 2016, resulting in an increase in revenue of $3.3 million. This average rate per day for Medicaid patients is the result of rate increases in certain states and increasing patient acuity levels. The average Medicare rate per patient day for same-store nursing centers in 2017 increased 1.6% compared to 2016, resulting in an increase in revenue of $1.5 million also related to our ability to attract and provide care for patients with increased acuity levels.

Our total average daily census increased by approximately 33.9% for the full portfolio compared to 2016 on a consolidated basis, but was primarily attributable to the aforementioned acquisition activity. On a same-store basis, our Medicare, Medicaid and Private average daily census for 2017 decreased compared to 2016, resulting in decreases in revenue of $5.0 million, $1.4 million and $2.2 million, respectively. Conversely, our Managed Care average daily census increased in 2017 compared to 2016 by $2.0 million.

Our same-store centers for 2017 experienced one less day of operations compared to 2016, resulting in a decrease in revenue of $1.0 million or 2.7%.

Operating Expense

Operating expense increased to $458.1 million in 2017 from $342.9 million in 2016, driven primarily by the $115.9 million in operating costs from the Golden Living nursing centers added in 2016, and $3.6 million from the center acquired in 2017. Operating expense decreased to 79.7% of revenue in 2017, compared to 80.5% of revenue in 2016.



	Year Ended December 31,
	2017		2016		Change
Same-store operating expenses	$	310,571	$	314,944	$	(4,373	)
2016 acquisition operating expenses	143,911		27,988		115,923
2017 acquisition operating expenses	3,640		—		3,640
Total operating expenses	$	458,122	$	342,932	115,190

The largest component of operating expenses is wages, which increased to $268.4 million in 2017 from $199.6 million in 2016, an increase of $68.8 million, or 34.4%.

On a same-store center basis, operating expenses decreased $4.4 million, which is primarily attributable to a decrease in our bad debt expense by $1.1 million and a provider tax refund of $2.8 million from the state of Kentucky. Our same-store nursing and ancillary and dietary expenses decreased by $0.1 million and $0.3 million, respectively. Conversely, these positive variances were slightly offset by an increase in salaries and related taxes of $1.0 million in 2017. However, due to one less day of operations in 2017, we experienced $0.5 million less in salaries and related taxes.

Lease Expense

Lease expense increased to $55.0 million in 2017 from $33.4 million in 2016, an increase of $21.6 million, or 64.8%. The increase in lease expense was driven by $22.1 million from the assumption of the Golden Living centers in the fourth quarter of 2016. This was slightly offset from the termination of the Carthage, Mississippi lease in September 2017.

Professional Liability

Professional liability expense was $10.8 million in 2017 compared to $8.5 million in 2016, an increase of $2.3 million, or 27.3%. As centers have been acquired in 2016 and 2017, the Company has accessed commercial insurance markets, which accounts for a significant portion of the growth in professional liability expense in the current year. We were engaged in 72 professional liability lawsuits as of December 31, 2017, compared to 67 as of December 31, 2016. Our cash expenditures for professional liability costs of continuing operations were $6.6 million and $4.5 million for 2017 and 2016, respectively. Professional liability expense and cash expenditures fluctuate from year to year based respectively on the results of our third-party professional liability actuarial studies, the premium costs of purchased insurance, and on the costs incurred in defending and settling existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.

General and Administrative Expense

General and administrative expenses were approximately $33.3 million in 2017 compared to $30.3 million in 2016, an increase of $3.0 million, or 10.0%. The overall increase in general and administrative expenses were attributable to a $3.7 million increase in salaries and related expenses associated with continued growth at the regional level, as well as additional corporate infrastructure to support the on-going growth of the portfolio. Legal expenses decreased by $0.7 million in 2017 compared to 2016, which is attributable to the 2016 acquisitions.

Depreciation and Amortization

Depreciation and amortization expense was approximately $10.9 million in 2017 and $8.3 million in 2016. The Company incurred an increase of $2.1 million in depreciation and amortization expenses related to capital expenditures for the assumed Golden Living operations in the fourth quarter of 2016.

Lease termination costs

The Company ceased operations at our Carthage, Mississippi, center in September 2017, which resulted in a $0.2 million cash termination receipt, net of legal costs. Lease termination costs were $2.0 million in 2016 due to the termination of the Avon, Ohio operating lease in May 2016.

Gain on bargain purchase

The Company acquired the operations and assets of a center in Selma, Alabama in July 2017. In connection with the business combination, we recognized a $0.9 million gain on bargain purchase.

Gain on sale of investment in unconsolidated affiliate

The sale of the pharmacy joint venture resulted in a $1.4 million gain in the fourth quarter of 2016. Subsequently, we recognized an additional gain of $0.7 million in the first quarter of 2017, related to the continuing liquidation of remaining net assets affiliated with the partnership.

Interest Expense, Net

Interest expense has increased to $6.4 million in 2017 compared to $4.8 million in 2016, an increase of $1.6 million. The increase was primarily attributable to higher debt balances in 2017 as a result of additional borrowings made during the change in ownership processes for the newly acquired centers in Alabama and Mississippi, and the amendment of the term loan facility that occurred in June 2017.

Debt retirement costs

Debt retirement costs were $0.4 million in 2016, which relates to the write off of our term loan deferred financing costs, as a result of our debt refinance that took place in February 2016.

Income (loss) from Continuing Operations before Income Taxes; Income (loss) from Continuing Operations per Common Share

As a result of the above, continuing operations reported income before taxes of $1.9 million in 2017, as compared to loss before taxes of $2.8 million in 2016. The provision for income taxes was $6.7 million in 2017, an effective rate of 346.9% and the provision for income taxes was $1.0 million in 2016, an effective rate of 37.1%. The higher effective tax rate reflects the impact of our revaluation of our net deferred tax assets of $5.5 million as a result of the Tax Act. The basic and diluted loss per common share from continuing operations were $0.76 and $0.76 in 2017, respectively, compared to a basic and diluted loss per common share from continuing operations of $0.28 and $0.28 in 2016, respectively.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity is the net cash flows provided by the operating activities of our centers. These internally generated cash flows are used to service existing debt obligations, fund required capital expenditures as well as provide cash flows for investing opportunities. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long term. Options for our cash include, but are not limited to, capital improvements, repurchase of additional shares of our common stock, acquisitions, and payment of existing debt obligations, as well as initiatives to improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long-term success.

Net cash provided by operating activities of continuing operations totaled $6.4 million in 2018 , compared to net cash provided by operating activities of continuing operations of $13.4 million in 2017 and net cash used in operating activities of continuing operations of $2.1 million in 2016 . The decrease in cash provided by operating activities between 2018 and 2017 is due to an increase in net loss of $2.6 million and an increase in income tax benefit valuation of $5.3 million. The increase in cash provided by operating activities from continuing operations between 2017 and 2016 was related to the Company completing the Change in Ownership ("CHOW") process for the nursing centers acquired in the fourth quarter of 2016, which increased the cash inflows from these centers. Operating activities of centers we no longer operate used cash of $0.7 million , $1.3 million and $3.5 million in 2018 , 2017 and 2016 , respectively.

Our cash expenditures related to professional liability claims of continuing operations were $6.5 million , $6.6 million and $4.5 million for 2018 , 2017 and 2016 , respectively. We also continue to experience cash expenditures related to professional liability claims of discontinued operations. Our cash expenditures related to professional liability claims of centers we no longer operate were $0.7 million , $1.3 million , and $3.6 million for 2018 , 2017 and 2016 , respectively. The Company will continue to defend, and make cash payments when required related to, professional liability claims asserted against centers we no longer operate. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our being unable to meet all of our cash needs as they become due.

Investing activities of continuing operations provided cash of $10.4 million in 2018 and used cash of $17.4 million and $9.8 million in 2017 and 2016 , respectively. The increase in cash provided by investing activities is due to the sale of Diversicare of Fulton, LLC, Diversicare of Clinton, LLC and Diversicare of Glasgow, LLC (the "Kentucky Properties") on December 1, 2018 for $18.7 million. The proceeds from the sale were immediately applied to our outstanding borrowings on our mortgage and revolver facilities, which is in accordance with our debt agreements. The remaining change in our cash from investing activities between 2018 and 2017 is attributable to the asset purchase of Park Place in Selma, Alabama in July 2017 for $8.8 million . The cash used in 2016 was the result of the purchase of Hutchinson and Clinton for $4.3 million and $3.3 million , respectively, and cash used to assume the operations of the twenty-two Golden Living centers in the fourth quarter of 2016. We have used $8.6 million , $9.7 million , and $6.0 million in 2018 , 2017 and 2016 , respectively, for capital expenditures of continuing operations. See Note 2, "Business Developments and Other Significant Transactions" of the consolidated financial statements for discussion on the sale of the "Kentucky Properties."

Net cash used in financing activities of continuing operations was $16.9 million in 2018, compared to net cash provided by financing activities of continuing operations of $4.6 million and $15.1 million in 2017 and 2016 , respectively. The decrease in cash from financing activities between 2018 and 2017 is due to the decrease in borrowings of $15.4 million and increased repayments of $6.5 million. The significant decrease in borrowings is due to the proceeds received from the sale of three Kentucky centers of $18.7 million , less closing costs, which was immediately used to relieve debt on our mortgage and revolver facilities. See Note 5, "Long-Term Debt, Interest Rate Swap and Capitalized Lease Obligations" to the consolidated financial statements for further discussion on the amended debt agreement related to the sale of the Kentucky centers. Cash provided by financing activities in 2017 is primarily due to draws on the Company's revolving credit facility of $21.0 million, acquisition revolver of $8.5 million and amending our credit facility resulting in proceeds of $7.5 million. The proceeds received were offset by repayments of $30.2 million . Cash provided by financing activities in 2016 is primarily attributable to draws on the Company's revolving credit facility of $21.0 million, acquisition revolver of $8.5 million and amending our credit facility resulting in proceeds of $7.5 million. The proceeds received were offset by repayments of $73.4 million . Financing activities reflect common stock of $1.1 million 2018 , $1.4 million in 2017 , and $1.4 million in 2016 .

Professional Liability

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, consolidated offshore limited purpose insurance subsidiary, SHC, which has issued a policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, and several of the Company’s nursing centers in Alabama, Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy include coverage limits of $1.0 million or $3.0 million per medical incident with a sublimit per center of $3.0 million and total annual aggregate policy limits of $5.0 million . All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide coverage limits of $1.0 million per claim and have sublimits of $3.0 million per center, with varying aggregate policy limits and deductibles. The deductibles for these policies are covered through the insurance subsidiary.

As of December 31, 2018 , we have recorded total liabilities for reported professional liability claims and estimates for incurred, but unreported claims of $27.2 million . Our calculation of this estimated liability is based on the Company's best estimates of the likelihood of adverse judgments with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.

Capital Resources

As of December 31, 2018 , we had $74.6 million of outstanding long-term debt and capital lease obligations. The $74.6 million total includes $0.9 million in capital lease obligations. The balance of the long-term debt is comprised of $51.7 million owed on our collateralized mortgage debt, $15.0 million currently outstanding on the revolving credit facility, and $6.9 million on the acquisition loan facility.

Under the terms of the agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72.5 million with a five year maturity through February 26, 2021, consisting of $60.0 million term and $12.5 million acquisition loan facilities, and a $42.3 million 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 $30.0 million . The Amended Mortgage Loan balance was $58.6 million as of December 31, 2018 , consisting of $51.7 million on the term loan facility with an interest rate of 6.5% and $6.9 million on the acquisition loan facility with an interest rate of 7.25% . The Amended Mortgage Loan is secured by 15 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. Eligible accounts receivable are calculated as defined and consider 80% of certain net receivables while excluding receivables from private pay patients, those pending approval by Medicaid and receivables greater than 120 days.

As of December 31, 2018 , the Company had $15.0 million borrowings outstanding under the Amended Revolver compared to $16.0 million outstanding as of December 31, 2017 . The interest rate related to the Amended Revolver was 6.5% as of December 31, 2018 . The outstanding borrowings on the 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 letters of credit of $6.9 million and $6.4 million to serve as a security deposit for our Omega and Golden Living leases, respectively. Finally, we have two other letters of credit, totaling $0.3 million , to serve as security deposits at certain centers. Considering the balance of eligible accounts receivable at December 31, 2018 , the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $36.6 million , the balance available for borrowing under the Amended Revolver is $8.1 million at December 31, 2018 .

Our lending agreements contain various financial covenants, the most restrictive of which relate to debt service coverage ratios. We are in compliance with all such covenants at December 31, 2018 .

Our calculated compliance with financial covenants is presented below:



	Requirement	Level at December 31, 2018
Minimum fixed charge coverage ratio	1.01:1.00	1.02:1.00
Minimum adjusted EBITDA	$13.0 million	$20.8 million
EBITDAR (mortgaged centers)	$10.0 million	$15.4 million
Current ratio (as defined in agreement)	1.00:1.00	1.23:1.00

As part of the debt agreements entered into in February 2016, 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 and maturity date as the Amended Mortgage Loan, and carries an initial notional amount of $30.0 million . 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 us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.

Nasdaq Notification

On December 19, 2018, we received an initial notification letter from the Nasdaq Listing Qualifications Department indicating that the MVLS of our common stock had been below $35 million for the last 30 consecutive business days. In accordance with Nasdaq Listing Rules 5810(c)(3)(C), the Company has been provided a period of 180 calendar days, or until June 17, 2019, in which to regain compliance with the requirement. In order to regain compliance with the MVLS requirement, the Company must maintain a MVLS of at least $35 million for a minimum of ten consecutive business days during this 180-day period. If the Company does not regain compliance with this requirement by June 17, 2019, the Company will receive written notification that its securities are subject to delisting. At that time, the Company may appeal the delisting determination to a Hearing Panel. There can be no assurance that the Company will be successful in maintaining its listing of the Common Stock on the Nasdaq Capital Market. If our stock is delisted, it could have a negative impact on our liquidity and ability to issue new equity.

Capitalized Lease Obligations

Upon acquisition of certain centers, we assume certain leases, primarily related to equipment, that constitute capital leases. Additionally, the Company leases certain technology equipment that supports the clinical systems, including electronic medical records, at our nursing centers that constitute capital leases.

As a result of the lease agreements above, we have recorded the underlying lease assets and capitalized lease obligations of $0.9 million , $1.4 million , and $2.1 million as of December 31, 2018 , 2017 , and 2016 , respectively. These lease agreements provide terms of three to five years.

Receivables

Our operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid and other third-party revenue sources. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by us in the processing of our invoices, could adversely affect our liquidity and financial position.

Net accounts receivable attributable to patient services of continuing operations totaled $66.3 million at December 31, 2018 compared to $64.9 million at December 31, 2017 , representing approximately 50 days and 49 days revenue in accounts receivable, respectively. We continue to evaluate and implement additional procedures to strengthen our collection efforts and reduce the incidence of uncollectible accounts.

Inflation

Based on contract pricing for food and other supplies and recent market conditions, we expect cost increases in 2019 to be relatively the same or slightly lower than the increases in 2018 . We expect salary and wage increases for our skilled health care providers to continue to be higher than average salary and wage increases, as is common in the healthcare industry.

Off-Balance Sheet Arrangements

We have four letters of credit outstanding totaling approximately $13.6 million as of December 31, 2018 . The letters of credit serve as security deposits for certain center leases. The letters of credit were issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.

Forward-Looking Statements

The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as "may," "will," "should," "expect," "believe," "estimate," "intend," and similar words indicating possible future expectations, events or actions. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to:


•	our ability to successfully integrate the operations of our new nursing center in Alabama, as well as successfully operate all of our centers,


•	our ability to increase census and occupancy rates at our centers,


•	changes in governmental reimbursement,


•	government regulation,


•	the impact of the Affordable Care Act, efforts to repeal or significantly modify the Affordable Care Act, and other health care reform initiatives,


•	any increases in the cost of borrowing under our credit agreements,


•	our ability to comply with covenants contained in those credit agreements,


•	our ability to comply with the terms of our master lease agreements,


•	our ability to renew or extend our leases at or prior to the end of the existing lease terms,


•	the outcome of professional liability lawsuits and claims,


•	our ability to control ultimate professional liability costs,


•	the accuracy of our estimate of our anticipated professional liability expense,


•	the impact of future licensing surveys,


•	the outcome of proceedings alleging violations of state or federal False Claims Acts,


•	laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA and laws governing reimbursement from government payors,


•	the costs of investing in our business initiatives and development,


•	our ability to control costs,


•	our ability to attract and retain qualified healthcare professionals,


•	changes to our valuation of deferred tax assets,


•	changing economic and competitive conditions,


•	changes in anticipated revenue and cost growth,


•	our ability to regain compliance with the Nasdaq continued listing requirements,


•	changes in the anticipated results of operations,


•	the effect of changes in accounting policies as well as others.

Investors also should refer to the risks identified in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Part I. Item 1A. Risk Factors” for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of December 31, 2018 , we had outstanding borrowings of approximately $73.6 million , $45.9 million of which were subject to variable interest rates. In connection with February 2016 financing agreement, we entered into an interest rate swap with respect to one half of the Amended Mortgage Loan to mitigate the floating interest rate risk of such borrowing. In the event that interest rates were to change 1%, the impact on future pre-tax cash flows would be approximately $0.5 million annually, representing the impact of increased or decreased interest expense on variable rate debt.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Audited financial statements are contained on pages F-1 through F-35 of this Annual Report on Form 10-K and are incorporated herein by reference. Audited supplemental schedule data is contained on pages S-1 through S-2 of this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Diversicare, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2018 . Based on this evaluation, the principal executive and financial officers have determined that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission's rules and forms.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018 . Management reviewed the results of its assessment with our Audit Committee.

Changes in Internal Control over Financial Reporting

There has been no change (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting that has occurred during our fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments

in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning our Directors, Executive Officers and Corporate Governance is incorporated herein by reference to our definitive proxy statement for our 2019 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning Executive Compensation is incorporated herein by reference to our definitive proxy statement for our 2019 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Information concerning Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is incorporated herein by reference to our definitive proxy statement for our 2019 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning Certain Relationships and Related Transactions, and Director Independence is incorporated herein by reference to our definitive proxy statement for our 2019 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning the fees and services provided by our principal accountant is incorporated herein by reference to our definitive proxy statement for our 2019 Annual Meeting of Shareholders, which we will file within 120 days of the end of the fiscal year to which this Report relates.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The Financial statements and schedule for us and our subsidiaries required to be included in Part II, Item 8 are listed below.



	Form 10-K Pages
Financial Statements
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets as of December 31, 2018 and 2017	F-2
Consolidated Statements of Operations for the Years Ended December 31, 2018, 2017 and 2016	F-3
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2018, 2017 and 2016	F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2018, 2017 and 2016	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016	F-6
Notes to Consolidated Financial Statements as of December 31, 2018, 2017 and 2016	F-8 to F-35
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts	S-1 to S-2

Exhibits

The exhibits filed as part of this Report on Form 10-K are listed in the Exhibit Index immediately following the financial statement pages.

ITEM 16. FORM 10-K SUMMARY

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DIVERSICARE HEALTHCARE SERVICES, INC.

/s/ Chad A. McCurdy

Chad A. McCurdy

Chairman of the Board

February 28, 2019

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

President and Chief Executive Officer

(Principal Executive Officer)

February 28, 2019

/s/ Kerry D. Massey

Kerry D. Massey

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

February 28, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



/s/ Chad A. McCurdy	/s/ Robert Z. Hensley
Chad A. McCurdy	Robert Z. Hensley
Chairman of the Board and Director	Director
February 28, 2019	February 28, 2019

/s/ James R. McKnight, Jr.	/s/ Leslie K. Morgan
James R. McKnight, Jr.	Leslie K. Morgan
President and Chief Executive Officer	Director
Director	February 28, 2019
February 28, 2019

/s/ Robert A. McCabe, Jr.	/s/ Richard M. Brame
Robert A. McCabe, Jr.	Richard M. Brame
Director	Director
February 28, 2019	February 28, 2019

/s/ Ben R. Leedle, Jr.
Ben R. Leedle, Jr.
Director
February 28, 2019

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

Consolidated Financial Statements

For the Years Ended December 31, 2018 , 2017 and 2016

Together with Report of Independent Registered Public Accounting Firm

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets	F-2

Consolidated Statements of Operations	F-3

Consolidated Statements of Comprehensive Loss	F-4

Consolidated Statements of Shareholders' Equity	F-5

Consolidated Statements of Cash Flows	F-6

Notes to Consolidated Financial Statements	F-8 to F-35

Schedule II - Valuation and Qualifying Accounts	S-1 to S-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors

Diversicare Healthcare Services, Inc.

Brentwood, Tennessee

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Diversicare Healthcare Services, Inc. (the "Company") and subsidiaries as of December 31, 2018 and 2017 , the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018 , and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017 , and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ BDO USA, LLP

We have served as the Company's auditor since 2002.

Nashville, Tennessee

February 28, 2019

F-1

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2018 AND 2017

(in thousands, except per share amounts)



ASSETS	2018			2017			LIABILITIES AND SHAREHOLDERS' EQUITY	2018			2017

CURRENT ASSETS:							CURRENT LIABILITIES:
Cash	$	2,685		$	3,524		Current portion of long-term debt and capitalized lease obligations, less deferred financing costs, net	$	12,449		$	13,065
Receivables, less allowance for doubtful accounts of $0 and $14,235, respectively	66,257			64,929			Trade accounts payable	15,659			14,080
Self-insurance receivables	4,475			—			Current liabilities of discontinued operations	86			461
Other receivables	1,191			375			Accrued expenses:
Prepaid expenses and other current assets	4,728			3,248			Payroll and employee benefits	19,471			20,013
Income tax refundable	1,115			537			Self-insurance reserves, current portion	13,158			8,792
Current assets of discontinued operations	86			45			Provider taxes	2,394			3,090
Total current assets	80,537			72,658			Other current liabilities	7,128			4,766
							Total current liabilities	70,345			64,267
							NONCURRENT LIABILITIES:
PROPERTY AND EQUIPMENT, at cost	138,460			147,549			Long-term debt and capitalized lease obligations, less current portion and deferred financing costs, net	60,984			74,603
Less accumulated depreciation and amortization	(85,361		)	(78,345		)	Self-insurance reserves, noncurrent portion	16,057			13,458
	53,099			69,204			Litigation contingency	6,400			—
							Other noncurrent liabilities	6,656			8,779
							Total noncurrent liabilities	90,097			96,840
							COMMITMENTS AND CONTINGENCIES
							SHAREHOLDERS’ EQUITY (DEFICIT):
OTHER ASSETS:							Common stock, authorized 20,000 shares, $.01 par value, 6,751 and 6,687 shares issued, and 6,519 and 6,455 shares outstanding, respectively	68			67
Deferred income taxes, net	15,851			15,154			Treasury stock at cost, 232 shares of common stock	(2,500		)	(2,500		)
Deferred leasehold costs	206			137			Paid-in capital	23,413			22,720
Other noncurrent assets	3,244			3,725			Accumulated deficit	(23,016		)	(14,534		)
Acquired leasehold interest, net	6,307			6,691			Accumulated other comprehensive income	837			709
Total other assets	25,608			25,707			Total shareholders’ equity (deficit)	(1,198		)	6,462
	$	159,244		$	167,569			$	159,244		$	167,569

The accompanying notes are an integral part of these consolidated financial statements.

F-2

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



	Years Ended December 31,
	2018			2017			2016
PATIENT REVENUES, net	$	563,462		$	574,794		$	426,063
EXPENSES:
Operating	450,686			458,122			342,932
Lease and rent expense	57,073			54,988			33,364
Professional liability	11,796			10,764			8,456
Litigation contingency expense	6,400			—			—
General and administrative	32,791			33,311			30,271
Depreciation and amortization	11,201			10,902			8,292
Gain on sale of assets	(4,825		)	—			—
Lease termination costs (receipts)	—			(180		)	2,008
Total expenses	565,122			567,907			425,323
OPERATING INCOME (LOSS)	(1,660		)	6,887			740
OTHER INCOME (EXPENSE):
Other income	168			—			—
Equity in net income of investment in unconsolidated affiliate	—			—			273
Gain on bargain purchase	—			925			—
Gain on sale of investment in unconsolidated affiliate	308			733			1,366
Hurricane costs	—			(232		)	—
Interest expense, net	(6,653		)	(6,369		)	(4,802		)
Debt retirement costs	(267		)	—			(351		)
	(6,444		)	(4,943		)	(3,514		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(8,104		)	1,944			(2,774		)
BENEFIT (PROVISION) FOR INCOME TAXES	750			(6,743		)	1,030
LOSS FROM CONTINUING OPERATIONS	(7,354		)	(4,799		)	(1,744		)
LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of income tax benefit of $5, $43 and $41, respectively	(42		)	(28		)	(67		)
LOSS FROM DISCONTINUED OPERATIONS	(42		)	(28		)	(67		)
NET LOSS	$	(7,396	)	$	(4,827	)	$	(1,811	)
NET LOSS PER COMMON SHARE:
Per common share – basic
Continuing operations	$	(1.15	)	$	(0.76	)	$	(0.28	)
Discontinued operations	(0.01		)	(0.01		)	(0.01		)
	$	(1.16	)	$	(0.77	)	$	(0.29	)
Per common share – diluted
Continuing operations	$	(1.15	)	$	(0.76	)	$	(0.28	)
Discontinued operations	(0.01		)	(0.01		)	(0.01		)
	$	(1.16	)	$	(0.77	)	$	(0.29	)
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.17		$	0.22		$	0.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,372			6,279			6,199
Diluted	6,372			6,279			6,199

The accompanying notes are an integral part of these consolidated financial statements.

F-3

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)



	Years Ended December 31,
	2018			2017			2016
NET LOSS	$	(7,396	)	$	(4,827	)	$	(1,811	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax	279			976			1,082
Less: reclassification adjustment for amounts recognized in net loss	(151		)	(462		)	(500		)
Total other comprehensive income	128			514			582
COMPREHENSIVE LOSS	$	(7,268	)	$	(4,313	)	$	(1,229	)

The accompanying notes are an integral part of these consolidated financial statements.

F-4

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

(in thousands)



	Common Stock			Treasury Stock				Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity (Deficit)
	Shares Issued	Amount		Shares	Amount			Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity (Deficit)

BALANCE, DECEMBER 31, 2015	6,513	$	65	232	$	(2,500	)	$	21,142		$	(5,053	)	$	(387	)	$	13,267
Net loss	—	—		—	—			—			(1,811		)	—			(1,811		)
Common stock dividends declared	—	—		—	—			46			(1,412		)	—			(1,366		)
Issuance/redemption of equity grants, net	79	1		—	—			(106		)	—			—			(105		)
Interest rate cash flow hedge	—	—		—	—			—			—			582			582
Tax impact of equity grant exercises	—	—		—	—			65			—			—			65
Stock based compensation	—	—		—	—			788			—			—			788

BALANCE, DECEMBER 31, 2016	6,592	66		232	(2,500		)	21,935			(8,276		)	195			11,420
Net loss	—	—		—	—			—			(4,827		)	—			(4,827		)
Common stock dividends declared	—	—		—	—			47			(1,431		)	—			(1,384		)
Issuance/redemption of equity grants, net	95	1		—	—			(95		)	—			—			(94		)
Interest rate cash flow hedge	—	—		—	—			—			—			514			514
Stock based compensation	—	—		—	—			833			—			—			833

BALANCE, DECEMBER 31, 2017	6,687	67		232	(2,500		)	22,720			(14,534		)	709			6,462
Net loss	—	—		—	—			—			(7,396		)	—			(7,396		)
Common stock dividends declared	—	—		—	—			31			(1,086		)	—			(1,055		)
Issuance/redemption of equity grants, net	64	1		—	—			(218		)	—			—			(217		)
Interest rate cash flow hedge	—	—		—	—			—			—			128			128
Stock based compensation	—	—		—	—			880			—			—			880

BALANCE, DECEMBER 31, 2018	6,751	$	68	232	$	(2,500	)	$	23,413		$	(23,016	)	$	837		$	(1,198	)

The accompanying notes are an integral part of these consolidated financial statements.

F-5

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Years Ended December 31,
	2018			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(7,396	)	$	(4,827	)	$	(1,811	)
Loss from discontinued operations	(42		)	(28		)	(67		)
Loss from continuing operations	(7,354		)	(4,799		)	(1,744		)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	11,201			10,902			8,292
Provision for doubtful accounts	—			8,958			7,163
Deferred income tax provision (benefit)	(615		)	5,997			(1,569		)
Provision for self-insured professional liability, net of cash payments	2,325			1,342			1,968
Stock based and deferred compensation	1,127			1,027			1,012
Debt retirement costs	267			—			351
Provision for leases, net of cash payments	(106		)	(936		)	(1,773		)
Lease termination costs, net of cash payments	—			—			1,863
Equity in net income of investment in unconsolidated affiliate	—			—			(271		)
Litigation contingency expense	6,400			—			—
Gain on sale of assets and unconsolidated affiliate	(5,133		)	(733		)	(1,366		)
Gain on bargain purchase	—			(925		)	—
Deferred bonus	—			761			350
Other	415			523			576
Changes in other assets and liabilities affecting operating activities:
Receivables	(2,289		)	(10,721		)	(25,551		)
Prepaid expenses and other assets	(5,857		)	385			(1,620		)
Trade accounts payable and accrued expenses	6,010			1,589			10,224
Net cash provided by (used in) continuing operations	6,391			13,370			(2,095		)
Net cash used in discontinued operations	(740		)	(1,310		)	(3,523		)
Net cash provided by (used in) operating activities	5,651			12,060			(5,618		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(8,578		)	(9,730		)	(6,022		)
Nursing center acquisitions	—			—			(7,550		)
Acquisition of property and equipment through business combination	—			(8,750		)	—
Proceeds from sale of assets and unconsolidated affiliate	19,008			1,100			2,068
Change in restricted cash	—			—			1,658
Net cash provide by (used in) continuing operations	10,430			(17,380		)	(9,846		)
Net cash used in discontinued operations	—			—			—
Net cash provided by (used in) investing activities	10,430			(17,380		)	(9,846		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(36,683		)	(30,154		)	(73,374		)
Proceeds from issuance of debt	21,689			37,067			92,789
Financing costs	(146		)	(195		)	(2,162		)
Issuance and redemption of employee equity awards	(217		)	(94		)	(105		)
Payment of common stock dividends	(1,055		)	(1,384		)	(1,366		)
Payment for preferred stock restructuring	(508		)	(659		)	(640		)
Net cash provided by (used in) continuing operations	(16,920		)	4,581			15,142
Net cash used in discontinued operations	—			—			—
Net cash provided by (used in) financing activities	(16,920		)	4,581			15,142

(Continued)

F-6

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(continued)



	Years Ended December 31,
	2018			2017			2016
NET DECREASE IN CASH AND RESTRICTED CASH	$	(839	)	$	(739	)	$	(322	)
CASH AND RESTRICTED CASH, beginning of period	3,524			4,263			4,585
CASH AND RESTRICTED CASH, end of period	$	2,685		$	3,524		$	4,263
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments of interest, net of amounts capitalized	$	6,074		$	5,404		$	3,965
Cash payments of income taxes	$	498		$	847		$	549
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Acquisition of equipment through capital lease	$	689		$	507		$	1,851

The table below reconciles cash and restricted cash as reported in the consolidated balance sheets to the total of the same amounts shown in the consolidated statements of cash flows:
Cash	$	2,685		$	3,524		$	2,605
Restricted cash	—			—			$	1,658
Total cash and restricted cash shown in the consolidated statements of cash flows	$	2,685		$	3,524		$	4,263

The accompanying notes are an integral part of these consolidated financial statements.

F-7

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2018 , 2017 , and 2016

(Dollars and shares in thousands, except per share data)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Diversicare Healthcare Services, Inc. ("Diversicare" or the "Company") provides a broad range of post-acute care services to patients and residents including skilled nursing, ancillary health care services and assisted living. In addition to the nursing and social services usually provided in long-term care centers, we offer a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services.

As of December 31, 2018 , our continuing operations consist of 72 nursing centers with 8,214 licensed skilled nursing beds. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 429 licensed assisted living and other residential beds. Our continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas. The number of centers and beds denoted in these consolidated financial statements are unaudited.

Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the financial position, operations and accounts of Diversicare and its subsidiaries, all wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation.

Any joint ventures are accounted for using the equity method, which is an investment in an entity over which the Company lacks control, but otherwise has the ability to exercise significant influence over operating and financial policies. The Company had one equity method investee through the fourth quarter of 2016. The Company’s share of the profits and losses from this investment are reported in equity in net income of investment in unconsolidated affiliate and the proceeds received from the sale are reported in gain on sale of investment in unconsolidated affiliate in the accompanying consolidated statement of operations.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

The fees charged by the Company to patients in its nursing centers are recorded on an accrual basis. These rates are contractually adjusted with respect to individuals receiving benefits under federal and state-funded programs and other third-party payors. Rates under federal and state-funded programs are determined prospectively for each center and may be based on the acuity of the care and services provided. These rates may be based on a center's actual costs subject to program ceilings and other limitations or on established rates based on acuity and services provided as determined by the federal and state-funded programs. Amounts earned under federal and state programs with respect to nursing home patients are subject to review by the third-party payors which may result in retroactive adjustments. In the opinion of management, adequate provision has been made for any adjustments that may result from such reviews. Retroactive adjustments, if any, are recorded when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits.

Allowance for Doubtful Accounts

The Company's allowance for doubtful accounts is estimated utilizing current agings of accounts receivable, historical collections data and other factors. Management monitors these factors and determines the estimated provision for doubtful accounts. Historical bad debts have generally resulted from uncollectible private balances, some uncollectible coinsurance and deductibles and other factors. Receivables that are deemed to be uncollectible are written off. The allowance for doubtful accounts balance is assessed on a quarterly basis, with changes in estimated losses being recorded in the Consolidated Statements of Operations in the period identified. Refer to Note 3, "Revenue Recognition and Receivables" for more information.

F-8

Lease Expense

As of December 31, 2018 , the Company operates 57 nursing centers under operating leases, including 34 owned by Omega, 20 owned by Golden Living and three owned by other parties. The Company's operating leases generally require the Company to pay stated rent, subject to increases based on changes in the Consumer Price Index, a minimum percentage increase, or increases in the net revenues of the leased properties. The Company's Omega and Golden Living leases require the Company to pay certain scheduled rent increases. Such scheduled rent increases are recorded as additional lease expense on a straight-line basis recognized over the term of the related leases and the difference between the amounts recorded for rent expense as compared to rent payments as an accrued liability.

See Note 2, "Business Development and Other Significant Transactions" and Note 9, "Commitments and Contingencies" for a discussion regarding the Company's Master Leases with Omega and Golden Living and the addition of certain leased centers.

Classification of Expenses

The Company classifies all expenses (except lease, interest, depreciation and amortization expenses) that are associated with its corporate and regional management support functions as general and administrative expenses. All other expenses (except lease, professional liability, interest, depreciation and amortization expenses) incurred by the Company at the center level are classified as operating expenses. Operating expenses for the year ended December 31, 2017 are net of approximately $2.2 million received during 2017 related to a settlement of provider taxes appealed by the Company.

Property and Equipment

Property and equipment are recorded at cost or at fair value determined on the respective dates of acquisition for assets obtained in a business combination, with depreciation and amortization being provided over the shorter of the remaining lease term (where applicable) or the assets' estimated useful lives on the straight-line basis as follows:



Buildings and improvements	-	5 to 40 years
Leasehold improvements	-	2 to 10 years
Furniture, fixtures and equipment	-	2 to 15 years

Interest incurred during construction periods for qualifying expenditures is capitalized as part of the building cost. Maintenance and repairs are expensed as incurred, and major betterments and improvements are capitalized.

The Company routinely evaluates the recoverability of the carrying value of its long-lived assets, including when significant adverse changes in the general economic conditions and significant deteriorations of the underlying undiscounted cash flows or fair values of the property indicate that the carrying amount of the property may not be recoverable. If circumstances suggest that the recorded amounts are not recoverable based upon estimated future undiscounted cash flows, the carrying values of such assets are reduced to fair value.

Cash

Cash and cash equivalents include cash on deposit with banks and all highly liquid investments with original maturities of three months or less when purchased. Our cash on deposit with banks was subject to the Federal Deposit Insurance Corporation ("FDIC") minimum insurance levels. Effective January 1, 2013, the coverage provided by the FDIC that had been unlimited under the Dodd-Frank Deposit Insurance Provision is limited to the legal maximum, which is generally $250,000 per ownership category.

Deferred Financing and Other Costs

The Company records deferred financing and lease costs for direct and incremental expenditures related to entering into or amending debt and lease agreements. These expenditures include lenders and attorneys fees. Financing costs are amortized using the effective interest method over the term of the related debt. The amortization is reflected as interest expense in the accompanying consolidated statements of operations. Deferred lease costs are amortized on a straight-line basis over the term of the related leases. See Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations" for further discussion.

F-9

Acquired Leasehold Interest

The Company has recorded an acquired leasehold interest intangible asset related to an acquisition completed during 2007. The intangible asset is accounted for in accordance with the Financial Accounting Standards Board's ("FASB") guidance on goodwill and other intangible assets, and is amortized on a straight-line basis over the remaining life of the acquired lease. As discussed in Note 2, "Business Developments and Other Significant Transactions," the Company entered into a new Master Lease agreement with Omega on October 1, 2018. The new Master Lease includes the seven centers to which the intangible asset relates. As such, the intangible asset is now being amortized over an adjusted remaining life, consistent with the term of the new Master Lease, which goes through September 30, 2030. Amortization expense of approximately $384 related to this intangible asset was recorded during each of the years ended December 31, 2018 , 2017 and 2016 , respectively.

The carrying value of the acquired leasehold interest intangible and the accumulated amortization are as follows:



	December 31,
	2018			2017
Intangible assets	$	10,652		$	10,652
Accumulated amortization	(4,345		)	(3,961		)
Net intangible assets	$	6,307		$	6,691

The Company evaluates the recoverability of the carrying value of the acquired leasehold intangible in accordance with the FASB's guidance on accounting for the impairment or disposal of long-lived assets. Included in this evaluation is whether significant adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows or fair values of the intangible asset, indicate that the carrying amount of the intangible asset may not be recoverable. The need to recognize an impairment charge is based on estimated future undiscounted cash flows from the asset compared to the carrying value of that asset. If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the intangible asset exceeds the fair value of the intangible asset.

The expected amortization expense for the acquired leasehold interest intangible asset is as follows:



2019	$	534
2020	534
2021	534
2022	534
2023	534
Thereafter	3,637
	$	6,307

Self-Insurance

Self-insurance liabilities primarily represent the unfunded accrual for self-insured risks associated with general and professional liability claims, employee health insurance and workers' compensation. The Company's health insurance liability is based on known claims incurred and an estimate of incurred but unreported claims determined by an analysis of historical claims paid. The Company's workers' compensation liability relates primarily to periods of self insurance and consists of an estimate of the future costs to be incurred for the known claims.

Final determination of the Company's actual liability for incurred general and professional liability claims is a process that takes years. The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this unfunded accrual. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished by the Company. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company's past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company's ultimate professional liability cost for current periods.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company's insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator's estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company's evaluation of the actual claim information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for

F-10

settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual has an unfavorable impact on results of operations in the period and any reduction in the accrual increases results of operations during the period.

All losses are projected on an undiscounted basis. The self-insurance liabilities include estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of related legal costs incurred and expected to be incurred.

One of the key assumptions in the actuarial analysis is that historical losses provide an accurate forecast of future losses. Changes in legislation such as tort reform, changes in our financial condition, changes in our risk management practices and other factors may affect the severity and frequency of claims incurred in future periods as compared to historical claims.

The facts and circumstances of each claim vary significantly, and the amount of ultimate liability for an individual claim may vary due to many factors, including whether the case can be settled by agreement, the quality of legal representation, the individual jurisdiction in which the claim is pending, and the views of the particular judge or jury deciding the case.

Although the Company adjusts its unfunded accrual for professional and general liability claims on a quarterly basis and retains a third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company's actual liability for claims incurred in any given period is a process that takes years. As a result, the Company's actual liabilities may vary significantly from the unfunded accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company's results of operations and financial position for the period in which the change in accrual is made.

Income Taxes

Effective January 1, 2018, the Tax Act reduced the corporate rate from 35% to 21%. The Company has adopted ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows the company to record provisional amounts during the period of enactment. Any change to the provisional amounts are recorded as an adjustment to the provision for income taxes in the period the amounts are determined. During the year ended December 31, 2017, the company recognized a provisional net deferred income tax expense of $5,476 to reflect the revaluation of the Company’s net deferred tax assets based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed.

The Company follows the FASB's guidance on Accounting for Income Taxes , which requires the asset and liability method of accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are provided against any estimated non-realizable deferred tax assets where necessary.

Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely than not” outcome considering the technical merits of the position. While the judgments and estimates made by the Company are based on management’s evaluation of the technical merits of a matter, historical experience and other assumptions that management believes are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded estimated amounts, resulting in charges or credits that could materially affect future financial statements. See Note 8, "Income Taxes" for additional information related to the provision for income taxes.

Disclosure of Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. The carrying amounts of cash, receivables, trade accounts payable and accrued expenses approximate fair value because of the short-term nature of these accounts. The Company's self-insurance liabilities are reported on an undiscounted basis as the timing of estimated settlements cannot be determined.

The Company follows the FASB's guidance on Fair Value Measurements and Disclosures which provides rules for using fair value to measure assets and liabilities as well as a fair value hierarchy that prioritizes the information used to develop the

F-11

measurements. It applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value and gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

As further discussed in Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations", in conjunction with the debt agreements entered into in February 2016, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

As the Company's interest rate swap, a cash flow hedge, 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. The debt balances as presented in the consolidated balance sheets approximate the fair value of the respective instruments as the debt is at a variable rate, the estimates of which are considered Level 2 fair value calculations within the fair value hierarchy.

The following table presents by level, within the fair value hierarchy, assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017 :



December 31, 2018	Fair Value Measurements - Assets (Liabilities)
	Total		Level 1		Level 2		Level 3
Interest rate swap	$	384	$	—	$	384	$	—

December 31, 2017	Fair Value Measurements - Assets (Liabilities)
	Total		Level 1		Level 2		Level 3
Interest rate swap	$	211	$	—	$	211	$	—

The change in fair value of the Company's cash flow hedge is detailed in the Company's Consolidated Statements of Comprehensive Loss.

Net Loss per Common Share

The Company follows the FASB's guidance on Earnings Per Share for the financial reporting of net loss per common share. Basic earnings per common share excludes dilution and restricted shares and is computed by dividing income available to common shareholders by the weighted-average number of common shares, excluding restricted shares, outstanding for the period. Diluted earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or otherwise resulted in the issuance of common stock that then shared in the earnings of the Company. See Note 7, "Net Loss per Common Share" for additional disclosures about the Company's Net Loss per Common Share.

Stock Based Compensation

The Company follows the FASB's guidance on Stock Compensation to account for share-based payments granted to team members and recorded non-cash stock based compensation expense of $1,127 , $1,027 and $1,012 during the years ended December 31, 2018 , 2017 and 2016 , respectively. Such amounts are included as components of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. See Note 6, "Shareholders' Equity, Stock Plans and Preferred Stock" for additional disclosures about the Company's stock based compensation plans.

F-12

Accumulated Other Comprehensive Income

Accumulated other comprehensive income consists of other comprehensive income (loss). Comprehensive income (loss) is a more inclusive financial reporting method that includes disclosure of financial information that historically has not been recognized in the calculation of net income (loss). The Company has chosen to present the components of other comprehensive income (loss) in a separate statement of comprehensive income (loss). Currently, the Company's other comprehensive income (loss) consists of the change in fair value of the Company's interest rate swap transaction accounted for as a cash flow hedge.

Recent Accounting Standards Adopted by the Company

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. For public companies, Topic 606 is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the requirements of this standard effective January 1, 2018. The Company elected to apply the modified retrospective approach with the cumulative transition effect recognized in beginning retained earnings as of the date of adoption. The impact of the implementation to the consolidated financial statements for periods subsequent to the adoption is not material. See Note 3, "Revenue Recognition and Receivables" for a discussion regarding revenue recognition under the new standard.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of accounting for share-based payment transactions, including the income tax consequences and classification on the statement of cash flows. We adopted this standard as of January 1, 2017. The adoption did not have a material impact on our financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The ASU provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effective for annual and interim periods beginning after December 15, 2017, which required the Company to adopt these provisions in the first quarter of fiscal 2018 using a retrospective approach. The adoption did not have a material impact on our financial position, results of operations or cash flows.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that the Statement of Cash Flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as Restricted Cash. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for periods beginning after December 15, 2017, which required the Company to adopt these provisions in the first quarter of fiscal 2018. The adoption did not have a material impact on our financial position, results of operation or cash flows.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business, which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted in certain circumstances. The Company will evaluate future acquisitions and dispositions under this guidance, which may result in future acquisitions being accounted for as asset acquisitions.

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The amended standard specifies the modification accounting applicable to any entity which changes the terms or conditions of a share-based payment award. The new guidance is effective for all entities after December 15, 2017. The adoption did not have a material impact on our financial position, results of operations or cash flows.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs pursuant to SEC Staff Accounting Bulletin No. 118 ("SAB No. 118"), which allowed SEC registrants to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of the Tax Cuts and Jobs Act. The Company recognized the estimated income tax effects of the Tax Cuts and Jobs Act in its 2017 Consolidated Financial Statements in accordance with SAB No. 118.

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Accounting Standards Recently Issued But Not Yet Adopted by the Company

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which allows lessees and lessors to recognize and measure existing leases at the beginning of the period of adoption without modifying the comparative period financial statements (which therefore will remain under prior GAAP, Topic 840, Leases). The Company will adopt the requirements of this standard effective January 1, 2019. The Company elected to use the optional expedient to recognize existing leases in the period of adoption, January 1, 2019, rather than the earliest period presented. For periods presented under Topic 842, extensive quantitative and qualitative disclosures will be required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company has organized an implementation group of cross-functional departmental management to ensure the completeness of the lease information (specifically for new contracts entered into after the adoption date), analyze the appropriate classification of leases under the new standard, and develop new processes to execute, approve and classify new leases on an ongoing basis. The Company has also implemented software tools and processes to maintain lease information critical to applying the standard, including implemented changes to the systems, related processes and controls around leases. The Company elected to use the package of practical expedients upon transition, which includes retaining the lease classification for any leases that exist prior to adoption of the standard. The Company is currently in the process of evaluating the appropriate incremental borrowing rate under Topic 842. The implementation of this standard will have a material impact on the consolidated financial position, primarily from nursing center operating leases.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Loses on Financial Instruments. This update is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for the fiscal year beginning after December 15, 2019 with early adoption permitted. The Company is in the initial stages of evaluating the impact from the adoption of this new standard on the consolidated financial statements and related notes.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which is intended to simplify and amend the application of hedge accounting to more clearly portray the economics of an entity’s risk management strategies in its financial statements. The new guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting and reduce complexity in fair value hedges of interest rate risk. The new guidance also changes how companies assess effectiveness and amends the presentation and disclosure requirements. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally the entire change in the fair value of a hedging instrument will be required to be presented in the same income statement line as the hedged item. The new guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The new guidance is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period or fiscal year before the effective date. The implementation is complete and the Company will adopt the new standard on January 1, 2019. The standard has an immaterial impact on our consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance allows entities the option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income (OCI) to retained earnings. The new guidance allows the option to apply the guidance retrospectively or in the period of adoption. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect of this guidance will have on our consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which modifies the accounting for share-based payment awards issued to nonemployees to largely align it with the accounting for share-based payment awards issued to employees. The standard is effective for fiscal years beginning after December 15, 2018. The Company is evaluating the effect of this guidance will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820. The standard is effective for fiscal years beginning after December 15, 2019. Early

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adoption is permitted. The Company is evaluating the effect of this guidance will have on our consolidated financial statements and related disclosures.

In October 2018, FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 805): Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU amends ASC 815 to add the OIS rate based on the SOFR as a fifth US benchmark interest rate. The Company is evaluating the effect of this guidance will have on our consolidated financial statements and related disclosures.

2. BUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS

2017 Acquisition

On June 8, 2017, the Company entered into an Asset Purchase Agreement (the "Purchase Agreement") with Park Place Nursing and Rehabilitation Center, LLC, Dunn Nursing Home, Inc., Wood Properties of Selma LLC, and Homewood of Selma, LLC to acquire a 103 -bed skilled nursing center in Selma, Alabama, for an aggregate purchase price of $8,750 . In connection with the funding of the acquisition, on June 30, 2017, the Company amended the terms of its Second Amended and Restated Term Loan Agreement to increase the facility by $7,500 , which is described in Note 5, "Long-Term Debt, Interest Rate Swap and Capitalized Lease Obligations." The acquisition of the business closed on July 1, 2017. In accordance with ASC 805, this transaction was accounted for as a business combination, which resulted in the expensing of $140 of acquisition costs and a $925 recorded gain on bargain purchase for the Company for the year ended December 31, 2017. The operating results of the acquired center have been included in the Company's consolidated statement of operations since the acquisition date. Supplemental pro forma information regarding the acquisition is not material to the consolidated financial statements. The allocation of the purchase price to the net assets acquired is as follows:



	Park Place
Purchase Price	$	8,750
Gain on bargain purchase	925
	$	9,675

Allocation:
Building	$	8,435
Land	760
Land Improvements	145
Furniture, Fixtures and Equipment	335
	$	9,675

2018 Assets Sold

On October 30, 2018, the Company entered into an Asset Purchase Agreement (the "Agreement") with Fulton Nursing and Rehabilitation LLC, Holiday Fulton Propco LLC, Birchwood Nursing and Rehabilitation LLC, Padgett Clinton Propco LLC, Westwood Nursing and Rehabilitation LLC, and Westwood Glasgow Propco (the "Buyers") to sell the assets and transfer the operations of Diversicare of Fulton, LLC, Diversicare of Clinton, LLC and Diversicare of Glasgow, LLC (the "Kentucky Properties"). On December 1, 2018, the Company completed the sale of the Properties with the Buyers for a purchase price of $18,700 . This transaction did not meet the accounting criteria to be reported as a discontinued operation. The carrying value of these centers' assets were $13,331 , resulting in a gain of $4,825 , with remaining proceeds for miscellaneous closing costs. The proceeds were used to relieve debt, which is required under the terms of the Company's Amended Mortgage Loan and Amended Revolver. Refer to Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations" for more information on this transaction.

2017 Lease Termination

On September 30, 2017, the Company entered into an Agreement with Trend Health and Rehab of Carthage, LLC ("Trend Health") to terminate the lease and the Company's right of possession of the center in Carthage, Mississippi. In consideration of the early termination of the lease, Trend Health provided the Company with a $250 cash termination payment which is included in lease termination receipts in the accompanying consolidated statements of operations for the year ended December 31, 2017, net of costs to terminate. For accounting purposes, this transaction was not reported as a discontinued operation as this disposal did not represent a strategic shift that has (or will have) a major effect on the Company's operations and financial results.

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2016 Sale of Investment in Unconsolidated Affiliate

On October 28, 2016, the Company and its partners entered into an asset purchase agreement to sell the pharmacy joint venture. The sale resulted in a $1,366 gain in the fourth quarter of 2016. Subsequently, we recognized additional gains of $308 and $733 for the years ended December 31, 2018 and 2017, respectively, related to the continuing liquidation of remaining net assets affiliated with the partnership.

3. REVENUE RECOGNITION AND RECEIVABLES

On January 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 606 using the modified retrospective method for all contracts as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP". The adoption of ASC 606 represents a change in accounting principle that more closely aligns revenue recognition with the delivery of the Company's services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. ASC 606 requires companies to exercise more judgment and recognize revenue in accordance with the standard's core principle by applying the following five steps:

Step 1: Identify the contract with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

Performance obligations are promises made in a contract to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company has concluded that the contracts with patients and residents represent a bundle of distinct services that are substantially the same, with the same pattern of transfer to the customer. Accordingly, the promise to provide quality care is accounted for as a single performance obligation.

The Company performed analyses using the application of the portfolio approach as a practical expedient to group patient contracts with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were evaluated on a contract-by-contract basis. These analyses incorporated consideration of reimbursements at varying rates from Medicaid, Medicare, Managed Care, Private Pay, Assisted Living, Hospice, and Veterans for services provided in each corresponding state. It was determined that the contracts are not materially different for the following groups: Medicaid, Medicare, Managed Care and Private Pay and other (Assisted Living, Hospice and Veterans).

In order to determine the transaction price, the Company estimates the amount of variable consideration at the beginning of the contract using the expected value method. The estimates consider (i) payor type, (ii) historical payment trends, (iii) the maturity of the portfolio, and (iv) geographic payment trends throughout a class of similar payors. The Company typically enters into agreements with third-party payors that provide for payments at amounts different from the established charges. These arrangement terms provide for subsequent settlement and cash flows that may occur well after the service is provided. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. Changes in the Company's expectation of the amount it will receive from the patient or third-party payors will be recorded in revenue unless there is a specific event that suggests the patient or third-party payor no longer has the ability and intent to pay the amount due and, therefore, the changes in its estimate of variable consideration better represent an impairment, or bad debt. These estimates are re-assessed each reporting period, and any amounts allocated to a satisfied performance obligation are recognized as revenue or a reduction of revenue in the period in which the transaction price changes.

The Company satisfies its performance obligation by providing quality of care services to its patients and residents on a daily basis until termination of the contract. The performance obligation is recognized on a time elapsed basis, by day, for which the services are provided. For these contracts, the Company has the right to consideration from the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date. Therefore, the Company recognizes revenue based on the amount billable to the customer in accordance with the practical expedient in ASC 606-10-55-18. Additionally, because the Company applied ASC 606 using certain practical expedients, the Company elected not to disclose the aggregate amount of the transaction price for unsatisfied, or partially unsatisfied, performance obligations for all contracts with an original expected length of one year or less.

The Company incurs costs related to patient/resident contracts, such as legal and advertising expenses. The contract costs are expensed as incurred. They are not expected to be recovered and are not chargeable to the patient/resident regardless of whether the contract is executed.

Financial Statement Impact of Adopting ASC 606

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The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers as of January 1, 2018 was not material to the consolidated financial statements. As a result of applying the modified retrospective method to adopt ASC 606, the following adjustments were made to our operating results:



	Twelve Months Ended December 31, 2018
	As Reported	Increase (Decrease)		Balances as if the previous accounting guidance was in effect
Patient Revenues, net	$563,462	14,682	(a)	$577,657
		(487)	(b)
		14,195
Operating Expenses	$450,686	14,682	(a)	$465,368
Total Expenses	$565,122	14,682	(a)	$579,804

(a) Adjusts for the implicit price concession of bad debt expense.

(b) Adjusts for the implementation of ASC 606.



	As of December 31, 2018
	As Reported	Increase (Decrease)		Balances as if the previous accounting guidance was in effect
Accounts Receivable	$66,257	(487)	(a)	$83,031
		17,261	(b)
		16,774
Accumulated Deficit	$(23,016)	487	(a)	$(22,575)
		(46)	(c)
		441

(a) Adjusts for the implementation of ASC 606.

(b) Adjusts for a direct reduction of accounts receivable that would have been reflected as allowance for doubtful accounts in the consolidated balance sheet prior to the adoption of ASC 606.

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Disaggregation of Revenue and Accounts Receivable

The following table summarizes revenue from contracts with customers by payor source for the periods presented (dollar amounts in thousands):



	Twelve Months Ended December 31,
	2018				2018				2017(1)
	As reported				As Adjusted to Legacy GAAP				As reported
Medicaid	$	267,015	47.4	%	$	303,412	52.5	%	$	300,926	52.4	%
Medicare	110,794		19.7	%	143,104		24.8	%	149,020		25.9	%
Managed Care	53,242		9.4	%	46,988		8.1	%	42,673		7.4	%
Private Pay and other	132,411		23.5	%	84,153		14.6	%	82,175		14.3	%
Total	$	563,462	100.0	%	$	577,657	100.0	%	$	574,794	100.0	%

(1) As noted above, prior period amounts have not been adjusted under the application of the modified retrospective method.

Accounts receivable as of December 31, 2018 and 2017 is summarized in the following table:



	December 31,
	2018		As Adjusted to Legacy GAAP			2017

Medicaid	$	8,126	$	10,229		$	9,356
Medicare	$	15,706	$	17,592		$	20,007
Managed Care	27,532		30,105			29,453
Private Pay and other	14,893		25,592			20,348
	66,257		83,518			79,164
Less: allowance for doubtful accounts	—		(17,261		)	(14,235		)
Accounts receivable, net	66,257		66,257			64,929

4. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following:



	December 31,
	2018			2017

Land	$	5,283		$	6,521
Buildings and leasehold improvements	87,995			98,140
Furniture, fixtures and equipment	45,182			42,888
	138,460			147,549
Less: accumulated depreciation	(85,361		)	(78,345		)
Net property and equipment	$	53,099		$	69,204

As discussed further in Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations", the property and equipment of certain skilled nursing centers are pledged as collateral for mortgage debt obligations. In addition, the Company has assets recorded as capital leased assets purchased through capitalized lease obligations. The Company capitalizes leasehold improvements which will revert back to the lessor of the property at the expiration or termination of the lease, and depreciates these improvements over the shorter of the remaining lease term or the assets' estimated useful lives.

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

Long-term debt consists of the following:



	December 31,
	2018			2017
Mortgage loan with a syndicate of banks; 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.	$	51,730		$	64,567
Acquisition loan with Canadian Imperial Bank of Commerce, interest at 4.75% above LIBOR.	6,900			7,500
Revolving credit facility borrowings payable to a bank; secured by receivables of the Company; interest at 4.0% above LIBOR.	15,000			16,000
Loan to finance equipment	—			40
	73,630			88,107
Less current portion	(12,449		)	(13,065		)
	61,181			75,042
Less deferred financing costs, net	(1,125		)	(1,884		)
Plus capitalized lease obligations	928			1,445
Long-term debt and capital lease obligation	$	60,984		$	74,603

Included in the current portion of long-term debt is $5 million related to the Revolver and $5 million related to the Acquisition Line, which are both due on February 26, 2021. It is classified as a current liability because it is management's intent to pay within the next 12 months.

As of December 31, 2018 , the Company's weighted average interest rate on long-term debt, including the impact of the interest rate swap, was approximately 6.31% .

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 allocated between a $72,500 Mortgage Loan ("Amended Mortgage Loan") and a $27,500 Revolver ("Amended Revolver"). The Amended Mortgage Loan consists of $60,000 term and $12,500 acquisition loan facilities. As of December 31, 2018 , financing costs associated with the Amended Mortgage Loan and the Amended Revolver in the amount of $146 are netted against the related debt and are being amortized over the five -year term of the agreements, which are included in debt.

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72,500 with a five -year maturity through February 26, 2021, and a $27,500 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 . The Amended Mortgage Loan balance was $58,630 as of December 31, 2018 , consisting of $51,730 on the term loan facility with an interest rate of 6.5% and $6,900 on the acquisition loan facility with an interest rate of 7.25% . The Amended Mortgage Loan is secured by 15 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 ("Second Revolver Amendment") to amend the Amended Revolver. The Second Amendment increased the Amended Revolver capacity from the $27,500 in the Amended Revolver to $52,250 ; provided that the maximum revolving facility be reduced to $42,250 on August 1, 2017. Subsequently, on June 30, 2017, the Company executed a Fourth Amendment (the "Fourth Revolver Amendment") to amend the Amended Revolver, which modifies the capacity of the revolver to remain at $52,250 .

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

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Effective June 30, 2017, the Company entered into a Second Amendment (the "Second Term Amendment") to amend the Amended Mortgage Loan. The Second Term Amendment amends the terms of the Amended Mortgage Loan by increasing the Company's term loan facility by $7,500 .

Effective February 27, 2018, the Company executed a Fifth Amendment to the Amended Revolver and a Third Amendment to the Amended Mortgage Loan. Under the terms of the Amendments, the minimum fixed charge coverage ratio shall not be less than 1.01 to 1.00 as of March 31, 2018 and for each quarter thereafter.

Effective December 1, 2018, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the Amended Revolver. The Sixth Amendment decreased the Amended Revolver capacity from $52,250 to $42,250 . The Company also applied $4,947 of net proceeds from the sale of the Kentucky centers to the outstanding borrowings under the Amended Revolver.

Effective December 1, 2018, the Company executed a Fourth Amendment (the "Fourth Term Amendment") to amend the Amended Mortgage Loan. The Company applied $11,100 and $2,100 of net proceeds from the sale of the Kentucky centers to the Term Loan and Acquisition Loan, respectively. Additionally, we amended the Acquisition Loan availability to include a reserve of $2,100 , and therefore, our borrowing capacity is $10,400 . For further discussion of the sale of the Kentucky centers, refer to Note 2, "Business Development and Other Significant Transactions."

As of December 31, 2018 , the Company had $15,000 in borrowings outstanding under the Amended Revolver compared to $16,000 outstanding as of December 31, 2017 . The interest rate related to the Amended Revolver was 6.50% as of December 31, 2018 . The outstanding borrowings on the revolver were used primarily for temporary working capital requirements. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has 4 letters of credit with a total value of $13,593 outstanding as of December 31, 2018 . Considering the balance of eligible accounts receivable, the letter of credit, the amounts outstanding under the Amended Revolver and the maximum loan amount of $36,648 , the balance available for borrowing under the Amended Revolver was $8,055 at December 31, 2018 .

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, 2018 .

In connection with the Company's 2018 and 2017 financing agreements, the Company recorded the following amounts related to deferred loan costs, with such costs classified as a reduction of the debt balances discussed above:



	2018		2017
Write-off of deferred financing costs	$	267	$	—
Deferred financing costs capitalized	$	146	$	195

The deferred financing costs included in the current and long-term debt balances were $1,125 at December 31, 2018 and $1,884 at December 31, 2017 .

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



2019	$	11,995
2020	8,993
2021	52,642
Total	$	73,630

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 $27,695 as of December 31, 2018 . 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

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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, 2018 , the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net asset of $384 at December 31, 2018 . The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company's consolidated balance sheets. The asset related to the change in the interest rate swap included in accumulated other comprehensive income at December 31, 2018 is $234 , net of income tax benefit of $150 . 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 liabilities and capitalized lease obligations of $928 and $1,445 as of December 31, 2018 and 2017 , respectively. These lease agreements provide three to five year terms.

Scheduled payments of the capitalized lease obligations are as follows:



2019	$	500
2020	202
2021	189
2022	131
Total	1,022
Amounts related to interest	(94		)
Principal payments on capitalized lease obligation	$	928

6. SHAREHOLDERS' EQUITY, STOCK PLANS AND PREFERRED STOCK

Stock Based Compensation Plans

The Company follows the FASB's guidance on Stock Compensation to account for stock-based payments granted to employees and non-employee directors.

Overview of Plans

In June 2008, the Company adopted the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (“Stock Purchase Plan”). The Stock Purchase Plan provides for the granting of rights to purchase shares of the Company's common stock to directors and officers and 150 shares of the Company's common stock has been reserved for issuance under the Stock Purchase Plan. The Stock Purchase Plan allows participants to elect to utilize a specified portion of base salary, annual cash bonus, or director compensation to purchase restricted shares or restricted share units (“RSU's”) at 85% of the quoted market price of a share of the Company's common stock on the date of purchase. The restriction period under the Stock Purchase Plan is generally two years from the date of purchase and during which the shares will have the rights to receive dividends, however, the restricted share certificates will not be delivered to the shareholder and the shares cannot be sold, assigned or disposed of during the restriction period and are subject to forfeiture. In June 2016, our shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common stock authorized under the Plan from 150 shares to 350 shares. No grants can be made under the Stock Purchase Plan after April 25, 2028.

In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”), followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation rights, stock options and other share and cash based awards. In June 2017, our shareholders approved an amendment to the Long-Term Incentive Plan to increase the number of shares of our common stock authorized under the Plan from 380 shares to 680 shares. No grants can be made under the 2010 Plan after May 31, 2027.

Equity Grants and Valuations

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During 2018 and 2017 , the Compensation Committee of the Board of Directors approved grants totaling approximately 90 and 88 , respectively, shares of restricted common stock to certain employees and members of the Board of Directors. These restricted shares vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. Upon vesting, all restrictions are removed. Our policy is to account for forfeitures of share-based compensation awards as they occur.

The Company recorded non-cash stock-based compensation expense from continuing operations for equity grants and RSU's issued under the Plans of $1,127 , $1,027 , and $1,012 during the years ended December 31, 2018 , 2017 , and 2016 , respectively. Such amounts are included as components of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. As of December 31, 2018 , there was $384 in unrecognized compensation costs related to stock-based compensation to be recognized over the applicable remaining vesting periods. The Company estimated the total recognized and unrecognized compensation for all options and SOSARs using the Black-Scholes-Merton equity grant valuation model. Restricted stock awards are valued using the market price on the grant date.

The table below shows the weighted average assumptions the Company used to develop the fair value estimates under its option valuation model:



	Year Ended December 31,
	2018	2017	2016
Expected volatility (range)	47%-49%	N/A ⁽¹⁾	N/A ⁽¹⁾
Risk free interest rate (range)	2.68%-2.75%	N/A ⁽¹⁾	N/A ⁽¹⁾
Expected dividends	2.70%	N/A ⁽¹⁾	N/A ⁽¹⁾
Weighted average expected term (years)	6	N/A ⁽¹⁾	N/A ⁽¹⁾

___________


(1)	The Company did not issue any options or other equity grants that would require application of the Black-Scholes-Merton equity grant valuation model during the years ended December 31, 2017 and 2016. All equity grants during these periods were restricted common shares which are valued using an intrinsic valuation method based on market price.

In computing the fair value estimates using the Black-Scholes-Merton valuation model, the Company took into consideration the exercise price of the equity grants and the market price of the Company's stock on the date of grant. The Company used an expected volatility that equals the historical volatility over the most recent period equal to the expected life of the equity grants. The risk free interest rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company used the expected dividend yield at the date of grant, reflecting the level of annual cash dividends currently being paid on its common stock.

In computing the fair value of these equity grants, the Company estimated the equity grants' expected term based on the average of the vesting term and the original contractual terms of the grants.

The table below describes the resulting weighted average grant date fair values calculated as well as the intrinsic value of options exercised under the Company's equity awards during each of the following years:



	Year Ended December 31,
	2018		2017 ⁽¹⁾		2016 ⁽¹⁾
Weighted average grant date fair value	$	3.05	$	—	$	—
Total intrinsic value of exercises	$	115	$	2	$	3

___________


(1)	The Company did not issue any options or other equity grants that would require application of the Black-Scholes-Merton equity grant valuation model during the years ended December 31, 2017 and 2016. All equity grants during this period were restricted common shares which are valued using an intrinsic valuation method based on market price.

The following table summarizes information regarding stock options and SOSAR grants outstanding as of December 31, 2018 :

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	Weighted
	Average			Intrinsic			Intrinsic
Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$8.14 to $10.21	$	9.32	60	$	—	60	$	—
$2.37 to $5.86	$	5.32	62	$	—	62	$	—
			122			122

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As of December 31, 2018 , the outstanding equity grants have a weighted average remaining life of 2.26 years and those outstanding equity grants that are exercisable have a weighted average remaining life of 2.7 years. During the year ended December 31, 2018 , approximately 100 stock option and SOSAR grants were exercised under these plans. All of the equity grants exercised were net settled. The net payments from equity grants exercised in 2018 was $(217) .

Summarized activity of the equity compensation plans is presented below:



			Weighted
	SOSARs/		Average
	Options		Exercise Price
Outstanding, December 31, 2017	211		$	6.64
Granted	30		8.14
Exercised	(100	)	5.79
Expired or cancelled	(19	)	9.17
Outstanding, December 31, 2018	122		$	7.29

Exercisable, December 31, 2018	102		$	7.13



			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2017	164		$	9.95
Granted	90		8.14
Dividend Equivalents	4		6.95
Vested	(131	)	9.71
Cancelled	(7	)	9.62
Outstanding December 31, 2018	120		$	8.77

Summarized activity of the Restricted Share Units for the Stock Purchase Plan is as follows:



			Weighted
			Average
	Restricted		Grant Date
	Share Units		Fair Value
Outstanding, December 31, 2017	44		$	9.59
Granted	17		8.14
Dividend Equivalents	1		6.89
Vested	(19	)	8.92
Cancelled	—		—
Outstanding December 31, 2018	43		$	9.26

Series A Preferred Stock

The Company is authorized to issue up to 200 shares of Series A Preferred Stock. The Company's Board of Directors is authorized to establish the terms and rights of each series, including the voting powers, designations, preferences, and other special rights, qualifications, limitations, or restrictions thereof.

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7.	NET LOSS PER COMMON SHARE

Information with respect to the calculation of basic and diluted net income (loss) per common share is presented below:



	Years Ended December 31,
	2018			2017			2016
Numerator: Loss:
Loss from continuing operations	$	(7,354	)	$	(4,799	)	$	(1,744	)
Loss from discontinued operations, net of income taxes	(42		)	(28		)	(67		)
Net loss	$	(7,396	)	$	(4,827	)	$	(1,811	)

Denominator: Basic Weighted Average Common Shares Outstanding:	6,372			6,279			6,199

Basic net loss per common share
Loss from continuing operations	$	(1.15	)	$	(0.76	)	$	(0.28	)
Loss from discontinued operations
Operating loss, net of taxes	(0.01		)	(0.01		)	(0.01		)
Discontinued operations, net of taxes	(0.01		)	(0.01		)	(0.01		)
Basic net loss per common share	$	(1.16	)	$	(0.77	)	$	(0.29	)



	2018			2017			2016
Numerator: Loss from continuing operations	$	(7,354	)	$	(4,799	)	$	(1,744	)
Loss from discontinued operations, net of income taxes	(42		)	(28		)	(67		)
Net loss	$	(7,396	)	$	(4,827	)	$	(1,811	)

Basic weighted average common shares outstanding	6,372			6,279			6,199
Incremental shares from assumed exercise of options, SOSARS and Restricted Stock Units	—			—			—
Denominator: Diluted Weighted Average Common Shares Outstanding:	6,372			6,279			6,199

Diluted net loss per common share
Loss from continuing operations	$	(1.15	)	$	(0.76	)	$	(0.28	)
Loss from discontinued operations
Operating loss, net of taxes	(0.01		)	(0.01		)	(0.01		)
Discontinued operations, net of taxes	(0.01		)	(0.01		)	(0.01		)
Diluted net loss per common share	$	(1.16	)	$	(0.77	)	$	(0.29	)

The dilutive effects of the Company's stock options, SOSARs, Restricted Shares and Restricted Share Units are included in the computation of diluted income per common share during the periods they are considered dilutive.

The following table reflects the weighted average outstanding SOSARs and Options that were excluded from the computation of diluted earnings per share, as they would have been anti-dilutive:



	2018	2017	2016
SOSARs/Options Excluded	114,000	45,000	31,000

The weighted average common shares for basic and diluted earnings for common shares was the same due to the losses in 2018, 2017 and 2016.

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8. INCOME TAXES

Overview

Effective January 1, 2018, the Tax Act reduced the corporate rate from 35% to 21%. The Company has adopted ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows the company to record provisional amounts during the period of enactment. Any change to the provisional amounts are recorded as an adjustment to the provision for income taxes in the period the amounts are determined. During the year ended December 31, 2017, the company recognized a provisional net deferred income tax expense of $5,476 to reflect the revaluation of the Company’s net deferred tax assets based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed.

The provision (benefit) for income taxes on continuing operations for the years ended December 31, 2018 , 2017 and 2016 is summarized as follows:



	Year Ended December 31,
	2018			2017			2016
Current provision (benefit) :
Federal	$	(49	)	$	274		$	17
State	(86		)	472			522
	(135		)	746			539
Deferred provision (benefit):
Federal	50			6,585			(1,284		)
State	(665		)	(588		)	(285		)
	(615		)	5,997			(1,569		)
Provision (benefit) for income taxes of continuing operations	$	(750	)	$	6,743		$	(1,030	)

A reconciliation of taxes computed at statutory income tax rates on income (loss) from continuing operations is as follows:



	Year Ended December 31,
	2018			2017			2016
Provision (benefit) for federal income taxes at statutory rates	$	(1,672	)	$	711		$	(889	)
Provision for state income taxes, net of federal benefit	(479		)	421			120
Valuation allowance changes affecting the provision for income taxes	(146		)	(372		)	(45		)
Employment tax credits	(64		)	(217		)	(529		)
Nondeductible expenses	1,919			496			453
Stock based compensation expense	15			(35		)	(62		)
Effect of Tax Cuts and Jobs Creation Act	—			5,476			—
Other	(323		)	263			(78		)
Provision (benefit) for income taxes of continuing operations	$	(750	)	$	6,743		$	(1,030	)

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Deferred Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that we will realize only some portion of the deferred tax assets. The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:



	December 31,
	2018			2017
Deferred tax assets (liabilities):
Net operating loss and other carryforwards	$	324		$	495
Credit carryforwards	2,878			3,237
Allowance for doubtful accounts	4,570			3,626
Prepaid expenses	(1,022		)	(731		)
Interest rate limitation	148			—
Deferred lease costs	—			32
Depreciation	1,318			1,190
Tax goodwill and intangibles	(1,079		)	(972		)
Stock-based compensation	197			476
Accrued liabilities	896			773
Accrued rent	1,914			1,892
Kentucky and Kansas acquisition costs	3			4
Impairment of long-lived assets	191			186
Interest rate swap	(152		)	(14		)
Hedge Ineffectiveness	(168		)	(106		)
Noncurrent self-insurance liabilities	5,997			5,443
Other	64			—
	16,079			15,531
Less valuation allowance	(228		)	(377		)
	$	15,851		$	15,154

Deferred Tax Valuation Allowance

The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting standards is highly judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax assets and liabilities, projected future taxable income, tax-planning strategies, and the results of recent operations. Since this evaluation requires consideration of historical and future events, there is significant judgment involved, and our conclusion could be materially different should certain of our expectations not transpire.

When assessing all available evidence, we consider the weight of the evidence, both positive and negative, based on the objectivity of the underlying evidence and the extent to which it can be verified. For the three-year period ended December 31, 2018 , the Company has a cumulative pre-tax loss from continuing operations of $8,934 , which includes $8,104 of loss attributable to the year ended December 31, 2018 . Additionally, the Company recognized governmental and regulatory changes have put downward revenue pressure on the long-term care industry as a piece of negative evidence in our analysis. As a result of this negative evidence, the Company performed a thorough assessment of the available positive and negative evidence in order to ascertain whether it is more-likely-than-not that in future periods the Company will generate sufficient pre-tax income to utilize all of our federal deferred tax assets and our net operating loss and other carryforwards and credits. State deferred tax assets are considered for valuation separately and on a state-by-state basis.

The Company also identified several pieces of objective positive evidence which were considered and weighed in the analysis performed regarding the valuation of deferred tax assets, including, but not limited to the expected accretive strategic acquisitions completed by us during the three-year period, corporate and regional restructuring expected to reduce costs while maintaining revenue levels, the long-term expiration dates of a majority of the net operating losses and credits, our history of not having carryforwards or credits expire unutilized, and the completed divestiture of the centers in Mississippi in 2017 and Ohio in 2016.

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In performing the analysis, the Company contemplated utilization of the deferred tax assets under multiple scenarios. After consideration of these factors, the Company determined that it was more likely than not that future taxable income would be sufficient to realize substantially all of the recorded value of the Company's deferred tax assets for federal income tax purposes.

Realization of the deferred tax assets is not assured and future events could result in a change in judgment. If future events result in a conclusion that realization is no longer more likely than not to occur, the Company would be required to establish a valuation allowance on the deferred tax assets at that time, which would result in a charge to income tax expense and a potentially material decrease in net income in the period in which the factors change our judgment.

At December 31, 2018 , the Company had $6,028 of net operating losses, which expire at various dates beginning in 2019 and continue through 2021. The use of a portion of these loss carryforwards is limited by change in ownership provisions of the Federal tax code to a maximum of approximately $1,162 . The Company has reduced the deferred tax asset and the corresponding valuation allowances for net operating loss deductions permanently lost as a result of the change in ownership provisions.

With respect to state deferred tax assets, the Company reduced the valuation allowance by approximately $147 in 2018 , primarily related to the expectation that deferred tax assets for which valuation allowances had previously been applied would more-likely-than-not be utilized as a result of the increase in taxable income during the year ended December 31, 2018 . In 2017 and 2016 , the Company recorded a deferred tax provision to adjust approximately $357 and $47 , respectively, of the valuation allowance on state deferred tax assets. The changes in valuation allowance were based on the Company's assessment of the realization of certain individual tax assets. The Company did not record a valuation allowance as of December 31, 2018 .

Under the Work Opportunity Tax Credit ("WOTC") program, the Company recorded $64 , $210 and $550 in Work Opportunity Tax Credits during 2018 , 2017 and 2016 , respectively.

The Company received a notice of an audit by the Internal Revenue Service related to the 2012 tax year, which was closed in 2017 . As of December 31, 2018 , the Company’s tax years for 2014 forward are subject to examination by tax authorities.

9. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company is committed under long-term operating leases with various expiration dates and varying renewal options. Minimum annual rentals (exclusive of taxes, insurance, and maintenance costs) under these leases beginning January 1, 2019 , are as follows:



2018	$	58,291
2019	59,391
2020	60,575
2021	61,808
2022	63,065
Thereafter	321,797
	$	624,927

Under these lease agreements, the Company's lease payments are subject to periodic annual escalations as described below and in Note 1, "Business and Summary of Significant Accounting Policies". Total lease expense for continuing operations was $57,073 , $54,988 and $33,364 for 2018 , 2017 and 2016 , respectively. The accrued liability related to straight line rent was $6,877 and $6,983 at December 31, 2018 and 2017 , respectively, and is included in “Other noncurrent liabilities” on the accompanying consolidated balance sheets.

Omega Master Lease

On October 1, 2018, the Company entered into a New Master Lease Agreement (the "Omega Master Lease") with Omega Healthcare Investors (the "Lessor") to lease 34 centers currently owned by Omega and operated by Diversicare. The old Master Lease with Omega provided for its operation of 23 skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and Ohio. Additionally, Diversicare operates 11 centers owned by Omega, previously under separate leases in Missouri, Kentucky, Indiana, and Ohio. The Omega Master Lease entered into by Diversicare and Omega consolidated the leases for all 34 centers under one New Master Lease. The Omega Master Lease has an initial term of twelve years with the option of two ten year extensions at the Company's election. The Omega Master Lease has annual rent escalators of 2.15% beginning on October 1, 2019.

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Under generally accepted accounting principles, the Company is required to report these scheduled rent increases on a straight line basis over the term of the lease. These scheduled increases had no effect on cash rent payments at the start of the lease term and only result in additional cash outlay as the annual increases take effect each year.

The Omega Master Lease requires the Company to fund annual capital expenditures related to the leased centers at an amount currently equal to four-hundred dollars per licensed bed. These amounts are subject to adjustment for increases in the Consumer Price Index. The Company is in compliance with the capital expenditure requirements. Total required capital expenditures during the remaining lease term are $18,611 . These capital expenditures are being depreciated on a straight-line basis over the shorter of the asset life or the appropriate lease term.

Upon expiration of the Omega Master Lease or in the event of a default under the Omega Master Lease, the Company is required to transfer all of the leasehold improvements, equipment, furniture and fixtures of the leased centers to Omega. The assets to be transferred to Omega are being amortized on a straight-line basis over the shorter of the remaining lease term, excluding the renewal options, or estimated useful life, and will be fully depreciated upon the expiration of the lease. All of the equipment, inventory and other related assets of the centers leased pursuant to the Omega Master Lease have been pledged as security under the Omega Master Lease. In addition, the Company has a letter of credit of $6,909 as a security deposit for the Company's leases with Omega, as described in Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations".

Renovation Funding

In January 2013, we entered into an amendment to the former master lease with Omega under which Omega agreed to provide an additional $5,000 to fund renovations to two nursing centers located in Texas that are leased from Omega. The annual base rent related to these centers is increased to reflect the amount of capital improvements to the respective centers as the related expenditures are made. The increase is based on a rate of 10.25% per year of the amount financed under this amendment.

The Company completed an expansion to one of its centers by making use of fifteen licensed beds it acquired in 2005. This expansion project was funded by Omega with the renovation funding previously described. Accordingly, the costs incurred to expand the center were recorded as a leasehold improvement asset with the amounts reimbursed by Omega for this project included as a long-term liability and were amortized to rent expense over the remaining term of the lease. The capitalized leasehold improvements and lessor reimbursed costs were amortized over the initial lease term that ended in September 2018. The leasehold improvement asset and accumulated amortization are as follows:



	December 31
	2018			2017
Leasehold improvement	$	921		$	921
Accumulated Amortization	(921		)	(842		)
Net	$	—		$	79

Golden Living Master Lease

The Company leases 20 nursing centers from Golden Living. On October 1, 2016, the Company and Golden Living entered into a Master Lease ("Golden Living Lease") agreement to lease eight centers located in Mississippi. On November 1, 2016, the Company and Golden Living entered into an Amended and Restated Master Lease ("Amended Lease") to extend the term of its centers leased from Golden Living and lease an additional twelve centers located in Alabama. The Amended Lease is triple net and has an initial term of ten years with two separate five year options to extend the term. Base rent for the amended lease is $24,675 for the first year and escalates 2% annually thereafter. Under generally accepted accounting principles, the Company is required to report these scheduled rent increases on a straight line basis over the term of the lease including the 10 year term of the renewal period. These scheduled increases had no effect on cash rent payments at the start of the lease term and only result in additional cash outlay as the annual increases take effect each year.

The Golden Living Lease requires the Company to fund annual capital expenditures related to the leased centers at an amount currently equal to five hundred and ten dollars per licensed bed. These amounts are subject to adjustment for increases in the Consumer Price Index. The Company is in compliance with the capital expenditure requirements. Total required capital expenditures during the remaining lease term and renewal options are $7,955 . These capital expenditures are being depreciated on a straight-line basis over the shorter of the asset life or the appropriate lease term.

Upon expiration of the Golden Living Lease or in the event of a default under the Golden Living Lease , the Company is required to transfer all of the leasehold improvements, equipment, furniture and fixtures of the leased centers to Golden Living. The assets to be transferred to Golden Living are being amortized on a straight-line basis over the shorter of the remaining lease term or estimated useful life, and will be fully depreciated upon the expiration of the lease. All of the equipment, inventory and other

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related assets of the center leased pursuant to the Golden Living Lease have been pledged as security under the Golden Living Lease. In addition, the Company has a letter of credit of $6,354 as a security deposit for the Company's leases with Golden Living, as described in Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations".

Insurance Matters

Professional Liability and Other Liability Insurance

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), to replace some of the expiring commercial policies. SHC covers losses up to specified limits per occurrence. All of the Company's nursing centers in Florida and Tennessee are now covered under the captive insurance policies along with most of the nursing centers in Alabama, Kentucky, and Texas. The insurance coverage provided for these centers under the SHC policy includes coverage limits of at least $1,000 per medical incident with a sublimit per center of $3,000 and total annual aggregate policy limits of $5,000 . All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the insurance subsidiary.

The Company follows the FASB Accounting Standards Update, “Presentation of Insurance Claims and Related Insurance Recoveries,” that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim liability should be determined without consideration of insurance recoveries. Accordingly, the estimated insurance recovery receivables are included within "Other Current Assets" on the Consolidated Balance Sheet. As of December 31, 2018 and 2017 , there are $5,478 and $1,579 , respectively, estimated insurance recovery receivables.

Reserve for Estimated Self-Insured Professional Liability Claims

Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and incurred but not reported claims of $27,201 and $20,057 as of December 31, 2018 and 2017 , respectively. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, estimates of insurance settlements over the deductible, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party actuarial firm to assist in the evaluation of this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company’s past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claim information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases results of operations in the period and any reduction in the accrual increases results of operations during the period.

The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $6,540 , $6,593 , and $4,456 for the years ended December 31, 2018 , 2017 and 2016 , respectively.

Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains a third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given

F-30

period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

Other Insurance

With respect to workers' compensation insurance, substantially all of our employees are covered under either a prefunded deductible policy or state-sponsored program. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. From June 30, 2003 until June 30, 2007, the Company’s workers’ compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. For the period from July 1, 2007 until June 30, 2008, the Company was completely insured for workers' compensation exposure. For the period from July 1, 2008 through December 31, 2017, the Company is covered by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500 per claim, subject to an aggregate maximum of $3,000 . The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims is $618 and $867 at December 31, 2018 and 2017 , respectively. The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,258 and $1,113 as of December 31, 2018 and 2017 , respectively. The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred.

As of December 31, 2018 , the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $200 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $1,396 and $1,326 at December 31, 2018 and 2017 , respectively. The differences between actual settlements and reserves are included in expense in the period finalized.

Employment Agreements

The Company has employment agreements with certain members of management that provide for the payment to these members of amounts up to 2.0 times their annual salary in the event of a termination without cause, a constructive discharge (as defined in each employee agreement), or upon a change in control of the Company (as defined in each employee agreement). The maximum contingent liability under these agreements is $1,692 as of December 31, 2018 . The terms of such agreements are from 1 to 3 years and automatically renew for 1 year if not terminated by the employee or the Company.

No amounts have been accrued for these contingent liabilities for members of management the Company currently employs.

Health Care Industry and Legal Proceedings

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our center. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of December 31, 2018 , we are engaged in 78 professional liability lawsuits, which are reserved for as discussed above. Eighteen lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the two centers that were the subject of the original civil investigative demand ("CID"). In connection with this matter, between July 2013 and early February 2016, the Company has received three civil investigative demands (a form of subpoena) for documents. The Company has responded to those demands and also provided voluntarily additional information requested by the DOJ. The DOJ has also taken testimony from current and former employees of the Company. In May 2018, the Company learned that a

F-31

second FCA complaint had been filed in late 2016 relating to the Company’s practices and policies for rehabilitation therapy at some of its facilities. The government’s investigation relates to the Company’s practices and policies for rehabilitation and other services at all of its facilities, for preadmission evaluation forms ("PAEs") required by TennCare and for Pre-Admission Screening and Resident Reviews ("PASRRs") required by the Medicare program.

The Company is engaged in preliminary discussions with the DOJ regarding settlement of this investigation. The Company denies any wrong doing and is prepared to vigorously defend its actions. However, based upon preliminary settlement discussions, the Company believes that it is probable a loss will result from this contingency and has accrued $6,400 as a contingent liability in connection with this matter during the year ended December 31, 2018. The Company cannot predict whether a settlement can be achieved, the outcome of the litigation if there is no settlement or the length of time necessary to conclude this matter. Accordingly, the contingent liability has been classified as a noncurrent liability in the accompanying interim consolidated balance sheets. The Company’s ultimate ability to settle this investigation will depend on several factors, including whether the amount and terms of an acceptable settlement can be reached with the DOJ, the Company’s assessment of the risks of litigating this case and the effect of protracted litigation or settlement terms on the Company’s business plans. Because the outcome of this investigation and related settlement discussions remain uncertain, there is a reasonable possibility that the amount ultimately incurred in connection with the resolution of this matter could differ materially from the current accrual, as the Company cannot, at this time, estimate the possible range of loss that may result from either a settlement or litigation of this matter. The ultimate outcome of this litigation could have a materially adverse effect on the Company, including the imposition of treble damages, criminal charges, fines, penalties and/or a corporate integrity agreement.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Center over the five -year period prior to the filing of the complaints. The lawsuit remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. Our reserve for professional liability expenses does not include any amounts for the pending DOJ investigation or the purported class action against the Arkansas centers. An unfavorable outcome in any of these lawsuits or any of our professional liability actions, any regulatory action, any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act case could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.

F-32

10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Selected quarterly financial information for each of the quarters in the years ended December 31, 2018 and 2017 is as follows:



	Quarter
2018	First			Second			Third			Fourth

Patient revenues, net	$	141,285		$	141,082		$	141,431		$	139,664
Professional liability expense ⁽¹⁾	2,775			3,182			2,933			2,906
Income (loss) from continuing operations	(81		)	(307		)	(7,389		)	423
Loss from discontinued operations	(22		)	(4		)	(8		)	(8		)
Net income (loss)	$	(103	)	$	(311	)	$	(7,397	)	$	415

Basic net income (loss) per common share:
Income (loss) from continuing operations	$	(0.01	)	$	(0.05	)	$	(1.15	)	$	0.07
Loss from discontinued operations	—			—			—			—
Net income (loss) per common share	$	(0.01	)	$	(0.05	)	$	(1.15	)	$	0.07



Diluted net income (loss) per common share:
Income (loss) from continuing operations	$	(0.01	)	$	(0.05	)	$	(1.15	)	$	0.07
Loss from discontinued operations	—			—			—			—
Net income (loss) per common share	$	(0.01	)	$	(0.05	)	$	(1.15	)	$	0.07


(1)	The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed further in Note 9, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of 2018 is set forth in the table above.

F-33



	Quarter
2017	First			Second			Third			Fourth

Patient revenues, net	$	141,500		$	142,550		$	146,377		$	144,367
Professional liability expense ⁽¹⁾	2,670			2,724			2,617			2,753
Income (loss) from continuing operations	1,348			381			(581		)	(5,947		)
Income (loss) from discontinued operations	(15		)	(28		)	1			14
Net income (loss)	$	1,333		$	353		$	(580	)	$	(5,933	)

Basic net income (loss) per common share:
Income (loss) from continuing operations	$	0.22		$	0.06		$	(0.09	)	$	(0.94	)
Loss from discontinued operations	—			—			—			—
Net income (loss) per common share	$	0.22		$	0.06		$	(0.09	)	$	(0.94	)



Diluted net income (loss) per common share:
Income (loss) from continuing operations	$	0.21	$	0.06	$	(0.09	)	$	(0.94	)
Loss from discontinued operations	—		—		—			—
Net income (loss) per common share	$	0.21	$	0.06	$	(0.09	)	$	(0.94	)


(1)	The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed further in Note 9, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of 2017 is set forth in the table above.

F-34

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

OF CONTINUING OPERATIONS

(in thousands)



Description	Balance at Beginning of Period	Impact of ASC 606 Adoption ⁽¹⁾	Additions Charged to Costs and Expenses	Deductions	Balance at End of Period
Year ended December 31, 2018: Allowance for doubtful accounts	$14,235	$(14,235)	$—	$—	$—
Year ended December 31, 2017: Allowance for doubtful accounts	$10,326	$—	$8,958	$(5,049)	$14,235
Year ended December 31, 2016: Allowance for doubtful accounts	$8,180	$—	$7,163	$(5,017)	$10,326

(1) Subsequent to the adoption of ASC 606, the allowance for doubtful accounts related to bad debt expense has been incorporated as an implicit price concession factored into net revenue and accounts receivable.

S-1

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



Column A	Column B	Column C			Column D	Column E
			Additions		Deductions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts ⁽²⁾	Other	Payments ⁽¹⁾	Balance at End of Period
Year ended December 31, 2018:
Professional Liability Reserve	$20,057	$8,865	$—	$5,475	$(7,196)	$27,201
Workers Compensation Reserve	$867	$(18)	$—	$—	$(231)	$618
Health Insurance Reserve	$1,326	$14,369	$—	$—	$(14,299)	$1,396
Year ended December 31, 2017:
Professional Liability Reserve	$19,977	$7,935	$—	$—	$(7,855)	$20,057
Workers Compensation Reserve	$171	$995	$—	$—	$(299)	$867
Health Insurance Reserve	$1,019	$13,769	$—	$—	$(13,462)	$1,326
Year ended December 31, 2016:
Professional Liability Reserve	$21,618	$6,423	$—	$114	$(8,178)	$19,977
Workers Compensation Reserve	$227	$372	$—	$—	$(428)	$171
Health Insurance Reserve	$686	$8,896	$—	$(137)	$(8,426)	$1,019


(1)	Payments for the Professional Liability Reserve include amounts paid for claims settled during the period as well as payments made under structured arrangements for claims settled in earlier periods.


(2)	The Company has presented the results of certain divestiture and lease termination transactions as discontinued operations. The amounts charged to Other Accounts represent the amounts charged to discontinued operations.

S-2



Exhibit
Number		Description of Exhibits



3.1			Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on Form S-1, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.2			Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2006).

3.3			Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-76150 on Form S-1, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.4			Bylaw Amendment adopted November 5, 2007 (incorporated by reference to Exhibit 3.4 to the Company's annual report on Form 10-K for the year ended December 31, 2007).

3.5			Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company's Form 8-A filed March 30, 1995, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

3.6			Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2001).

3.7			Certificate of Ownership and Merger of Diversicare Healthcare Services, Inc. with and into Advocat Inc. (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed March 14, 2013).

3.8			Amendment to Certificate of Incorporation dated June 9, 2016 (incorporated by reference to Exhibit 3.8 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

3.9			Bylaw Second Amendment adopted April 14, 2016 (incorporated by reference to Exhibit 3.9 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2017.

4.1			Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

*10.1			Master Agreement and Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement No. 33-76150 on Form S-1).

10.2			Form of Director Indemnification Agreement (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement No. 33-76150 on Form S-1, filed in paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T).

10.3			Consolidated Amended and Restated Master Lease dated November 8, 2000, effective October 1, 2000, between Sterling Acquisition Corp. (as Lessor) and Diversicare Leasing Corp. (as Lessee) (incorporated by reference to Exhibit 10.84 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.4			Management Agreement effective October 1, 2000, between Diversicare Leasing Corp. and Diversicare Management Services Co. (incorporated by reference to Exhibit 10.85 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.5			Amended and Restated Security Agreement dated as of November 8, 2000 between Diversicare Leasing Corp. and Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.86 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.6			Guaranty given as of November 8, 2000 by Registrant, Advocat Finance, Inc., and Diversicare Management Services Co., in favor of Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.88 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.7			First Amendment to Consolidated Amended and Restated Master Lease dated September 30, 2001 by and between Sterling Acquisition Corp. and Diversicare Leasing Corporation (incorporated by reference to Exhibit 10.126 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001).




10.8			Second Amendment to Consolidated Amended and Restated Master Lease dated as of June 15, 2005 by and between Sterling Acquisition Corp. and Diversicare Leasing Corporation (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).

10.9			Third Amendment to Consolidated Amended and Restated Master Lease executed as of October 20, 2006, to be effective as of October 1, 2006 by and between Sterling Acquisition Corp. and Diversicare Leasing Corporation (incorporated by reference to Exhibit 10.2 to the Company's current report on Form 8-K filed October 24, 2006).

10.10			Fourth Amendment to Consolidated Amended and Restated Master Lease executed and delivered as of April 1, 2007 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2007).

10.11			Fifth Amendment to Consolidated Amended and Restated Master Lease dated as of August 10, 2007 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2007).

10.12			Sixth Amendment to Consolidated Amended and Restated Master Lease dated as of March 14, 2008 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2008).

10.13			Seventh Amendment to Consolidated Amended and Restated Master Lease dated as of October 24, 2008 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2008).

*10.14			Advocat Inc. 2005 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on April 20, 2006).

*10.15			First Amendment to the Advocat Inc. 2005 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.63 to the Company's annual report on Form 10-K for the year ended December 31, 2008).

*10.16			Advocat Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on April 28, 2010).

10.17			First Amendment to the Diversicare Healthcare Services, Inc. 2010 Long-Term Incentive Plan (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed on April 26, 2017).

*10.18			Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (incorporated by reference to Appendix A to the Company's Definitive Proxy Statement on Schedule 14A filed May 2, 2008).

10.19			Ninth Amendment to Consolidated Amended and Restated Master Lease dated as of May 5, 2009 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2009).

10.20			Tenth Amendment to Consolidated Amended and Restated Master Lease dated as of September 8, 2009 by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp., a Tennessee corporation (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2009).

10.21			Eleventh Amendment to the Amended and Restated Master Lease between the Company and Sterling Acquisition Corp., an affiliate of Omega Healthcare Investors, Inc. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2011).

*10.22			Amended and Restated Employment Agreement effective as of April 1, 2012, by and between Advocat Inc., a Delaware corporation, and Kelly Gill (incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2012).

*10.23			Employment Agreement effective August 20, 2012, between James R. McKnight, Jr. and Advocat Inc. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2012).



*10.24			Employment Agreement effective January 1, 2013, between Leslie Campbell and Advocat Inc. (incorporated by reference to Exhibit 10.49 to the Company’s annual report on Form 10-K for the year ended December 31, 2012).

*10.25			Amendment No. 1 to Amended and Restated Employment Agreement effective as of March 1, 2013 by and between Advocat Inc., a Delaware corporation, and Kelly Gill (incorporated by reference to Exhibit 10.50 to the Company's annual report on Form 10-K for the year ended December 31, 2012).

10.26			Thirteenth Amendment to Consolidated Amended and Restated Master Lease effective September 1, 2013 by and between Sterling Acquisition Corp. and Diversicare Leasing Corp. (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2013).

10.27			Fifteenth Amendment to Consolidated Amended and Restated Master Lease dated as of June 30, 2014 by and between the Company and Sterling Acquisition Corp. (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2014).

10.28			Second Amended and Restated Term Loan and Security Agreement dated February 26, 2016 (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2016).

10.29			Second Amended and Restated Guaranty (Revolver) dated as of February 26, 2016, by the Company to and for the benefit of The PrivateBank in its capacity as administrative agent.

10.30			Second Amended and Restated Guaranty (Term) dated as of February 26, 2016, by the Company to and for the benefit of The PrivateBank in its capacity as administrative agent.

10.31			Third Amended and Restated Revolving Loan and Security Agreement dated February 26, 2016 (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2016).

10.32			Amendment to Diversicare Healthcare Services, Inc. 2008 Employee Stock Purchase Plan for Key Personnel (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

10.33			First Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated August 3, 2016 (incorporated by reference to exhibit 10.12 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

10.34			First Amendment to Second Amended and Restated Term Loan and Security Agreement dated August 3, 2016 (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).

10.35			Second Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated October 3, 2016 (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2016).

10.36			Third Amendment to the Third Amended and Restated Revolving Loan and Security Agreement dated December 29, 2016.

**10.37			Amended and Restated Golden Living Master Lease Agreement dated November 1, 2016.

10.38			Fourth Amendment to the Third Amended and Restated Revolving Loan And Security Agreement dated June 30, 2017 (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2017).

10.39			Second Amendment to the Second Amended and Restated Term Loan and Security Agreement dated June 30, 2017 (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2017).

10.40			Fifth Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated February 27, 2018.

10.41			Third Amendment to Second Amended and Restated Term Loan and Security Agreement dated February 27, 2018.

10.42			Kelly Gill Separation Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018).




10.43		Employment Agreement effective September 10, 2018, between Kerry D. Massey and Diversicare Healthcare Services, Inc. (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed September 5, 2018).

10.44		Amended Employment Agreement effective July 6, 2018, between James R. McKnight, Jr. and Diversicare Healthcare Services, Inc. (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed September 20, 2018).

** 10.45		Master Lease Agreement Effective October 1, 2018 by and between the Company and Omega Healthcare Investors (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018).

10.46		Amended and Restated Guaranty in favor of Omega Healthcare Investors, Inc. dated October 1, 2018.

10.47		Amended and Restated Security Agreement dated October 1, 2018 by and among the Company and a syndicate of financial institutions and banks.

10.48		Asset Purchase Agreement dated October 30, 2018 by and between Diversicare of Fulton, LLC, Diversicare of Fulton Properties, LLC, Diversicare of Clinton, LLC, Diversicare of Clinton Properties, LLC, Diversicare of Glasgow, LLC and Fulton Nursing and Rehabilitation LLC, Holiday Fulton Propco LLC, Birchwood Nursing and Rehabilitation LLC, Padgett Clinton Propco LLC and Westwood Nursing and Rehabilitation LLC.

10.49		Fourth Amendment to Second Amended and Restated Term Loan and Security Agreement dated December 1, 2018.

10.50		Sixth Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated December 1, 2018.

21		Subsidiaries of the Registrant.

23.1		Consent of BDO USA, LLP.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	*	Indicates management contract or compensatory plan or arrangement.
	**	Confidential treatment has been requested for portions of this exhibit

SECOND AMENDED AND RESTATED GUARANTY

(REVOLVING LOANS)

THIS SECOND AMENDED AND RESTATED GUARANTY (“ Guaranty ”) dated as of February 26, 2016, by DIVERSICARE HEALTHCARE SERVICES, INC. , a Delaware corporation (“ Guarantor ”), is to and for the benefit of THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation in its capacity as administrative agent for the Lenders identified below (together with its successors and assigns, the “ Administrative Agent ”).

R E C I T A L S:

A. DIVERSICARE MANAGEMENT SERVICES CO. , a Tennessee corporation, (together with each (i) of the other direct and indirect subsidiaries of Guarantor identified on Schedule 1.1(a) of the Loan Agreement (as defined below) as borrowers thereunder and (ii) additional borrowers from time to time party to the Loan Agreement (whether pursuant to an amendment, written joinder or otherwise), individually and collectively referred to herein as, “ Borrower ”, has requested that the Administrative Agent on behalf of the Lenders make certain revolving loans (individually and collectively, the “ Loan ”) to Borrower pursuant to and in accordance with that certain Third Amended and Restated Revolving Loan and Security Agreement dated of even date herewith by and among Borrower, the lenders party thereto (collectively, the “ Lenders ”), and the Administrative Agent (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the “ Loan Agreement ”); capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement.

B. As security for repayment of the Loan, in addition to this Guaranty, certain other loan and security documents have been executed and delivered to the Administrative Agent. The Loan Agreement, the Revolving Credit Notes, the Pledge Agreements, the Blocked Account Agreement, this Guaranty, each other guaranty delivered in favor of the Administrative Agent on behalf of the Lenders in connection with the Loan Agreement, and any and all other instruments, agreements, and documents executed in conjunction herewith and therewith (including, without limitation, each of the “Financing Agreements” (as defined in the Loan Agreement)) are hereinafter sometimes collectively referred to herein as the “ Loan Documents .”

C. The Guarantor and Borrower are Affiliates of each other. Guarantor will derive substantial direct and indirect benefit (financial and otherwise) from the Loan made to Borrower under the Loan Agreement. The Guarantor desires to induce the Administrative Agent on behalf of the Lenders to make the Loan to Borrower.

D. Administrative Agent on behalf of the Lenders is unwilling to make the Loan pursuant to the Loan Agreement unless Guarantor guarantees the payment of the principal and interest and all other amounts due or owing to the Administrative Agent and Lenders provided in the Loan Agreement and other Loan Documents and the performance by Borrower of all of the covenants on Borrower’s part to be performed and observed pursuant to the terms thereof, and Guarantor has agreed to execute and deliver this Guaranty to Administrative Agent (for the ratable benefit of Lenders and Administrative Agent).

DM3\3777657.3

NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION RECEIVED , the adequacy and sufficiency of which is hereby acknowledged, and in further consideration of any advances, credit or other financial accommodation heretofore, now or that may hereafter at any time be extended to Borrower by Administrative Agent on behalf of Lenders under, pursuant to or in connection with the Loan Documents, (a) Guarantor hereby, jointly and severally, together with each Other Guarantor (as defined in Section 3 below), and, unconditionally and irrevocably, guarantees, irrespective of the validity or enforceability of any instrument, writing or agreement relating to or the subject of any such advances, financial accommodation or loans (including, but not limited to, the Loan Documents), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, (i) the full and prompt payment to Administrative Agent and Lenders at maturity, whether by acceleration or otherwise, and at all times thereafter of any and all “Liabilities” (as defined in the Loan Agreement) of every kind and nature of Borrower to Administrative Agent and Lenders (arising out of or in connection with the Loan, the Loan Agreement, and each of the other Loan Documents to which Borrower (or any of its Affiliates) is a party, including, without limitation, for principal, interest, default interest, charges, fees, indemnification, costs, expenses, reasonable attorneys’ fees, or otherwise), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, howsoever evidenced, whether now existing or hereafter created or arising, directly or indirectly, primary or secondary, absolute or contingent, due or to become due, and howsoever owned, held or acquired, whether through discount, overdraft, purchase, direct loan or as collateral, or otherwise, and (ii) the prompt, full and faithful performance and discharge by Borrower of each and every of the terms, conditions, agreements, covenants, representations and warranties on the part of Borrower contained in any agreement, the Loan Agreement and each of the other Loan Documents to which Borrower is a party, and any other promissory notes, loan agreements, or security agreements, or in any modification or addenda thereto or substitution thereof in connection with any advance, credit or financial accommodation afforded by Administrative Agent on behalf of Lenders to Borrower (collectively the “ Guaranteed Liabilities ”); and (b) Guarantor further agrees to pay all costs and expenses, legal and/or otherwise (including, but not limited to, court costs and reasonable attorneys’ fees and expenses), paid or incurred by Administrative Agent on behalf of Lenders in endeavoring to collect the Guaranteed Liabilities, the Extraordinary Claims (as hereinbelow defined), or in either case, any part thereof, or in enforcing this Guaranty or in defending any suit based on any act of commission or omission of Administrative Agent or Lenders with respect to the Liabilities, the Collateral (as defined in the Loan Agreement), or this Guaranty or in connection with any Recovery Claim (as hereinbelow defined) (the “ Enforcement Costs ”); and (c) Guarantor further agrees to pay any and all costs, losses, damages and reasonable attorney’s fees incurred by the Administrative Agent in connection with any of the following: (i) misapplication or misappropriation of any insurance or condemnation proceeds; and (ii) Borrower or Guarantor institutes or becomes by virtue of a counterclaim a party to any case, action, suit, or proceeding which reduces, impedes or impairs Administrative Agent’s right of recourse to the Collateral or any part thereof or Borrower or Guarantor engages in any act, omission, or misrepresentation which has the effect of suspending, delaying, reducing, impeding, or impairing the Administrative Agent’s right of recourse to the Collateral or any part thereof (each of the aforesaid are collectively referred to as an “ Extraordinary Claims ”). The Guaranteed Liabilities, the Enforcement Costs, and the Extraordinary Claims are

DM3\3777657.3

collectively referred to as the “ Guaranteed Obligations .” Capitalized terms used herein and not otherwise defined herein shall have the meaning given to them in the Loan Agreement.

Guarantor hereby further agrees as follows:

1. Continuing Guaranty . This Guaranty includes any and all Guaranteed Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Guaranteed Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Guaranteed Obligations after prior Guaranteed Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, Guarantor hereby waives any right to revoke this Guaranty as to future Liabilities. If such a revocation is effective notwithstanding the foregoing waiver, Guarantor acknowledges and agrees that (a) no such revocation shall be effective until written notice thereof has been received by Administrative Agent, (b) no such revocation shall apply to any Guaranteed Obligations in existence on such date (including, but not limited to, any subsequent continuation, extension, or renewal thereof, or change in the interest rate, payment terms, or other terms and conditions thereof), (c) no such revocation shall apply to any Guaranteed Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of Administrative Agent in existence on the date of such revocation, (d) no payment by Guarantor, Borrower, or from any other source, prior to the date of such revocation shall reduce the maximum obligation of Guarantor hereunder, and (e) any payment by Borrower or from any source other than Guarantor, subsequent to the date of such revocation, shall first be applied to that portion of the Guaranteed Obligations as to which the revocation is effective and which are not, therefore, guaranteed hereunder, and to the extent so applied shall not reduce the maximum obligation of Guarantor hereunder.

2. Performance Under This Guaranty . If Borrower fails to make any payment of any Guaranteed Obligations on or before the due date thereof and after the expiration of the applicable notice and cure period, if any, or if Borrower shall fail, after the expiration of the applicable notice and cure period, if any, to perform, keep, observe, or fulfill any other obligation, covenant or agreement referred to or contained in any instrument, writing, document or agreement relating to the Guaranteed Obligations, Guarantor immediately shall cause such payment to be made or each of such obligations to be performed, kept, observed, or fulfilled to the extent such obligations constitute Guaranteed Obligations.

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or any such Other Guarantor is joined in such action. Guarantor agrees that Guarantor’s liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement of any lien, security interest, mortgage or realization upon any security or collateral Administrative Agent may at any time possess. Guarantor agrees that any release which may be given by Administrative Agent to Borrower or any Other Guarantor shall not release Guarantor. Guarantor consents and agrees that Administrative Agent shall be under no obligation to marshal any assets of Borrower or any Other Guarantor in favor of said Guarantor, or against or in payment of any or all of the Guaranteed Obligations.

4. Return of Payments . Guarantor agrees that, if at any time all or any part of any payment theretofore applied by Administrative Agent to any amounts due under the Loan or the Loan Agreement is rescinded or returned by Administrative Agent or any Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy, liquidation or reorganization of any party), such amounts shall, for the purposes of this Guaranty, be deemed to have continued in existence to the extent of such payment, notwithstanding such application by Administrative Agent and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such amounts due under the Loan and the Loan Agreement, all as though such application by Administrative Agent or Lenders had not been made.

5. Waivers .

(a) Guarantor hereby waives: (1) notice of acceptance hereof; (2) notice of any Loan or other financial accommodations made or extended to Borrower or the creation or existence of any Guaranteed Obligations; (3) notice of the amount of the Guaranteed Obligations, subject, however, to Guarantor’s right to make inquiry of Administrative Agent to ascertain the amount of the Guaranteed Obligations at any reasonable time; (4) notice of any adverse change in the financial condition of Borrower or of any other fact that might increase Guarantor’s risk hereunder; (5) notice of presentment for payment, demand, protest, and notice thereof as to any promissory notes or other instruments, writing or agreements evidencing Guaranteed Obligations; (6) notice of any event of default by Borrower under any instrument, writing or agreement with Administrative Agent or any Lender including the Loan Documents; and (7) all other notices (except if such notice is specifically required to be given to Guarantor hereunder) and demands to which Guarantor might otherwise be entitled.

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security or collateral for the Loan, or any part thereof, whether by commercial code sale or otherwise, Administrative Agent may, at its discretion, purchase all or any part of such collateral offered for sale, for its own account (on behalf of the Lenders and itself), and may apply against the amount bid therefore the balance due it pursuant to the terms of the Loan Agreement and other Loan Documents. Guarantor further agrees that Guarantor is bound to the payment of all Guaranteed Obligations, whether now existing or hereafter accruing, as fully as if such Guaranteed Obligations were directly owing to Administrative Agent and Lenders by Guarantor. Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid) of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof. Guarantor consents to any and all forbearances and extensions of the time of payment of the Loan Agreement or any of the other Loan Documents, and to any and all changes in the terms, covenants and conditions thereof hereafter made or granted, and to any part of the collateral therefor; it being the intention and agreement hereof that Guarantor shall remain unconditionally liable as a principal as, to and until the Guaranteed Obligations shall have been fully repaid to Administrative Agent on behalf of the Lenders, and the terms, covenants and conditions of the Loan Agreement and of the other Loan Documents and all other notes, instruments, writing or agreements evidencing or securing the Guaranteed Obligations shall have been fully performed and observed, notwithstanding any act, omission or thing which might otherwise operate as a legal or equitable discharge of Borrower or Guarantor.

(c) Guarantor hereby waives: (1) any rights to assert against Administrative Agent or Lenders any defense (legal or equitable), setoff, counterclaim, or claim which Guarantor may now or at any time hereafter have against Borrower or any other party liable to Administrative Agent or Lenders (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid); and (2) any defense, setoff, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Guaranteed Obligations or any security therefor (including, but not limited to, any of the Loan Documents). Without limiting the generality of the foregoing or any other provisions of this Guaranty, Guarantor agrees that this Guaranty shall not be discharged, limited, impaired or affected by: (a) the transfer of all or any part of the personal property or real property described in any of the Loan Documents; (b) any sale, pledge, surrender, indulgence, alteration, substitution, exchange, modification or other disposition of any of the Guaranteed Obligations, all of which Administrative Agent and Lenders are expressly authorized to make from time to time; (c) any failure, neglect or omission on the part of Administrative Agent or Lenders to realize or protect any of the Guaranteed Obligations, or any personal property or real property or lien given as security therefor, or to exercise any lien upon or right of appropriation of monies, credits or property of Borrower toward liquidation of the Liabilities, or performance of the covenants guaranteed hereby; and (d) any proceedings with respect to the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, the marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, imposition or readjustment of, or other similar proceedings affecting Borrower or any Other Guarantor or any of their respective assets, it being expressly understood and agreed that no such proceeding shall affect, modify, limit or discharge the liability or obligation of Guarantor hereunder in any manner whatsoever, and that Guarantor shall continue to remain

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absolutely liable under this Guaranty to the same extent, and in the same manner, as if such proceedings had not been instituted.

(d) Guarantor hereby waives any right of subrogation Guarantor has or may have as against Borrower until all preference periods under all applicable laws have expired. In addition, Guarantor hereby waives any right to proceed against Borrower, now or hereafter for contribution, indemnity, reimbursement and any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which Guarantor may now have or hereafter have as against Borrower. Until the Guaranteed Obligations are indefeasibly paid in full hereunder, Guarantor also hereby waives any right to recourse to or with respect to any asset of Borrower. Guarantor agrees that in light of the immediately foregoing waivers, the execution of the Guaranty shall not be deemed to make Guarantor a “creditor” of Borrower, and that for purposes of Sections 547 and 550 of the Bankruptcy Code, Guarantor shall not be deemed a “creditor” of Borrower.

6. Releases . No release or discharge of the Other Guarantor, or of any other person or entity, whether primarily or secondarily liable for or obligated with respect to the Guaranteed Obligations, or the institution of bankruptcy, receivership, insolvency, reorganization, dissolution or liquidation proceedings by or against the Other Guarantor or any other person or entity, or the entry of any restraining or other order in any such proceeding, shall release or discharge Guarantor, unless and until all of the Guaranteed Obligations shall have been fully paid. Notwithstanding anything to the contrary contained herein, Administrative Agent agrees that the obligations of Guarantor under this Guaranty shall terminate, subject to Sections 4 and 8 hereof, at the earlier of such time as (a) Administrative Agent on behalf of Lenders and itself shall have received indefeasible payment in full in cash of all Guaranteed Liabilities and all other Guaranteed Obligations under this Guaranty and all financing arrangements and accommodations by and among Borrower, Administrative Agent and Lenders shall have been irrevocably terminated and Administrative Agent and Lenders have no obligations to make any loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities. Release of this Guaranty, if it occurs, however, shall not affect, in any respect, the Loan or any other instrument securing or guarantying the Loan.

7. Right of Setoff . Guarantor agrees that Administrative Agent and Lenders have all rights of setoff and banker’s liens provided by applicable law. Following any default by Guarantor hereunder or an Event of Default by Borrower under the Loan Agreement, any and all moneys, credits, deposits, accounts, or other property belonging to the Guarantor in transit to or in the possession or under the control of Administrative Agent or any Lender, or any agent or bailee thereof, may, without notice and opportunity to be heard, be setoff against, and appropriated and applied against and towards the payment of any and all of the liabilities of Guarantor under this Guaranty. Following any default by Guarantor hereunder or an Event of Default by Borrower under the Loan Agreement, subject to the terms of any applicable Intercreditor Agreement, Guarantor does hereby assign and transfer to Administrative Agent (for the ratable benefit of Lenders and itself) any and all cash, negotiable instruments, documents of title, chattel paper, securities, certificates of deposit, deposit accounts, other cash equivalents and other assets of said Guarantor in transit to, or in the possession or control of Administrative Agent, or any agent or bailee of Administrative Agent for any purpose and to apply the same on any or all of the Guaranteed Obligations. The rights of the

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Administrative Agent and Lenders under this Section are in addition to all other rights and remedies which the Administrative Agent and Lenders may otherwise have in equity or at law.

8. Recovery Claim . Should a claim (“ Recovery Claim ”) be made upon Administrative Agent or Lenders at any time for recovery of any amount received by Administrative Agent or Lenders in payment of the Guaranteed Obligations (whether received from Borrower, Guarantor pursuant hereto, or otherwise) and should Administrative Agent or any Lender repay all or part of said amount by reason of (a) any judgment, decree, or order of any court or administrative body having jurisdiction over Administrative Agent or any Lender or any of its respective property; or (b) any reasonable settlement or compromise of any such Recovery Claim effected by Administrative Agent or such Lender with the claimant (including Borrower), Guarantor shall remain liable to Administrative Agent and Lenders for the amount so repaid to the same extent as if such amount had never originally been received by Administrative Agent and Lenders, notwithstanding any termination hereof or the return of this document to Guarantor or the cancellation of any note or other instrument evidencing any of the Liabilities.

9. Assignments . In the event Administrative Agent shall sell, assign or transfer the Guaranteed Obligations, or any part hereof, or grant participations therein, each and every immediate or remote successive assignee, transferee, holder of or participant or other interests therein, of all or any part of the Guaranteed Obligations shall have the right to enforce this Guaranty by suit or otherwise for the benefit of such assignee, transferee, holder or participant, as fully as if such assignee, transferee, holder or participant were herein by name specifically given such rights, powers and benefits; but Administrative Agent (for the ratable benefit of the Lenders and itself) shall have an unimpaired, prior and superior right to enforce this Guaranty for Administrative Agent’s benefit as to so much of the guaranteed debt as it has not sold, assigned or transferred.

10. Representations and Warranties . Guarantor agrees that the following shall constitute representations and warranties of Guarantor to Administrative Agent (for the benefit of Lenders and itself), which shall survive the execution and delivery hereof, and that Administrative Agent on behalf of the Lenders intends to make the Loan and other financial accommodations, if any, guaranteed hereby in reliance thereon:

(a) Guarantor is not in default under any agreement to which Guarantor is a party, the effect of which will materially impair performance by the Guarantor of Guarantor’s obligations pursuant to and as contemplated by the terms of this Guaranty, and neither the execution and delivery of this Guaranty nor compliance with the terms and provisions of this Guaranty, will violate any law or any presently existing regulation, order, writ, injunction or decree of any court or governmental department, commission, board, bureau, agency or instrumentality, will conflict or will be inconsistent with, or will result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind which creates, represents, evidences or provides for any lien, charge or encumbrance upon any of the property or assets of the Guarantor, or any other indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which Guarantor is a party or by which Guarantor may be bound of which the Guarantor is a party or by which Guarantor may be bound, or in the event of any such conflict, the required consent or

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waiver of the other party or parties thereto has been validly granted, is in full force and effect and is valid and sufficient therefor. This Guaranty is the legal, valid and binding obligation of the Guarantor and is enforceable against the Guarantor in accordance with its terms.

(b) Except as set forth on Schedule 10(b) hereof, there are no actions, suits or proceedings pending or to the best of Guarantor’s knowledge overtly threatened in writing against the Guarantor before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which will materially adversely affect performance by the Guarantor of Guarantor’s obligations pursuant to and as contemplated by the terms and provisions of this Guaranty.

(c) Neither this Guaranty nor any document, financial statement, credit information, written certificate or written statement heretofore furnished or required herein to be furnished to Lender by the Guarantor contains any untrue statement of material fact or omits to state a fact material to this Guaranty.

(d) Guarantor is currently informed of the financial condition of Borrower and of all other circumstances which a diligent inquiry would reveal and which would bear upon the risk of nonpayment of the Guaranteed Obligations. Guarantor will continue to keep informed of the financial condition of Borrower and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Guaranteed Obligations.

(e) As of the date hereof, the present fair saleable value of Guarantor’s assets is greater than the amount required to pay Guarantor’s total Indebtedness (contingent or otherwise), and is greater than the amount that will be required to pay such Indebtedness as it matures and as it becomes absolute and matured. The transactions contemplated hereby were effectuated without actual intent to hinder, delay or defraud present or future creditors of Guarantor; it is Guarantor’s express intention that Guarantor will maintain a Solvent financial condition, giving effect to the Guaranteed Obligations incurred hereunder, as long as any of the Guaranteed Obligations remain outstanding or Guarantor is obligated to Administrative Agent or any Lender in any other manner whatsoever. At all times until the Guaranteed Obligations remain satisfied and paid in full, the Guarantor shall keep and maintain assets sufficient to honor and pay any and all of the Guaranteed Obligations as and when due, subject to any express monetary limitation set forth herein.

11. Subordination . Any rights of Guarantor, whether now existing or later arising, to receive payment on account of any Indebtedness (including interest) owed to Guarantor by Borrower, or to withdraw capital invested by Guarantor in Borrower, if any, or to receive and retain distributions from Borrower if and solely as expressly provided in the Loan Agreement, shall at all times be subordinate as to Lien and time of payment, and in all other respects to the full and prior repayment to Administrative Agent and Lenders of all of the Liabilities owing to Administrative Agent and Lenders pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan). Except for dividends or distributions permitted by Section 9.9 of the Loan Agreement, Guarantor shall not be entitled to enforce or receive payment of any sums hereby subordinated until the Loan have been paid and performed in full, and any such sums received in violation of this Guaranty shall not be commingled with other monies of Guarantor and shall be received by Guarantor in trust for Administrative Agent on behalf of Lenders and itself.

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12. Payments; Application . All payments to be made hereunder by Guarantor shall be made in lawful money of the United States of America at the time of payment, shall be made in immediately available funds, and shall be made without deduction (whether for taxes or otherwise) or offset. All payments made by Guarantor hereunder shall be applied as follows; first, to all costs and expenses (including, but not limited to, reasonable attorneys’ fees, expenses and court costs) incurred by Administrative Agent in enforcing this Guaranty or in collecting the Guaranteed Obligations; second, to all accrued and unpaid interest and fees owing to Administrative Agent and Lenders constituting Guaranteed Obligations; and third, to the balance of the Guaranteed Obligations, all subject to the terms of the Loan Agreement.

13. [Intentionally Omitted]

14. Notices . Any notice or other communication required or permitted under this Guaranty shall be in writing and personally delivered, mailed by registered or certified U.S. mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid nationally recognized overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Guaranty:

If to Administrative Agent, at:

The PrivateBank and Trust Company

120 South LaSalle Street

Chicago, Illinois 60603

Attention: Adam D. Panos, Managing Director

Telephone No.: 312-564-1278

Facsimile No.: 312-564-6889

With a copy to:

Duane Morris LLP

190 South LaSalle Street - Suite 3700

Chicago, Illinois 60603

Attention: Brian P. Kerwin, Esq.

Telephone No: 312-499-6737

Facsimile No: 312-499-6701

If to Guarantor, at:

Diversicare Healthcare Services, Inc.

1621 Galleria Boulevard

Brentwood, Tennessee 37027

Attention: James R. McKnight, Jr.

Telephone No.: 615-771-7575

Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner

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333 Commerce Street, Suite 1500

Nashville, Tennessee 37201

Attention: John N. Popham IV, Esq.

Telephone No.: 615-251-1093

Facsimile No.: 615-251-1059

If mailed, notice shall be deemed to be given three (3) days after being sent, and if sent by personal delivery, telecopier, or prepaid courier, notice shall be deemed to be given when delivered. If any notice is tendered to an addressee and delivery thereof is refused by such addressee, such notice shall be effective upon such tender unless expressly set forth in such notice.

15. Cumulative Remedies . No remedy under this Guaranty is intended to be exclusive of any other remedy, but each and every remedy shall be cumulative and in addition to any and every other remedy given hereunder and those provided by law or in equity. No delay or omission by Administrative Agent to exercise any right under this Guaranty shall impair any such right nor be construed to be a waiver thereof. No failure on the part of Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right.

16. Financial Information . Without limiting anything contained in this Guaranty, Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, Guarantor shall deliver to Administrative Agent, upon Administrative Agent’s written request and to the extent not included in the Guarantor’s public filings with the United States Securities and Exchange Commission, on at least an annual basis, and at such other times as Administrative Agent may reasonably request, (i) financial statements (showing all changes in Guarantor’s financial condition which occurred during the preceding fiscal year and Guarantor’s current financial position), (ii) federal and state tax returns of Guarantor, as applicable, and (iii) such other financial information as Administrative Agent or the Lenders may reasonably request. Copies of annual tax returns shall be delivered to Administrative Agent upon Administrative Agent’s written request therefore. The failure of Guarantor to perform or observe any of its obligations hereunder within the period of time specified in any notice from Administrative Agent to Guarantor, which notice shall in no event be less than five (5) business days, advising Guarantor of such failure, shall constitute a default under this Guaranty and an Event of Default under the Loan Agreement and the other Loan Documents.

17. Books and Records . Guarantor agrees that Administrative Agent’s books and records showing the Liabilities among Administrative Agent on behalf of Lenders and Borrower shall be admissible in any action or proceeding and shall be binding upon Guarantor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof absent manifest error.

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includes” are used in this Guaranty, they should be interpreted in a non-exclusive manner as though the words “, without limitation,” immediately followed the same. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Guaranty is prohibited or unenforceable under applicable law, such provision shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. As used herein, except in circumstances where under the Loan Documents the term is intended to mean or refer to all of the Borrowers or all of the Credit Parties on a consolidated basis, the term “Borrower” refers to any one or all of the Borrowers under the Loan Agreement, as applicable, provided, however, in the event of any disagreement between Administrative Agent and Guarantor as to whether or not a reference to Borrower means any or all of such Borrower(s) individually or collectively herein, and the circumstances are not covered by the Loan Documents, the Administrative Agent shall in reasonable good faith make such determination.

19. Bankruptcy . So long as any Guaranteed Obligations shall be owing to Administrative Agent or Lenders, Guarantor shall file in any bankruptcy or other proceeding against Borrower in which the filing of claims is required or permitted by law all claims which Guarantor may have against Borrower relating to any Indebtedness of Borrower to Guarantor and will assign to Administrative Agent (for the ratable benefit of Lenders and itself) all rights of Guarantor thereunder. If Guarantor does not file any such claim, Administrative Agent, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Administrative Agent’s discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Administrative Agent’s nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Administrative Agent or its nominee shall have the sole right to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Administrative Agent the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Administrative Agent (for the ratable benefit of Lenders and itself) all of Guarantor’s rights to any such payments or distributions to which Guarantor would otherwise be entitled; provided, however, Guarantor’s obligations hereunder shall not be satisfied except to the extent that Administrative Agent receives cash by reason of any such payment or distribution. If Administrative Agent receives anything hereunder other than cash, the same shall be held as collateral for amounts due under this Guaranty. At such time as all Guaranteed Obligations have been fully paid, any sums or other collateral received by Administrative Agent pursuant to this Section 19 remaining in the possession of Administrative Agent shall be paid or delivered to Guarantor.

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action by Administrative Agent until all of the Indebtedness, Liabilities and obligations owing to Administrative Agent and Lenders pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan and other Liabilities) have been indefeasibly paid in full in cash and otherwise performed in full and all financing arrangements and accommodations among Borrower, Administrative Agent and Lenders shall have been irrevocably terminated and Administrative Agent and Lenders have no obligations to make any loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities.

21. Costs and Expenses . If any lawsuit is commenced which arises out of or which relates to this Guaranty, the Loan Documents or the Loan, including, without limitation, any insolvency, bankruptcy or similar proceeding, Guarantor agrees to pay all of Administrative Agent’s costs and expenses, including, without limitation, reasonable attorneys’ fees which may be incurred in any effort to collect or enforce any term of this Guaranty. From the time(s) incurred until paid in full to Administrative Agent on behalf of Lenders, all sums shall bear interest at the “Default Rate” set forth in the Loan Agreement.

22. Entire Agreement; Amendments; Other Agreements . This Guaranty constitutes the entire agreement between Guarantor and Administrative Agent pertaining to the subject matter contained herein, and may not be altered, amended, or modified, nor may any provision hereof be waived or noncompliance therewith consented to, except by means of a writing executed by Guarantor as to which such consent or waiver is applicable and by Administrative Agent. Any such alteration, amendment, modification, waiver, or consent shall be effective only to the extent specified therein and for the specific purpose for which it is given. No course of dealing and no delay or waiver of any right or default under this Guaranty shall be deemed a waiver of any other similar or dissimilar right or default or otherwise prejudice the rights and remedies hereunder. The Guarantor shall not enter into any agreement containing any provision which would be violated or breached by the performance of Guarantor’s obligations hereunder or which would violate or breach any provision hereof, or that would or is reasonably likely to adversely affect the Administrative Agent’s interests or rights under this Guaranty. Time is of the essence for the payment and performance of this Guaranty. The recitals hereto are hereby made a part of and incorporated into this Guaranty by this reference thereto. A signature delivered or sent by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for any and all purposes.

23. Successors and Assigns . This Guaranty shall be binding upon Guarantor’s representatives, heirs, legal beneficiaries, successors, and assigns, as applicable, and shall inure to the benefit of the successors and assigns of Administrative Agent; provided, however, Guarantor shall not be permitted to assign this Guaranty or any of Guarantor’s rights, liabilities or obligations hereunder without the prior written consent of the Administrative Agent. In the event of the dissolution, bankruptcy or failure to maintain a Solvent financial condition, as applicable, of the Guarantor, the Loan Agreement and any and all sums due thereunder, along with all of the other Guaranteed Obligations, shall at once, without any notice or demand from Administrative Agent, be due and payable.

24. SUBMISSION OF JURISDICTION . THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY:

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(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT HEREOF, TO THE EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME, (ii) THE RIGHT TO ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE GUARANTOR WISHES TO PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE GUARANTOR AT ITS ADDRESS SET FORTH ABOVE OR AT SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE GUARANTOR AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE GUARANTOR IN ANY SUIT, ACTION OR PROCEEDING, AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE GUARANTOR.

(d) NOTHING HEREIN SHALL AFFECT THE LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR LIMIT THE LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE GUARANTOR OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

25. GOVERNING LAW . THIS GUARANTY SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

DM3\3777657.3

ARISING OUT OF THIS GUARANTY OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS GUARANTY. THE ADMINISTRATIVE AGENT AND THE GUARANTOR AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

27. Pledge of Equity . Subject to the applicable Pledge Agreement, Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, Guarantor shall remain the owner (either directly or through one of its Subsidiaries) of all of the issued and outstanding equity in each Borrower. Without the prior written consent of Administrative Agent, Guarantor shall not assign, sell, convey, gift, transfer, pledge, hypothecate, grant a security interest in, encumber or in any other manner permit any lien (other than Permitted Liens) to exist in or on, all or any portion of the equity in or of any Borrower, except for those pledges to the Omega Senior Lessor in effect on the date hereof.

28. REVIEW BY GUARANTOR . The Guarantor acknowledges that Guarantor has thoroughly read and reviewed the terms and provisions of this Guaranty, and that such terms and provisions are clearly understood by the Guarantor, and has been fully and unconditionally consented to by the Guarantor with the full benefit and advice of counsel chosen by the Guarantor.

29. Amended and Restatement . On the date hereof, that certain Amended and Restated Guaranty (Revolving Loans) previously entered into by the Guarantor on April 30, 2013 in favor of the Administrative Agent (as amended through the date hereof, the “ Original Guaranty ”) shall be modified, amended and restated by this Guaranty. All Guaranteed Obligations of Pledgor pursuant to the Original Guaranty shall survive the amendment and restatement of the Original Guaranty pursuant to this Guaranty.

[Signature Page Follows]

IN WITNESS WHEREOF , Guarantor has executed and delivered this Second Amended and Restated Guaranty as of the date set forth in the first paragraph hereof.



Guarantor: DIVERSICARE HEALTHCARE SERVICES, INC.
By:	/s/Kelly J. Gill
	Name: Kelly J. Gill Title: President and Chief Executive Officer

SCHEDULE 10(b)

Guaranty

LITIGATION

See attached list of pending or threatened litigation against Diversicare Healthcare Services, Inc.

DM3\3777657.3

SECOND AMENDED AND RESTATED GUARANTY

(TERM LOAN)

R E C I T A L S:

A. Certain direct and indirect subsidiaries of the Guarantor identified on Schedule 1.1(a) of the Loan Agreement (as defined below) (individually and collectively referred to herein as, “ Borrower ”) have requested that the Lenders (as defined below) make a (i) certain term loan and (ii) certain acquisition loans (collectively, the “ Loan ”) to Borrower pursuant to and in accordance with that certain Second Amended and Restated Term Loan and Security Agreement dated of even date herewith by and among Borrower, the lenders party thereto (collectively, the “ Lenders ”), and the Administrative Agent (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the “ Loan Agreement ”); capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement.

B. As security for repayment of the Loan, in addition to this Guaranty, certain other loan and security documents have been executed and delivered to the Administrative Agent. The Loan Agreement, the Term Loan Notes, the Acquisition Loan Notes, the Pledge Agreements, the Mortgages, this Guaranty, each other guaranty delivered in favor of the Administrative Agent on behalf of the Lenders in connection with the Loan Agreement, and any and all other instruments, agreements, and documents executed in conjunction herewith and therewith (including, without limitation, each of the “Financing Agreements” (as defined in the Loan Agreement)) are hereinafter sometimes collectively referred to herein as the “ Loan Documents .”

Guarantor hereby further agrees as follows:

3. Primary Obligations . This Guaranty is a primary and original obligation of Guarantor, is not merely the creation of a surety relationship, and is an absolute, unconditional, and continuing guaranty of payment and performance and not of collection which shall remain in full force and effect without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to the issuance of any instrument, writing or agreement relating to the Guaranteed Obligations. Guarantor agrees that Guarantor is directly and severally with any other guarantors of the Guaranteed Obligations liable to Administrative Agent and Lenders, that the obligations of Guarantor hereunder are independent of the obligations of Borrower or any other guarantor, and that a separate action may be brought against Guarantor whether such action is brought against Borrower or any other guarantor of Borrower’s Indebtedness, obligations or liabilities to Administrative Agent and Lenders (each an “ Other Guarantor ”) or whether Borrower or any such Other Guarantor is joined in such action. Guarantor agrees that Guarantor’s liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement of any lien, security interest, mortgage or realization upon any security or collateral Administrative Agent may at any time possess. Guarantor agrees that any release which may be given by Administrative Agent to Borrower or any Other Guarantor shall not release Guarantor. Guarantor consents and agrees that Administrative Agent shall be under no obligation to marshal any assets of Borrower or any Other Guarantor in favor of said Guarantor, or against or in payment of any or all of the Guaranteed Obligations.

5. Waivers .

(b) Guarantor hereby waives the right by statute or otherwise to require Administrative Agent or any Lender to institute suit against Borrower or under any other guaranty; or to exhaust any rights and remedies which Lender has or may have against Borrower or under any other guaranty; provided , however , that nothing herein contained shall prevent Administrative Agent from suing on the Loan Agreement or foreclosing any security interest or lien created by any of the other Loan Documents, or from exercising any other rights thereunder, and if such commercial code sale or other remedy is availed of, only the net proceeds therefrom, after deduction of all charges and expenses of every kind and nature whatsoever relating to the proceedings or sale, shall be applied in reduction of the amount due on the Loan Agreement and other Loan Documents, and Administrative Agent shall not be required to institute or prosecute proceedings to cover any deficiency as a condition of any payment hereunder or enforcement hereof. At any sale of the security or collateral for the Loan, or any part thereof, whether by commercial code sale or otherwise, Administrative Agent may, at its discretion, purchase all or any part of such collateral offered for sale, for its own account (on behalf of the Lenders and itself), and may apply against the amount bid therefore the balance due it pursuant to the terms of the Loan Agreement and other Loan Documents. Guarantor further agrees that Guarantor is bound to the payment of all Guaranteed Obligations, whether now existing or hereafter accruing, as fully as if such Guaranteed Obligations were directly owing to Administrative Agent and Lenders by Guarantor. Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid) of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof. Guarantor consents to any and all forbearances and extensions of the time of payment of the Loan Agreement or any of the other Loan Documents, and to any and all changes in the terms, covenants and conditions thereof hereafter made or granted, and to any part of the collateral therefor; it being the intention and agreement hereof that Guarantor shall remain unconditionally liable as a principal as, to and until the Guaranteed Obligations shall have been fully repaid to Administrative Agent on behalf of the Lenders, and the terms, covenants and conditions of the Loan Agreement and of the other Loan Documents and all other notes, instruments, writing or agreements evidencing or securing the Guaranteed Obligations shall have been fully performed and observed, notwithstanding any act, omission or thing which might otherwise operate as a legal or equitable discharge of Borrower or Guarantor.

(b) Except as set forth on Schedule 10(b) hereof, there are no actions, suits or proceedings pending or to the best of Guarantor’s knowledge threatened against the Guarantor before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which will materially adversely affect performance by the Guarantor of Guarantor’s obligations pursuant to and as contemplated by the terms and provisions of this Guaranty.

13. [Intentionally Omitted]

If to Administrative Agent, at:

The PrivateBank and Trust Company

120 South LaSalle Street

Chicago, Illinois 60603

Attention: Adam D. Panos, Managing Director

Telephone No.: 312-564-1278

Facsimile No.: 312-564-6889

With a copy to:

Duane Morris LLP

190 South LaSalle Street - Suite 3700

Chicago, Illinois 60603

Attention: Brian P. Kerwin, Esq.

Telephone No: 312-499-6737

Facsimile No: 312-499-6701

If to Guarantor, at:

Diversicare Healthcare Services, Inc.

1621 Galleria Boulevard

Brentwood, Tennessee 37027

Attention: James R. McKnight, Jr.

Telephone No.: 615-771-7575

Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner

333 Commerce Street, Suite 1500

Nashville, Tennessee 37201

Attention: John N. Popham IV, Esq.

Telephone No.: 615-251-1093

Facsimile No.: 615-251-1059

18. Interpretation and Severability of Provisions . The headings of sections and paragraphs in this Guaranty are for convenience of reference only and shall not be construed in any way to limit or define the content, scope or intent of the provisions hereof. As used in this Guaranty, the singular shall include the plural, and masculine, feminine and neuter pronouns shall be fully interchangeable, where the context so requires. Whenever the words “including”, “include or includes” are used in this Guaranty, they should be interpreted in a non-exclusive manner as though the words “, without limitation,” immediately followed the same. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Guaranty is prohibited or unenforceable under applicable law, such provision shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. As used herein, except in circumstances where under the Loan Documents the term is intended to mean or refer to all of the Borrowers or all of the Credit Parties on a consolidated basis, the term “Borrower” refers to any one or all of the Borrowers under the Loan Agreement, as applicable, provided, however, in the event of any disagreement between Administrative Agent and Guarantor as to whether or not a reference to Borrower means any or all of such Borrower(s) individually or collectively herein, and the circumstances are not covered by the Loan Documents, the Administrative Agent shall in reasonable good faith make such determination.

20. Additional and Independent Obligations . Guarantor’s obligations under this Guaranty are in addition to Guarantor’s obligations under any other existing or future guaranties, each of which shall remain in full force and effect until it is expressly modified or released in a writing signed by Administrative Agent. Guarantor’s obligations under this Guaranty are independent of those of Borrower and any Other Guarantor. Administrative Agent may bring a separate action against Guarantor without first proceeding against Borrower, any Other Guarantor, any other person or entity or any security that Administrative Agent may hold, and without pursuing any other remedy. Administrative Agent’s rights under this Guaranty shall not be exhausted by any action by Administrative Agent until all of the Indebtedness, Liabilities and obligations owing to Administrative Agent and Lenders pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan and other Liabilities) have been indefeasibly paid in full in cash and otherwise performed in full and all financing arrangements and accommodations among Borrower, Administrative Agent and Lenders shall have been irrevocably terminated and Administrative Agent and Lenders have no obligations to make any loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities.

24. SUBMISSION OF JURISDICTION . THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY:

26. JURY TRIAL . THE GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS GUARANTY OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS GUARANTY. THE ADMINISTRATIVE AGENT AND THE GUARANTOR AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

27. Pledge of Equity . Subject to the applicable Pledge Agreement, Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, except in the case of a Borrower that has been released from the Guaranteed Obligations in connection with any party’s prepayment thereof in accordance with the terms of the Loan Documents and is no longer a Borrower thereunder, Guarantor shall remain the owner (either directly or through one of its Subsidiaries) of all of the issued and outstanding the equity in each Borrower. Without the prior written consent of Administrative Agent, Guarantor shall not assign, sell, convey, gift, transfer, pledge, hypothecate, grant a security interest in, encumber or in any other manner permit any lien (other than Permitted Liens) to exist in or on, all or any portion of the equity in or of any Borrower.

29. Amendment and Restatement . On the date hereof, that certain Amended and Restated Guaranty (Term Loan) previously entered into by the Guarantor in favor of the Administrative Agent (as amended through the date hereof, the “ Original Guaranty ”) shall be modified, amended and restated by this Guaranty. All indemnification obligations of Pledgor pursuant to the Original Guaranty shall survive the amendment and restatement of the Original Guaranty pursuant to this Guaranty.

[Signature Page Follows]

IN WITNESS WHEREOF , Guarantor has executed and delivered this Second Amended and Restated Guaranty as of the date set forth in the first paragraph hereof.



Guarantor: DIVERSICARE HEALTHCARE SERVICES, INC.
By:	/s/Kelly J. Gill
	Name: Kelly J. Gill Title: President and Chief Executive Officer

SCHEDULE 10(b)

Guaranty

LITIGATION

See attached list of pending or threatened litigation against Diversicare Healthcare Services, Inc. (f/k/a Advocat Inc.)

SECURITY AGREEMENT

( OHI – Diversicare )

THIS SECURITY AGREEMENT (the “ Security Agreement ”) is made and entered into as of October 1, 2018, by and among the entities listed on Schedule 1 to this Agreement (collectively, the “ Tenant ”), the entities listed on Schedule 2 to this Agreement (collectively, the “ Subtenants ”), and DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation (“ DMS ”, and together with Tenant and the Subtenants, each being sometimes referred to individually as a “ Debtor ” and collectively as “ Debtors ”) , and the entities listed on Schedule 3 to this Agreement (collectively, “ Secured Party ”).

RECITALS:

A. Capitalized terms used and not otherwise defined herein shall have the meanings given them in Article I below.

B. Tenant has executed and delivered to Secured Party a Master Lease dated as of the date of this Agreement (as such agreement may from time to time be amended, modified or supplemented, the “ Master Lease ”), pursuant to which Tenant is leasing from Secured Party the healthcare facilities identified therein.

C. Simultaneously with the execution of the Master Lease, (i) DLC and DTI have entered into an Amended and Restated Master Sublease and (ii) DTI and each other Subtenant have executed a an Amended and Restated Sublease with respect to a Facility (collectively, the “ Subleases ”). DMS is executing this Security Agreement in its capacity as the UPL-IGT Manager of a permitted Hospital Transaction (each as defined in the Master Lease).

NOW, THEREFORE, in consideration of the foregoing and in order to induce Secured Party to enter into the Master Lease and to consent to the Subleases, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE I
DEFINITIONS

This Security Agreement is executed and delivered in connection with the Master Lease. Terms defined in the Commercial Code (as hereinafter defined) or in the Master Lease and not otherwise defined in this Security Agreement or in the Master Lease shall have the meanings ascribed to those terms in the Commercial Code. In addition to the other definitions contained herein, when used in this Security Agreement the following terms shall have the following meanings:

“ Collateral ” means the collateral described in Article II, Section 2 below.

“ Commercial Code ” means the Uniform Commercial Code, as enacted and in force from time to time in the State of Maryland.

“ DLC ” means Diversicare Leasing Corp., a Tennessee corporation.

“ DTI ” means Diversicare Texas I, LLC, Delaware limited liability company.

“ Facilities ” means the healthcare facilities leased pursuant to the Master Lease. The initial Facilities are identified on attached Schedule 4 .

ARTICLE II
AGREEMENT

1. GRANT OF SECURITY INTEREST .

(a) Debtor hereby grants to Secured Party a security interest in the Collateral to secure the payment of all amounts now or hereafter due and owing to Secured Party from Tenant, the Subtenants and their Affiliates under the Master Lease and the other Lease Documents, or any extension or renewal thereof, and any and all other obligations incurred in connection therewith, whether direct or indirect, whether primary, secondary, absolute, contingent or otherwise, now or hereafter existing (including future advances), due or to become due, plus all interest, costs, out-of-pocket expenses and reasonable attorneys’ fees which may be made or incurred by Secured Party in the disbursement, administration, and collection thereof, and in the protection, maintenance, and liquidation of the Collateral (the “ Liabilities ”).

(b) If the Debtor shall at any time acquire a commercial tort claim, as defined in Article 9 of the Commercial Code (“Article 9”), Debtor shall immediately notify the Secured Party, in a writing signed by Debtor, of the details thereof and grant to Secured Party in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Security Agreement, with such writing to be in form and substance satisfactory to Secured Party.

2. COLLATERAL . The “ Collateral ” covered by this Security Agreement is all of the personal property described below that Debtor now owns or shall hereafter acquire or create, immediately upon the acquisition or creation thereof, wherever located, and consisting of the following:

All personal and fixture property of every kind and nature including, without limitation, all furniture, fixtures, equipment, raw materials, inventory, other goods, accounts, accounts receivable, contract rights (including rights under any management agreement or franchise agreement with respect to the Facilities), rights to the payment of money, prepaid items, choses in action, insurance refund claims and all other insurance claims and proceeds, commercial tort claims, chattel paper, electronic chattel paper, documents, instruments, securities and all other investment property (other than a security, whether certificated or uncertificated, in a subsidiary or affiliate of DLC or DMS) , deposits, deposit accounts, rights to proceeds of letters of credit, letter-of-credit rights, supporting obligations of every nature, and general intangibles, including, without limitation, to the extent permitted by applicable law:

(i)

all tax refund claims, license fees, patents, patent applications, trademarks, trademark applications, trade names, copyrights, copyright applications, rights to sue and recover for past infringement of patents, trademarks and copyrights, computer programs, computer software, engineering drawings, service marks, customer lists, goodwill, and all licenses, permits, agreements of any kind or nature pursuant to which (a) the Debtor operates or has authority to operate, (b) the Debtor possesses, uses or has authority to possess or use property (whether tangible or intangible) of others, or (c) others possess, use, or have authority to possess or use property (whether tangible or intangible) of the Debtor; and


(ii)	all recorded data of any kind or nature, regardless of the medium of recording, including, without limitation, all software, writings, plans, specifications, and schematics; and

(iii)

to the extent permitted by law, all rights under that certain program of medical assistance, funded jointly by the federal government and the states, for impoverished individuals who are aged, blind and/or disabled, and/or members of families with dependent children, which program is more fully described in Title XIX of the Social Security Act (42 U.S.C. §§ 1396 et seq.) and the regulations promulgated thereunder; and

(iv)

to the extent permitted by law, all rights under that certain federal program providing health insurance for eligible elderly and other individuals, under which physicians, hospitals, skilled nursing homes, home health care, and other providers are reimbursed for certain covered services they provide to the beneficiaries of such program, which program is more fully described in Title XVIII of the Social Security Act (42 U.S.C. §§ 1395 et seq.) and the regulations promulgated thereunder; and

(v)

any and all contracts, authorizations, agreements or consents made by or on behalf of any patient or resident of any of the Facilities, or any other person seeking or obtaining services or goods from Debtor, pursuant to which Debtor provides skilled nursing care, intermediate care, personal care and/or assisted living facilities, or any form of patient or residential care, as well as related services (“Primary Intended Use”) at any of the Facilities (as such contracts, authorizations, agreements or consents may be amended, supplemented, renewed, replaced, extended or modified from time to time); including consents to treatment and assignments of payment of benefits; and

(vi)

to the extent permitted by law, the (a) operating licenses for each of the Facilities, any certificate of need, any other license, permit, approval or certificate which from time to time, may be issued or is required to be issued by the United States, any state or local government, or any agency or instrumentality of any of the foregoing with respect to the construction, installation or operation of any of the Facilities or any portion or component of any of the Facilities, the providing of any professional or other services by the Debtor, the purchase, sale, dispensing, storage, prescription or use of drugs, medications or the like by Debtor, or any other operations or businesses of Debtor at the Facilities; and (b) certifications and eligibility for participation by Debtor, in respect of its operation of any of the Facilities and any related businesses or operations at the Facilities, in programs or arrangements of or reimbursement from any third-party payors, including Medicare and Medicaid; and (c) all other licenses permits and certificates used or useful in connection with the ownership, operation, use or occupancy of any of the Facilities; and

(vii)

to the extent permitted by law, all rights to third-party reimbursement contracts for the Facilities which are now or hereafter in effect with respect to residents or patients qualifying for coverage under the same, including Medicare and Medicaid, managed care plans and private insurance agreements, and any successor program or other similar reimbursement program and/or private insurance agreements, now or hereafter existing; and

(viii)

all ledgers, printouts, papers, data, file materials and information pertaining to any of the above described property, relating to any account debtors in respect thereof, and/or to the operation of the Debtor’s business relating to the Facilities, and all rights of access to such books, records, ledgers, printouts, data, file materials and information, and all property in which such books, records, ledgers, printouts, data, file materials and information are stored wherever located, but excluding any computer readable memory and any computer hardware or software necessary to process such memory.

and all rights, remedies, powers and/or privileges of Debtor with respect to any of the foregoing and all proceeds therefrom owned by Debtor or in which Debtor has an interest, which are now or at any time hereafter in possession or under the control of Secured Party or in transit by mail or carrier to or from Secured Party or in the possession of any third party acting on behalf of Secured Party, without regard to whether Secured Party received the same in pledge, for safekeeping, as agent for collection or transmission or otherwise, or whether Secured Party has conditionally released the same; but specifically excluding all continuous quality improvement program, manuals and materials, management information systems, policy, procedure and educational manuals and materials, and similar proprietary property including any right to the use of the name “Diversicare”, or any derivative or trademark thereof, and any subsequent trade name adopted and which is commonly used as part of a long term marketing program among multiple facilities by Debtor and Affiliates of Debtor.

The Debtor acknowledges and agrees that, with respect to any term used herein that is defined in either (i) Article 9 in effect as of the date this Security Agreement is signed by the Debtor, or (ii) Article 9 as in force at any time hereafter, the meaning ascribed thereto with respect to any particular item of property shall be that under the more encompassing of the two definitions.

Notwithstanding anything in this Agreement to the contrary, DLC is only granting to Secured Party a security interest in Collateral to the extent such Collateral is located at, used in connection with, or arises out of the operation of, the Facilities, and DMS is only granting to Secured Party a security interest in Collateral to the extent such Collateral is located at, used in connection with, or arises out of the operation of, or is related to the Facility commonly known as Diversicare of Providence, 4915 Charlestown Road, New Albany, IN 47150.

Except with respect to DLC and DMS, the description of the Collateral to be included on any financing statements executed in connection herewith shall be as follows:

All personal and fixture property of Debtor, but excluding (i) any computer readable memory and any computer hardware or software necessary to process such memory, and (ii) all continuous quality improvement program, manuals and materials, management information systems, policy, procedure and educational manuals and materials, and similar proprietary property including any right to the use of the name “Diversicare”, or any derivative or trademark thereof, and any subsequent trade name adopted and which is commonly used as part of a long term marketing program among multiple facilities by Debtor and Affiliates of Debtor.

The Description of the Collateral to be included on any financing statements for DLC shall be as follows:

All personal and fixture property of Debtor which is located at, used in connection with, or arises out of the operation of, the Facilities, but excluding (i) any computer readable memory and any computer hardware or software necessary to process such memory, and (ii) all continuous quality improvement program, manuals and materials, management information systems, policy, procedure and educational manuals and materials, and similar proprietary property including any right to the use of the name “Diversicare”, or any derivative or trademark thereof, and any subsequent trade name adopted and which is commonly used as part of a long term marketing program among multiple facilities by Debtor and Affiliates of Debtor.

The Description of the Collateral to be included on any financing statements for DMS shall be as follows:

All personal and fixture property of Debtor which is located at, used in connection with, or arises out of the operation of, the healthcare facility commonly known as Diversicare of Providence, 4915 Charlestown Road, New Albany, IN 47150, but excluding (i) any computer readable memory and any computer hardware or software necessary to process such memory, and (ii) all continuous quality improvement program, manuals and materials, management information systems, policy, procedure and educational manuals and materials, and similar proprietary property including any right to the use of the name “Diversicare”, or any derivative or trademark thereof, and any subsequent trade name adopted and which is commonly used as part of a long term marketing program among multiple facilities by Debtor and Affiliates of Debtor

3. PERFECTION OF SECURITY INTEREST .

(b) Perfection by Filing . Debtor hereby irrevocably authorizes Secured Party, at any time and from time to time, pursuant to the provisions of this Security Agreement, to take any and all actions Secured Party may reasonably determine to be necessary to assure that the security interests granted hereby are and remain perfected, including without limitation, filing financing statements, continuation statements and amendments thereto that describe the Collateral as all assets of Debtor or words of similar effect and which contain any other information required by Part 5 of Article 9 for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether that Debtor is an organization, the type of organization and any organization identification number(s) issued to the Debtor. Debtor agrees to furnish any such information to Secured Party promptly upon request. Any such financing statements, continuation statements or amendments may be signed by Secured Party on behalf of Debtor, and may be filed at any time in any jurisdiction deemed appropriate by Secured Party; provided that in any state in which an indebtedness tax is imposed upon the filing of a financing statement, Secured Party shall only file in such state if necessary under applicable law to perfect the security interest created pursuant to this Agreement or if Secured Party otherwise agrees to pay such indebtedness tax. Debtor further agrees to execute and deliver to Secured Party, concurrently with Debtor’s execution of this Security Agreement, and at any time or times hereafter at the request of Secured Party, all financing statements and continuation financing statements (where not covered by the first sentence of this paragraph), assignments, affidavits, reports, notices, letters of authority, vehicle title notations and all other documents that Secured Party may reasonably request, in a form reasonably satisfactory to Secured Party, to perfect and maintain perfected Secured Party’s security interests in the Collateral. Debtor also agrees to make appropriate entries on its books and records disclosing Secured Party’s security interests in the Collateral.

(c) Other Perfection, etc . Debtor shall at any time and from time to time take such steps as Secured Party may reasonably request for Secured Party (i) to obtain an acknowledgment, in form and substance satisfactory to Secured Party, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for the benefit of Secured Party, (ii) to obtain “control” of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper, with any agreements establishing control to be in form and substance satisfactory to Secured Party, and (iii) otherwise to insure the continued perfection and priority of Secured Party’s security interest in any of the Collateral and of the preservation of its rights therein. Debtor authorizes Secured Party to file financing statements describing any statutory liens held by Secured Party.

3. WARRANTIES AND COVENANTS . In addition to the warranties and representations, if any, made in the Master Lease, as of the date of execution of this Security Agreement, Debtor warrants, represents and agrees that:


(a)	To the extent permitted by law, Debtor has rights in or the power to transfer the Collateral, and is and will be the lawful owner or lessee of all of the Collateral, with the right, to the extent permitted by law, to subject the Collateral to the security interests of Secured Party hereunder;

(b)

Except for the security interests in the Collateral herein granted to Secured Party and as may otherwise be permitted under the Master Lease, there are no other adverse claims, liens, restrictions on transfer or pledge, or security interests in the Collateral that are known to Debtor, and there are no financing statements covering any of the Collateral filed in any public office created by or known to Debtor prior to the date hereof. Debtor shall defend Secured Party against any claims and demands of any and all other persons to the Collateral inconsistent with this Security Agreement;


(c)	All of the Collateral that constitutes tangible personal property is or will be (upon delivery) located at the Facilities or at the chief executive offices of Debtor;

(d)

Except as permitted under the Master Lease or hereunder, Debtor shall not remove the Collateral from the Facilities or its chief executive offices without Secured Party’s prior written consent and shall not use or permit the Collateral to be used for any unlawful purpose whatsoever. Except as permitted under the Master Lease or hereunder, Debtor shall not remove any Collateral from the state in which the Facilities or its chief executive offices are located, without the prior written consent of Secured Party;

(e)

Except as permitted under the Master Lease, Debtor shall not conduct business under any name at the Facilities other than that given above or set forth on attached Schedule 1 and Schedule 2 , nor will Debtor ( other than DMS) change or reorganize the type of business entity under which it presently does business, except upon prior and express written approval of Secured Party, which approval shall not be unreasonably withheld, and, if such approval is granted, Debtor agrees that all documents, instruments and agreements reasonably requested by Secured Party and relating to such change shall be prepared, filed and recorded at Debtor’s expense before the change occurs;


(f)	Debtor shall not remove any records concerning the Collateral located at the Facilities or its chief executive offices nor keep any of its records concerning the same at any other location unless written notice thereof is given to Secured Party at least ten (10) days prior to the removal of such records to any new addresses; and


(g)	Debtor has the right and power and is duly authorized to enter into this Security Agreement. The execution of this Security Agreement does not and will not constitute a breach of any provision contained in any agreement or instrument to which Debtor is or may become a party or by which Debtor is or may be bound or affected.

(h)

Debtor (other than DMS) shall not change its location (as that term is defined in Section 9.307 of the Commercial Code). DMS shall not change its location (as that term is defined in Section 9.307 of the Commercial Code) without providing Secured Party thirty (30) days prior written notice. Debtor shall not change its corporate name without providing Secured Party thirty (30) days prior written notice.

(i)

Debtor’s (i) chief executive office is located in the state of Tennessee, (ii) location (as that term is defined in Section 9.307 of the Commercial Code) is the State of Tennessee (as to DLC and DMS) and the State of Delaware as to the other Debtors (the “ Debtor State ”), (iii) exact legal name is as set forth in the first paragraph of this Security Agreement, and (v) filing number with the Debtor State is set forth on Schedule 1 and Schedule 2 and is 000244626 for DMS.

(j)

To the extent required under the Master Lease, the Debtor shall maintain the Collateral in good order and repair and with reasonable promptness make all necessary and appropriate repairs thereto of every kind and nature whether ordinary or extraordinary, foreseen or unforeseen, or arising by reason of a condition whether or not existing prior to the date of this Security Agreement. It is the intention of this provision that the level of maintenance of the Collateral shall be not less than that of a first class operator making use of the Collateral for its Primary Intended Use.

(k)

All agreements and papers required to be filed, registered or recorded in order to create in favor of the Secured Party a perfected lien in the Collateral are true and correct, have been, or will be, filed, registered or recorded in the appropriate filing offices, and to the best of Debtor’s knowledge no further or subsequent filing, refiling, registration, reregistration, recorded or rerecording is necessary in any jurisdiction, except as provided under applicable law with respect to the filing of continuation statements.


(l)	Except as otherwise permitted pursuant to the terms of this Security Agreement or the Master Lease, Debtor will not sell, lease assign, transfer, grant any other security interest in, pledge, license or otherwise dispose of or encumber any Collateral to any third party while this Security Agreement is in effect without the prior and express written consent of Secured Party.

4. COLLECTION OF ACCOUNTS .

(a) Secured Party conditionally authorizes Debtor to collect accounts from Debtor's account debtors provided, however, this privilege may be terminated by Secured Party at any time upon an Event of Default and, upon such Event of Default, Secured Party shall have all of Debtor's rights, title, and interest in the accounts (to the extent permitted under applicable law), including a right of stoppage in transit. After the occurrence of an Event of Default, Secured Party (to the extent permitted under applicable law) may notify any account debtor(s) of Secured Party's security interest in Debtor's accounts and shall be entitled to collect same, and, Debtor will thereafter receive all accounts payments as the agent of and as trustee for Secured Party and will deliver to Secured Party on the day of receipt, all checks, cash, drafts, acceptances, notes and other accounts payments and, until such delivery, Debtor shall not use or commingle any accounts payments and shall at all times keep all such remittances separate and apart from Debtor's own funds, capable of identification as the Secured Party’s property. After the occurrence of an Event of Default, Secured Party and its representatives are hereby authorized to endorse in Debtor's name, any item received by the Secured Party representing any payment on or proceeds of any of the Collateral, and may sign Debtor's name upon all accounts, invoices, assignments, financing statements, notices to debtors, bills of lading, storage receipts, or other instruments or documents in respect to the account debtors, the proceeds therefrom, or property related thereto. Debtor shall promptly give Secured Party copies of all accounts statements, accompanied by such additional information, documents, or copies thereof, as Secured Party may request. Debtor shall maintain all records with respect to the accounts of the Facilities and with respect to the general conduct and operation of Debtor's business at the Facilities, including balance sheets, operating statements and other financial information, in accordance with generally accepted accounting principles and as Secured Party may reasonably request.

(b) Until such time as Secured Party shall notify Debtor of the revocation of such power and authority by reason of an Event of Default (and effective only during the continuance thereof), Debtor (i) may, only in the ordinary course of business, at its own expense, sell, lease or furnish under contracts of service any of the inventory normally held by Debtor for such purpose; (ii) may use and consume any raw materials, work in process or materials, the use and consumption of which is necessary in order to carry on Debtor’s business; (iii) replace equipment in accordance with the provisions of the Master Lease; and (iv) shall, at its own expense, endeavor to collect, as and when due, all amounts due with respect to any of the Collateral, including the taking of such action with respect to such collection as Secured Party may request or, in the absence of such request, as Debtor may deem advisable. A sale, lease, furnishing of services or other transfer of the Collateral as a partial or total satisfaction of any debt of Debtor shall not constitute a sale in the ordinary course of business.

5. INSPECTIONS/INFORMATION . Debtor shall permit Secured Party or its agents upon reasonable written request and during business hours to have access to and to inspect any of the Collateral. Secured Party may from time to time inspect, check, make copies of, or extracts from the books, records and files of Debtor relating to the Collateral, and Debtor shall make the same available to Secured Party upon reasonable written notice and during business hours. Secured Party’s right of access and inspection shall be subject to any prohibitions or limitations on disclosure under applicable law, including the Health Insurance Portability and Accountability Act (“HIPAA”) and any so-called “Patient’s Bill of Rights” or similar legislation, including such limitations as may be necessary to preserve the confidentiality of the Facility-patient relationship and the physician-patient relationship. Debtor agrees to promptly supply Secured Party with such financial and other information concerning its financial and business affairs, assets and liabilities relating to the Collateral as Secured Party may from time to time request, and Debtor agrees that Secured Party or its agents may from time to time verify Debtor's continuing compliance with any of Debtor's warranties and covenants made in Paragraph 4 above, at Debtor's cost and expense.

6. DEFAULT/REMEDIES .

(a) The occurrence of any of the following shall constitute an Event of Default under this Security Agreement without any additional notice or grace period:

(i) An Event of Default as defined in the Master Lease;

(ii) Debtor fails to observe or perform any other term, covenant or condition of this Security Agreement and the failure is not cured by Debtor within a period of fifteen (15) days after written notice thereof from Secured Party, unless the failure cannot with due diligence be cured within a period of fifteen (15) days, in which case such failure shall not be deemed an Event of Default if and for so long as Debtor proceeds promptly and with due diligence to cure the failure and completes the cure prior to the time that the same causes a default under the Master Lease and prior to the time that the same results in civil or criminal penalties to Secured Party, Debtor, any affiliates of either or to the Facilities; however, in no event to exceed a period of sixty (60) days; or

(iii) Any of the representations or warranties of the Debtor contained herein proves to be untrue when made in any material respect, the Secured Party or Collateral is materially and adversely affected thereby, and same is not cured within fifteen (15) days after written notice from Secured Party thereof.

(b) Whenever an Event of Default shall have occurred and so long as its continues (and subject to the Intercreditor Agreement), Secured Party may exercise from time to time any rights and remedies, including the right to immediate possession of the Collateral, available to it under the Master Lease, this Security Agreement or applicable law. Secured Party shall have the right to hold any property then in or upon the Facilities (but excluding any property belonging to patients at the Facilities) at the time of repossession not covered by this Security Agreement until return is demanded in writing by Debtor. Debtor agrees, in case of the occurrence of an Event of Default and upon the request of Secured Party, to assemble, at its expense, all of the Collateral at a convenient place acceptable to Secured Party and to pay all costs of Secured Party of collection of all the Liabilities, and enforcement of rights hereunder, including reasonable attorneys’ fees and legal expenses, including participation in bankruptcy proceedings, and the expenses of locating the Collateral and the expenses of any repairs to any realty or other property to which any of the Collateral may be affixed or be a part. If the Collateral is disposed of at a public sale, the parties agree that (i) a public sale with at least ten (10) calendar days prior notice to Debtor and notice to the public by one publication in a local newspaper is commercially reasonable, and (ii) a disclaimer of warranties at a public or private sale is commercially reasonable. If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if sent at least ten (10) days before such disposition, by first class mail, postage prepaid, addressed to the Debtor either at the address set forth in the notice section hereof, or at any other address of the Debtor appearing on the records of Secured Party.

(c) TO THE EXTENT PERMITTED BY LAW, DEBTOR AGREES THAT SECURED PARTY SHALL, UPON THE OCCURRENCE OF ANY EVENT OF DEFAULT, HAVE THE RIGHT TO PEACEFULLY RETAKE ANY OF THE COLLATERAL. DEBTOR WAIVES ANY RIGHT IT MAY HAVE, IN SUCH INSTANCE, TO A JUDICIAL HEARING PRIOR TO SUCH RETAKING.

(d) The obligations of Debtor under this Security Agreement, the Master Lease and other agreements and instruments executed by Debtor and its Affiliates in connection with the Master Lease are cross-defaulted and cross-collateralized such that upon an Event of Default under the Master Lease, this Security Agreement and/or any such other agreements and instruments which evidence, secure or otherwise relate to the Master Lease, the Secured Party has the right to declare such Event of Default to be an Event of Default without the benefit of any notice or grace periods contained under any or all of this Security Agreement, the Master Lease and such other agreements and instruments and without limitation to resort to any or all of the Collateral and the other collateral securing such obligations in pursuit of its remedies thereunder.

(e) Debtor acknowledges and agrees that in the event that any of the Collateral is sold by the Secured Party for credit, then credit shall be made against the Liabilities only as, if and when cash payments are actually received by the Secured Party for such Collateral.

7. Intentionally omitted.

8. GENERAL .

(a) Time . Time shall be deemed of the essence with respect to this Security Agreement.

(b) Condition of Collateral . Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if it takes such action for that purpose as Debtor requests in writing, but failure of Secured Party to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. Failure of Secured Party to preserve or protect any rights with respect to such Collateral against any prior parties shall not be deemed a failure to exercise reasonable care in the custody and preservation of such Collateral.

(c) Waivers . Any delay on the part of Secured Party in exercising any power, privilege or right under the Master Lease, this Security Agreement or under any other instrument or document executed by Debtor in connection herewith shall not operate as a waiver thereof. No single or partial exercise thereof, or the exercise of any other power, privilege or right shall preclude other or further exercise thereof, or the exercise of any other power, privilege or right. The waiver by Secured Party in writing of any default by Debtor shall not constitute a waiver of any subsequent defaults but shall be restricted to the default so waived.

(d) Rights Cumulative . All rights, remedies and powers of Secured Party hereunder are irrevocable and cumulative, and nothing contained herein shall be construed as in any way modifying, limiting, creating an alternative to or exclusive of, and shall be in addition to all rights, remedies and power is given by the Master Lease or the Commercial Code, or any other applicable rules of decision, regulations or laws now existing or hereafter enacted.

(e) Rules of Construction . In this Security Agreement, words in the singular include the plural, and in the plural include the singular; words of the masculine gender include the feminine and the neuter, and when the sense so indicates words of the neuter gender may refer to any gender and the word “or” is disjunctive but not exclusive; and the words “include”, “including” or “includes” are not limiting terms. The captions and section numbers appearing in this Security Agreement are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of this Security Agreement.

(f) Severability . If any term or provision set forth in this Security Agreement shall be held invalid or unenforceable, the remainder of this Security Agreement, or the application of such terms or provisions to persons or circumstances, other than those to which it is held invalid or unenforceable, shall be construed in all respects as if such invalid or unenforceable term or provision were omitted.

(g) Counterparts . This Security Agreement may be executed in any number of counterparts, all of which shall constitute one and the same instrument, and any party hereto may execute this Security Agreement by signing and delivering one or more counterparts.

(h) Successors . The terms of this Security Agreement shall be binding upon the Debtor, its successors, assigns, heirs, executors and personal representatives, including all “new debtors” within the meaning of the Commercial Code, and shall inure to the benefit of Secured Party, its successors and any holder, owner or assignee of any rights in the Master Lease and will be enforceable by them as their interest may appear.

(i) Enforcement Expenses . In the event of any action to enforce this Security Agreement or to protect the security interest of Secured Party in the Collateral, or to protect, preserve, maintain, process, assemble, develop, insure, market or sell any Collateral, Debtor agrees to pay the costs owed and expenses thereof, together with reasonable and documented attorneys’ fees (including fees incurred in appeals and post judgment enforcement proceedings).

(j) Choice of Law . THIS SECURITY AGREEMENT SHALL BE CONSTRUED, AND THE RIGHTS AND OBLIGATIONS OF THE DEBTOR AND SECURED PARTY SHALL BE DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, EXCEPT THAT THE LAWS OF THE STATE WHERE THE COLLATERAL IS LOCATED SHALL GOVERN THIS SECURITY AGREEMENT (A) TO THE EXTENT NECESSARY TO PERFECT AND/OR ENFORCE THE LIENS CREATED BY THIS SECURITY AGREEMENT AND TO THE EXTENT NECESSARY TO OBTAIN THE BENEFIT OF THE RIGHTS AND REMEDIES SET FORTH HEREIN WITH RESPECT TO THE COLLATERAL, AND (B) FOR PROCEDURAL REQUIREMENTS THAT MUST BE GOVERNED BY THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED.

(k) Jurisdiction, Venue, Service of Process . DEBTOR CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED AND MARYLAND AND AGREES THAT ALL DISPUTES CONCERNING THIS SECURITY AGREEMENT BE HEARD IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE IN WHICH THE COLLATERAL IS LOCATED OR IN MARYLAND. DEBTOR AGREES THAT SERVICE OF PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED OR MARYLAND, AND DEBTOR IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED AND MARYLAND.

(l) Amendments . No amendment to this Security Agreement shall be effective unless the same shall be in writing and signed by the party to be charged.

(m) Notices . All notices, demands or requests required or permitted to be given to any party hereto shall be given and deemed effective as provided in the Master Lease. The parties hereby agree that a notice sent as specified in this paragraph at least ten (10) days before the date of any intended public sale or the date after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to be reasonable notice of such sale or other disposition.

(n) Joint Preparation . This Security Agreement shall be deemed to have been prepared jointly by the parties hereto. Any ambiguity herein shall not be interpreted against any party hereto and shall be interpreted as if each of the parties hereto had prepared this Security Agreement.

(o) Entire Agreement . This Security Agreement, the schedules and exhibits hereto and the agreements and instruments required to be executed and delivered hereunder set forth the entire agreement of the parties with respect to the subject matter hereof and supersede and discharge all prior agreements (written or oral) and negotiations and all contemporaneous oral agreements concerning such subject matter and negotiations. There are no oral conditions precedent to the effectiveness of this Security Agreement.

(p) Joint and Several . If more than one Debtor has signed this Security Agreement, their obligations shall be joint and several.

(q) Agency Appointment . Each entity comprising Secured Party appoints each other entity comprising Secured Party as its contractual representative for the purpose of administering and enforcing the terms and conditions of this Agreement; provided, however, that no Secured Party may, as an agent for any other Secured Party, release any collateral or modify or amend this Agreement, each of which shall require the written consent of all Secured Parties. It is expressly understood and agreed that no Secured Party, as agent, shall have any fiduciary responsibilities to any other Secured Party by reason of this Agreement. In its capacity as the Secured Parties’ contractual representative, each Secured Party (i) is a "representative" of the Secured Parties within the meaning of the term "secured party" as defined in the Uniform Commercial Code and (ii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement. Each Secured Party, as a contractual representative, shall have and may exercise such powers under this Agreement as are specifically delegated by the terms of hereof, together with such powers as are reasonably incidental thereto. No Secured Party shall have any implied duties to the other Secured Parties, or any obligation to the other Secured Parties to take any action hereunder.

(r) Release . Upon the full payment, satisfaction and discharge of the Liabilities herein secured, the security interest provided for herein shall terminate and Secured Party shall file, register or record, or authorize Debtors in writing to file, register or record, UCC-3 termination statements or other appropriate evidence of such termination with the appropriate filing offices in all jurisdictions necessary to evidence such termination .

(Signature Pages Follow)

IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date first written above.

TENANT:

DIVERSICARE LEASING CORP.

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Its: President and Chief Executive Officer

DIVERSICARE OF CHATEAU, LLC

DIVERSICARE OF RIVERSIDE, LLC

DIVERSICARE OF ST. JOSEPH, LLC

DIVERSICARE OF PROVIDENCE, LLC

DIVERSICARE OF ST. THERESA, LLC

DIVERSICARE OF SIENA WOODS, LLC

DIVERSICARE OF BRADFORD PLACE, LLC

DIVERSICARE OF NICHOLASVILLE, LLC

DIVERSICARE OF SENECA PLACE, LLC

DIVERSICARE OF GREENVILLE, LLC

Each a Delaware limited liability company

By: Diversicare Leasing Company II, LLC, its sole member

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Its: President and Chief Executive Officer

DIVERSICARE HIGHLANDS, LLC

A Delaware limited liability company

By: Diversicare Leasing Corp., its sole member

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Its: President and Chief Executive Officer

SUBTENANTS:

DIVERSICARE TEXAS I, LLC

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Title: President and Chief Executive Officer

DIVERSICARE BALLINGER, LLC

DIVERSICARE DOCTORS, LLC

DIVERSICARE ESTATES, LLC

DIVERSICARE HUMBLE, LLC

DIVERSICARE KATY, LLC

DIVERSICARE NORMANDY TERRACE, LLC

DIVERSICARE TREEMONT, LLC

DIVERSICARE PARIS, LLC

By: Diversicare Texas I, LLC

sole Member

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Title: President and Chief Executive Officer

DMS:

DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Title: President and Chief Executive Officer

SECURED PARTY:

STERLING ACQUISITION, LLC

STEVENS AVENUE PROPERTY, L.L.C.

ST. JOSEPH MISSOURI PROPERTY, L.L.C.

OHIO INDIANA PROPERTY, L.L.C.

NICHOLASVILLE KENTUCKY PROPERTY, L.L.C.

LOUISVILLE DUTCHMANS PROPERTY, L.L.C.

GREENVILLE KENTUCKY PROPERTY, L.L.C.

By: /s/Megan M. Ames

Name: Megan M. Ames

Title: Senior Vice President - Operations

SCHEDULE 1

TENANTS



ENTITY	ORG. ID#	STATE
Diversicare Leasing Corp.	184309	Tennessee
Diversicare of Chateau, LLC	5543771	Delaware
Diversicare of Riverside, LLC	5543777	Delaware
Diversicare of St. Joseph, LLC	5543776	Delaware
Diversicare of Providence, LLC	5371371	Delaware
Diversicare of St. Theresa, LLC	5371372	Delaware
Diversicare of Siena Woods, LLC	5371369	Delaware
Diversicare of Bradford Place, LLC	5371370	Delaware
Diversicare of Nicholasville, LLC	5518692	Delaware
Diversicare of Seneca Place, LLC	5364461	Delaware
Diversicare of Greenville, LLC	5584479	Delaware

SCHEDULE 2

SUBTENANTS :



ENTITY	ORG. ID#	STATE
Diversicare Texas I, LLC	4388082	Delaware
Diversicare Ballinger, LLC	4388083	Delaware
Diversicare Doctors, LLC	4388084	Delaware
Diversicare Estates, LLC	4388085	Delaware
Diversicare Humble, LLC	4388087	Delaware
Diversicare Katy, LLC	4388088	Delaware
Diversicare Normandy Terrace, LLC	4388089	Delaware
Diversicare Treemont, LLC	4388090	Delaware
Diversicare Paris, LLC	4421472	Delaware

SCHEDULE 3

Secured Party

Sterling Acquisition, LLC, the successor by conversion to Sterling Acquisition Corp.

Stevens Avenue Property, L.L.C.

St. Joseph Missouri Property, L.L.C.

Ohio Indiana Property, L.L.C.

Nicholasville Kentucky Property, L.L.C.

Louisville Dutchmans Property, L.L.C.

Greenville Kentucky Property, L.L.C.

SCHEDULE 4

INITIAL FACILITIES :



	Facility
1.	Best Care, Inc. 2159 Dogwood Ridge Wheelersburg, OH 45694
2.	Boyd Nursing and Rehab Center 12800 Princeland Drive Ashland, KY 41102
3.	Canterbury Health Center 1720 Knowles Road Phoenix City, AL 36867
4.	Carter Nursing & Rehab Center 250 McDavid Boulevard, P.O. Box 904 Grayson, KY 41143
5.	Elliott Nursing & Rehab Center Howard Creek Road, P.O. Box 694, Route 32 East Sandy Hook, KY 41171
6.	Hardee Manor Care Center 401 Orange Place Wauchula, FL 33873
7.	Laurel Manor Health Center 902 Buchanan Road, P.O. Box 505 New Tazewell, TN 37825
8.	Lynwood Nursing Home 4164 Halls Mill Road Mobile, AL 36693
9.	Manor House of Dover 537 Spring Street, P.O. Box 399 Dover, TN 37058
10.	Mayfield Rehab and Special Care Center 200 Mayfield Drive Smyrna, TN 37167
11.	Northside Health Care 700 Hutchins Ave Gadsden, AL 35901
12.	South Shore Nursing & Rehab Center James Hannah Drive, P.O. box 489 South Shore, KY 41175
13.	West Liberty Nursing & Rehab Center 774 Liberty Road, P.O. Box 219, Route 5 Wells Hill West Liberty, KY 41472
14.	Westside Health Care Center 4320 Judith Lane Huntsville, AL 35805
15.	Wurtland Nursing & Rehab Center 100 Wurtland Avenue, P.O. Box 677 Wurtland, KY 41144
16.	Doctors Healthcare 9009 White Rock Trail Dallas, TX 75238
17.	Estates at Ft. Worth 201 Sycamore School Road Fort Worth, TX 76134
18.	Heritage Oaks Estates 2001 N. 6th Street Ballinger, TX 76821
19.	Humble 8450 Will Clayton Parkway Humble, TX 77338
20.	IHS of Dallas at Treemont 5550 Harvest Hill Road Dallas, TX 75230
21.	Katy 1525 Tull Drive Katy, TX 77499
22.	Normandy Terrace 841 Rice Road San Antonio, TX 78220
23.	Brentwood Terrace 2885 Stillhouse Road Paris, TX 75460
24.	Highlands Nursing and Rehabilitation Center 1705 Stevens Avenue Louisville, KY 40205
25.	Chateau Care Center 811 N. Ninth Street St. Joseph, MO 64501
26.	Riverside Care Center 1616 Weisenborn Road St. Joseph, MO 64507
27.	The Inn 3002 N. 18th Street St. Joseph, MO 64505
28.	Diversicare of Bradford Place (fka Mercy Schroder) 1302 Millville Avenue Hamilton, OH 45013
29.	Diversicare of Providence 4915 Charlestown Road New Albany, IN 47150
30.	Diversicare of Siena Woods 6125 North Main Street Dayton, OH 45415
31.	Diversicare of St. Theresa 7010 Rowan Hill Drive Cincinnati, OH 45227
32.	Royal Manor Health Care 100 Sparks Avenue Nicholasville, KY 40356
33.	Twinbrook Nursing and Rehabilitation Center 3526 Dutchman's Lane Louisville, KY 40205
34.	Belle Meade Home 521 Greene Dr. Greenville, KY 42345

24516935.4

Derwent – 9.25.18

Execution Version

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (“ Agreement ”) is made effective as of October 30, 2018, by and among DIVERSICARE OF FULTON, LLC, a Delaware limited liability company (“ Fulton OpCo ”), DIVERSICARE FULTON PROPERTIES, LLC, a Delaware limited liability company (“ Fulton PropCo ”), DIVERSICARE CLINTON, LLC, a Delaware limited liability company (“ Clinton OpCo ”), DIVERSICARE CLINTON PROPERTIES, LLC, a Delaware limited liability company (“ Clinton PropCo ”), DIVERSICARE OF GLASGOW, LLC, a Delaware limited liability company (“ Glasgow OpCo ”), and DIVERSICARE GLASGOW PROPERTIES, LLC, a Delaware limited liability company (“ Glasgow Properties ,” and together with Fulton OpCo, Fulton PropCo, Clinton OpCo, Clinton PropCo, and Glasgow OpCo, the “ Sellers ”), and FULTON NURSING AND REHABILITATION LLC, a Kentucky limited liability company (“ Fulton OpCo Buyer ”), HOLIDAY FULTON PROPCO LLC, a Kentucky limited liability company (“ Fulton PropCo Buyer ”), BIRCHWOOD NURSING AND REHABILITATION LLC, a Kentucky limited liability company (“ Clinton OpCo Buyer ”), PADGETT CLINTON PROPCO LLC, a Kentucky limited liability company (“ Clinton PropCo Buyer ”), WESTWOOD NURSING AND REHABILITATION LLC, a Kentucky limited liability company (“ Glasgow OpCo Buyer ”), WESTWOOD GLASGOW PROPCO LLC, a Kentucky limited liability company (“ Glasgow PropCo Buyer ,” and together with Fulton OpCo Buyer, Fulton PropCo Buyer, Clinton OpCo Buyer, Clinton PropCo Buyer, and Glasgow OpCo Buyer, the “ Buyers ”).

A. Fulton OpCo, Clinton OpCo and Glasgow OpCo are each sometimes referred to herein as an “ OpCo Seller ”, and collectively as the “ OpCo Sellers ”; Fulton PropCo, Clinton PropCo and Glasgow PropCo are each sometimes referred to herein as a “ PropCo Seller ” and collectively as the “ PropCo Sellers ”; Fulton OpCo Buyer, Clinton OpCo Buyer and Glasgow OpCo Buyer are sometimes referred to herein individually as an “ OpCo Buyer ”, and collectively as the “ OpCo Buyers ”; and Fulton PropCo Buyer, Clinton PropCo Buyer and Glasgow PropCo Buyer are sometimes referred to individually as a “ PropCo Buyer ”, and collectively as the “ PropCo Buyers ”.

B. Sellers own and operate certain skilled nursing facilities listed on Exhibit A (individually, a “ Facility ” and collectively, the “ Facilities ”), with the Real Estate and Equipment and Furnishings (each as defined below) for each Facility being owned by the PropCo Seller identified on Exhibit A and the other Assets (as defined below) and operations for such Facility being owned by the OpCo Seller identified on Exhibit A .

C. Sellers desire to sell and transfer the assets of the Facilities to the Buyers and Buyers desire to purchase the same from Sellers, subject to the terms and conditions of this Agreement.

D. Exhibit A also sets forth the applicable PropCo Buyer which is to acquire the Real Estate and Equipment and Furnishings for each Facility, and the applicable OpCo Buyer which is to acquire the other Assets and operations of such Facility, subject to the terms and conditions of this Agreement.

In consideration of the mutual covenants contained in this Agreement and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties intending to be legally bound hereby agree as follows:

Article 1. PURCHASE AND SALE

1.1 Purchase and Sale . Sellers agree at Closing (as defined herein), to sell, transfer, assign, convey and deliver to Buyers, and Buyers agree to purchase, acquire and accept from Sellers all right, title and interest in and to certain assets of Sellers related to the Facilities (collectively, the “ Assets ”), as set forth below, but expressly excluding the “ Excluded Assets ” (as defined in Section 1.2 below):

(1) All right, title and interest, in and to all of the land and real property, and rights owned by Sellers and used in connection with the Facilities as listed on Exhibit 1.1(1) attached hereto, including without limitation, all buildings, structures, improvements, fixed assets and fixtures including fixed machinery and fixed equipment situated thereon or forming a part thereof and all appurtenances, easements and rights-of-way related thereto (collectively, the “ Real Estate ”);

(2) All tangible personal property, medical and other equipment, machinery, data processing and computer hardware and software, furniture, furnishings, appliances, vehicles and other tangible personal property and located at the Facility (collectively, the “ Equipment and Furnishings ”);

(3) All inventory of goods and supplies used or maintained in connection with the Facilities including food, cleaning materials, disposables, linens, consumables, office supplies, and medical supplies (collectively, the “ Inventory ”);

(4) All personnel, resident/occupant and other records related to the Facilities (including hard, electronic and microfiche copies) and all manuals, books and records used in operating the Facilities including, without limitation, personnel policies and files and manuals, accounting records, and computer files;

(5) To the extent transferable, all licenses, permits, registrations, certificates, accreditations and approvals necessary to operate the Facilities;

(6) All plans and surveys, including “as-built” plans, those relating to utilities, easements and roads, and plats, specifications, engineers’ drawings, architectural renderings and similar items in Sellers’ possession;

(7) All goodwill and, to the extent assignable by Sellers, all warranties (express or implied) and rights and claims related to the Assets or the operation of the Facilities;

(8) All resident escrows, deposits and any prepaid rent or any other fees paid by Facility residents related to the Facility (the “ Deposits ”), as set forth on Exhibit 1.1(8) attached;

(9) The Assumed Contracts, as defined in Section 3.9, and as set forth on Exhibit 3.(9) attached; and

(10) all licenses, permits accreditations and approvals including, but not limited to, Opco Seller’s Medicare Provider Agreements, and other regulatory approvals, if any, issued by any federal, state, municipal or local governmental authority running to, or in favor of, Opco Sellers to the extent legally assignable and/or transferrable pursuant to applicable law (other than certificates of need (or the equivalent and Sellers’ provider agreements with Medicaid or any other state governmental payor program and any corresponding provider numbers)), related to the use, maintenance or operation the Facilities.

1.2 Excluded Assets . Sellers are not selling and Buyers are not purchasing or assuming obligations with respect to the following (collectively, the “ Excluded Assets ”):

(1) Sellers’ corporate and fiscal records and other records that Sellers are required by law to retain in their possession and that are not included in Section 1.1(4) above;

(2) All accounts not included in Section 1.1(8) above, notes and other receivables;

(3) All cash, cash equivalents, cash deposits and escrows, bank accounts, money market accounts, other accounts, certificates of deposit and other investments of Sellers other than any Facility’s petty cash;

(4) All Contracts not included in the Assumed Contracts;

(5) Any items that are owned by Sellers’ ultimate parent company, Diversicare Healthcare Services or its affiliates, generally, such as enterprise-wide trademarks, software and manuals;

(6) Any rights in or to the use of the name “Diversicare” or any derivative thereof; and

(7) Any other items listed on Exhibit 1.2 .

1.3 Assumed Contracts and Liabilities .

(1) At Closing, Buyers will assume and agree to pay or perform, as the case may be, those obligations of Sellers (i) arising from or relating to the Assumed Contracts (as defined in Section 3.9 below) after Closing, and (ii) arising from all accrued vacation and paid time off for Employees (as defined in Section 3.13) who are hired by a Buyer or Buyer’s agent at Closing (collectively, the “ Assumed Liabilities ”).

(2) Except for the Assumed Liabilities, Buyers shall not assume, and shall not be liable for, any debt, liability or obligation of Sellers of any type or description whatsoever, whether related or unrelated to the Assets, the Facilities or the transactions contemplated within this Agreement and Sellers shall remain liable and responsible for the payment or performance, as the case may be, of all such debts, liabilities and obligations.

(3) For purposes of determining the credit given to Buyers at Closing for assuming the employee obligations described in Section 1.3(1)(ii) above, the amount assumed by Buyers shall be equal to one hundred percent (100%) of the accrued and unused vacation time (vested, but not unvested) plus fifty percent (50%) of the accrued unvested vacation time as shown on the payroll records delivered from Sellers to Buyers at least three (3) business days before Closing, for the last pay period ended at least five (5) business days before Closing, subject to a final adjustment in accordance with Section 2.2 in the event of any variation in the amounts estimated at Closing and the actual amount of employee obligations assumed by Buyers. Buyer shall not be liable and Seller shall indemnify and hold the Buyer harmless on account of any and all other liabilities and obligations with regard to any of the Facility’s employees (other than Employees who are hired by a Buyer or Buyer’s agent at Closing).

Article 2. PURCHASE PRICE; ALLOCATIONS;
ACCOUNTS RECEIVABLE AND RESIDENT FUNDS

2.1 Purchase Price; Escrow .

(1) The purchase price payable by Buyers to Sellers for the Assets shall be Eighteen Million Seven Hundred Thousand and No/100 Dollars ($18,700,000.00) (the “ Purchase Price ”). The Purchase Price shall be payable at Closing by wire transfer to an account designated by Sellers of immediately available, same day federal funds. At Closing, the parties shall direct the Title Company to release the Deposit (as defined below) to Sellers, and the Deposit, together with any interest earned thereon, shall be applied to the Purchase Price and Buyers shall also receive a credit for (i) vacation and sick leave as assumed by Buyers pursuant to Section 1.3(1)(ii) above, and (ii) the “PCA Credit” as defined in Section 8.6.

(2) Upon execution of this Agreement, Buyers shall deliver to Riverside Abstract LLC, as agent for Chicago Title Insurance Company (the “ Title Company ”), as escrow agent, the sum of One Hundred Fifty Thousand Dollars ($150,000) as a deposit (the “ Deposit ”) for the payment of the Purchase Price, which shall be held in an escrow account and paid by Title Company in accordance with this Agreement. Any interest accrued on the Deposit shall be added to and become a part of the Deposit. In the event the Closing occurs as contemplated under this Agreement, the Deposit shall be applied against the Purchase Price and Buyer shall receive a credit therefor. In the event that this Agreement is terminated under Section 6.2(1)(a)-(b), 6.2(2), or Section 12.15 hereof or as a result of a default by either of the Sellers in its obligations under this Agreement, Buyers and Sellers shall deliver instructions to the Title Company within three (3) business days of such termination to return the Deposit plus any accrued interest to Buyers. In the event that this Agreement is terminated for any other reason whatsoever, Buyers and Sellers shall deliver instructions to the Deposit Escrow Agent within three (3) business days of such termination to deliver the Deposit plus any accrued interest to Seller.

2.2 Apportionable Income and Expenses . All income and expense attributable to the operation of the Facilities (measured on an accrual basis) through 11:59 p.m. on the day before the Closing shall be for the account of Sellers. Thereafter, such income and expense shall be for the account of Buyers. All apportionable items of operating income and expense applicable to any periods commencing before Closing and continuing after Closing shall be prorated between Sellers and, to the extent they are included within the Assumed Liabilities, Buyers. Apportionable operating income and expenses shall include, but shall not be limited to, such items as prepaid income, power and utility charges, personal property taxes, real estate taxes and rents.

If final prorations cannot be made at Closing for any item being prorated under this Section 2.2, Buyers and Sellers agree to allocate such items on a fair and equitable basis as soon as invoices or bills are available and applicable reconciliation have been completed, with final adjustment to be made as soon as reasonably possible after the Closing (but in no event later than ninety (90) days after the Closing, except that adjustments arising from any tax protest shall not be subject to such ninety (90) day limitation, but shall be made as soon as reasonably possible), to the effect that income and expenses are received and paid by the parties on an accrual basis with respect to their period of ownership. Payments in connection with the final adjustment shall be due no later than ninety (90) days after the Closing, except that adjustments arising from any tax protest shall not be subject to such 90-day limitation, but shall be made as soon as reasonably possible. Sellers shall have reasonable access to, and the right to inspect and audit, Buyers’ books to confirm the final prorations for a period of one (1) year after the Closing. To the extent invoices or bills for the current real estate tax year are not yet issued, the parties shall prorate such taxes on the basis of the most recent tax year and will adjust such proration within five (5) business days after Sellers or Buyers receive the real estate tax invoice for the current tax year.

2.3 Allocation of Purchase Price . The Purchase Price shall be allocated among the Assets in the manner to be agreed upon by and between the Parties prior to Closing (the “ Allocation ”). The parties to this Agreement agree that the Allocation shall be used by them for all purposes including tax, reimbursement and other purposes. Each party to this Agreement agrees that it will report the transaction completed pursuant to this Agreement in accordance with the Allocation, including any report made under Section 1060 of the Internal Revenue Code of 1986, as amended (the “ Code ”), and that no party will take a position inconsistent with the Allocation except with the prior written consent of the other parties hereto.

2.4 Accounts Receivable .

(1) Sellers are not selling, and shall retain all right, title and interest in and to all unpaid accounts receivable with respect to the Facilities which relate to the period prior to the Closing Date, including, but not limited to, any accounts receivable arising from rate adjustments which relate to the period prior to the Closing Date even if such adjustments occur after the Closing Date (“ Sellers’ A/R ”). Buyers (i) shall not interfere with any of Sellers’ rights with respect to the Sellers’ A/R, including but not limited to, the right to collect the same and to enforce any and all of Sellers’ rights with respect to Sellers’ A/R; provided Sellers shall not initiate any litigation for collections against parties who continue to be residents of the Facilities after Closing without Buyers’ written consent, which consent may be granted or withheld in Buyers’ sole and absolute discretion, and (ii) agree that if they receive any proceeds with respect to the Sellers’ A/R, Buyers will hold such proceeds in trust for Sellers and shall promptly turn over those proceeds to Sellers without demand, in the form received. If Sellers receive any amounts with respect to accounts receivable for services provided after the Closing of the Facilities, such amounts shall promptly, without demand (and in no event more than five (5) business days after receipt by Sellers) be forwarded to Buyers.

(2) Not less than two (2) business days prior to the Closing Date, Sellers shall provide Buyers with a schedule setting forth by patient their outstanding accounts receivable with respect to the Facilities as of the Closing Date.

(3) In furtherance and not in limitation of the requirements set forth in Section 2.4, payments received by Buyers from and after the Closing Date from third party payors, including but not limited to Medicare, Medicaid, managed care and health insurance, shall be handled as follows:

(a) If such payments specifically indicate on the accompanying remittance advice, or the parties otherwise agree, that they relate to the period prior to the Closing Date, the payments shall be forwarded to Sellers by Buyers, along with the applicable remittance advice, promptly, but in no event more than five (5) business days, after receipt thereof;

(b) If such payments indicate on the accompanying remittance advice, or the parties otherwise agree, that they relate to the period on or after the Closing Date, they shall be retained by Buyers; and

(c) If the period(s) for which such payments are made is not indicated on the accompanying remittance advice, and the parties are unable to agree as to the periods for which such payments relate, the parties shall assume that each payment received within sixty (60) days after the Closing Date relates to the oldest outstanding unpaid receivables for reimbursement and, based on such assumption, the portion thereof which relates to the period on and after the Closing Date shall be retained by Buyer and the balance shall be remitted to Sellers promptly, but in no event more than five (5) business days, after receipt thereof. After said sixty (60) day period, such payments which fail to designate the period to which they relate shall be first applied to post-Closing balances with any excess applied to reduce pre-Closing balances.

(4) Any payments received by Buyers within thirty (30) days after the Closing Date from or on behalf of private pay patients with outstanding balances as of the Closing Date which fail to designate the period to which they relate, will first be applied by Buyer to reduce the patients’ pre-Closing Date balances, with any excess applied to reduce any balances due for services rendered by Buyer after the Closing Date.

(5) In the event the parties mutually determine that they misapplied any payment hereunder, the party that erroneously received the payment shall remit it to the other party promptly, but in no event more than five (5) business days, after the determination of misapplication is made.

(6) For the first anniversary of the Closing Date or until Sellers receive payment of all accounts receivable attributed to the operation of the Facilities prior to the Closing Date, whichever is sooner, by the 20th day of each month, Buyers shall provide Sellers with a report setting forth all amounts received by Buyers during the preceding month with respect to Sellers’ A/R which are set forth in the schedule provided by Sellers pursuant to Section 2.4, together with all supporting documentation. Sellers shall have the right to inspect all cash receipts of Buyers during weekday business hours in order to confirm Buyers’ compliance with the obligations imposed on it under this Section.

2.5 Transfer on Resident Trust Funds .

(1) Upon execution of this Agreement, each OpCo Seller shall prepare and deliver to the applicable PropCo Buyer a current true, correct, and complete accounting and inventory (properly reconciled) of any resident trust funds and residents’ property held by such OpCo Seller in trust for residents at the Facility operated by such OpCo Seller (the “ Resident Trust Funds ”). Not less than seven (7) days prior to Closing, each OpCo Seller shall prepare and deliver to the applicable PropCo Buyer an updated true, correct and complete accounting and inventory (properly reconciled) of the Resident Trust Funds.

(2) As of the Closing Date, each OpCo Seller hereby agrees to transfer to the applicable OpCo Buyer the Resident Trust Funds and such OpCo Buyer hereby agrees to accept such Resident Trust Funds in trust for the residents/responsible parties and be solely accountable to the residents/responsible parties for such Resident Trust Funds in accordance with the terms of this Agreement and applicable statutory and regulatory requirements.

(3) Within five (5) days after the Closing Date, each OpCo Seller shall prepare a final reconciliation comparing the actual Resident Trust Fund balance on the Closing Date to the amount of the Resident Trust Funds transferred to the applicable OpCo Buyer at the Closing and to the extent the former exceeds the latter, the such OpCo Seller shall remit such excess to the applicable OpCo Buyer or to the extent the latter exceeds the former, the applicable OpCo Buyer shall remit such excess to the such OpCo Seller.

(4) No Seller shall have any responsibility to the applicable resident/responsible party and regulatory authorities with respect to any Resident Trust Funds amounts delivered to OpCo Buyers. An OpCo Seller shall be responsible for claims arising from any inaccuracy in the accounting and inventory of Resident Trust Funds provided hereunder.

2.6 Assignment to Bill and Collect During Interim Billing Period .

(1) In order to allow Buyers to fully bill and collect for services provided by Buyers at the Facilities to beneficiaries of Government Programs during the Interim Billing Period (as defined below) and in compliance with applicable Law, Seller hereby agrees to assign its Medicare agreement with respect to the Facility and authorizes Buyer to use Seller’s National Provider Identifier (“ NPI ”) and/or Medicaid contract number with respect to the Facility for the sole purpose of billing any claims to Medicare or Medicaid for services rendered by Buyer at the Facility during the Interim Billing Period (the “ Interim Accounts Receivable ”). At Buyer’s sole expense with respect to any third party expenses incurred by Seller (with Seller giving Buyer prior notice of the expected incurrence of such expenses), Seller shall cooperate in good faith and provide Buyer with reasonable assistance necessary in order to allow Buyer to collect the Interim Accounts Receivable, including withholding the submission of Seller’s forms to deactivate its NPI number, or change its bank account during the Interim Billing Period. Seller hereby authorizes Buyer to take, and Buyer shall be solely liable for and shall indemnify and hold Seller and its Affiliates harmless for, the following actions with respect to the Interim Accounts Receivable: (i) to bill Government Programs using Seller’s NPI or Medicare or Medicaid program number(s); (ii) to collect Interim Accounts Receivable resulting from such billing using Seller’s NPI or program numbers; and (c) to take possession of and, subsequent to receipt, to endorse in the name of Seller, any notes, checks, money orders and other instruments received in payment of Interim Accounts Receivable. Sellers shall reasonably cooperate with Buyer’s efforts to obtain “hardship status” from Medicaid for purposes of billing Medicaid Interim Accounts Receivable. Buyer shall be responsible, at Buyer’s sole expense, for disputing all disallowances or claims denials with respect to the Interim Accounts Receivable, and shall refund any amounts paid with respect to the Interim Accounts Receivable that are subsequently denied.

(2) It is understood and agreed that the Medicare and Medicaid programs will make payment on certain of the Interim Accounts Receivable directly into a bank account of Seller (the “ Seller Bank Account ”). Without limiting the generality of the foregoing, the following reconciliation procedure shall be followed with respect to the Interim Accounts Receivable. No later than the third business day of each calendar week, Seller shall provide Buyer with any explanation of benefit (“ EOB ”) forms received by Seller during the previous calendar week that reflect payments for services provided by Buyer after the Closing. Within three (3) business days of Seller’s delivery to Buyer of any such EOB forms, Seller shall remit to Buyer an amount equal to the amount set forth in such EOB forms as payable to Buyer. Buyer shall be solely responsible for the collection of all Interim Accounts Receivable from all applicable payors. If, prior to the Due Diligence Termination Date, Buyer’s lender requests an intercreditor agreement with Sellers’ lender further securing the payment obligations under this Section 2.6(2), Sellers shall make such request of Sellers’ lender and act in good faith to obtain their consent to such request.

(3) For purposes of this Agreement, “ Interim Billing Period ” shall mean: (i) for Medicare, the period commencing as of the Closing Date and ending upon the earlier of (A) the date set forth in written notice from Buyer to Seller that Buyer’s Medicare Change of Ownership application has been processed, (B) the Regional Office has issued the tie-in notice approving the Change of Ownership, and (C) Buyer has received approval to file claims under the assigned provider agreement and Buyer’s NPI number; and (ii) for Medicaid, the period commencing as of the Closing Date and ending upon the earlier of (A) the date that Buyer is able to file claims under Buyer’s new Medicaid contract or (B) such date that is two hundred forty (240) days following the Closing Date. Seller and Buyer will cooperate in good faith with one another both before and after the Closing Date to obtain approval of such Change of Ownership applications as expeditiously as possible after the Closing Date.

(4) Buyers shall maintain, and be responsible for adequate patient records to substantiate compliance with applicable Medicare and Medicaid guidelines; shall document the necessity and provision of medical care for each patient for which it submits bills under this Section 2.6. Buyers shall be responsible for verifying the accuracy of the content of all claims submitted by Buyers hereunder. If Buyers access the EDI (or any similar arrangement) Buyers shall not alter or modify in any way any information pertaining to claims submitted for services provided at any Facility prior to the Interim Billing Period.

Article 3. REPRESENTATIONS AND WARRANTIES OF SELLERS

As a material inducement to Buyers to enter into this Agreement and to consummate the transactions contemplated herein, Sellers hereby represent and warrant to Buyers, which representations and warranties shall be true and correct on the date hereof and as of the date of Closing, as follows:

3.1 Organization, Qualification and Authority . Each Seller is a limited liability company organized, validly existing and in good standing in the State of Delaware, and is in good standing and qualified to do business as a foreign limited liability company in the State of Kentucky. Each Seller has full power and authority to own and operate its respective Facility and its Assets as presently owned and operated and to carry on its business as it is now being conducted. Each Seller has the full right, power and authority to execute, deliver and carry out the terms of this Agreement and all documents and agreements necessary to give effect to the provisions of this Agreement and to consummate the transactions contemplated on the part of each such Seller hereby. The execution, delivery and consummation of this Agreement, and all other agreements and documents executed in connection herewith by each Seller, have been duly authorized by all necessary action on the part of such Seller and such Seller has provided to Buyers certified copies of resolutions or consents of Sellers evidencing such authorizations. No action, consent or approval on the part of Sellers or any other person or entity is necessary to authorize Sellers’ due and valid execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith. This Agreement and all other agreements and documents executed in connection herewith by each Seller, upon execution and delivery thereof, constitute the valid and binding obligations of such Seller, enforceable in accordance with their respective terms.

3.2 Absence of Default . To Sellers’ Knowledge, the execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith by Sellers will not constitute a material violation of, or be in conflict with, and will not, with or without the giving of notice or the passage of time, or both, result in a material breach of, constitute a material default under, or create or cause the acceleration of the maturity of any material debt, indenture, obligation or liability affecting the Assets or the Facility pursuant to, or result in the creation or imposition of any security interest, lien, charge or other encumbrance upon any of the Assets under: (1) any term or provision of the governing documents of Sellers; (2) any judgment, decree, order, regulation or rule of any court or regulatory authority; or (3) any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or governmental authority or arbitration tribunal to which Sellers and/or the Assets are subject.

3.3 Financial Statements . Attached hereto as Exhibit 3.3 are true and correct copies of the unaudited balance sheets for the Facilities as of December 31, 2016 and 2017, and unaudited income statements for the years then ending, and the interim unaudited balance sheet and income statement of the Facilities for the eight (8) month period ended August 31, 2018 (collectively, the “ Financial Statements ”). The Financial Statements present fairly in all material respects in accordance with GAAP, consistently applied, the financial condition of the Facilities as of the dates thereof and the results of its operations for the period(s) covered thereby. The foregoing notwithstanding, the Financial Statements are not and will not be prepared in accordance with GAAP to the extent that such Financial Statements (a) are subject to cost report and other year-end audit adjustments, (b) do not contain footnotes, (c) were prepared without physical inventories, (d) are not restated for subsequent events, (e) may not contain a statement of construction in process, and (f) may not fully reflect the following liabilities: (i) vacation, holiday and similar accruals, (ii) liabilities payable in connection with workers’ compensation claims, (iii) liabilities payable to any employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) maintained by Sellers or their affiliates on account of Sellers’ employees, (iv) federal, state and local income or franchise taxes and (v) bonuses payable to certain employees.

3.4 Operations Since December 31, 2017 . Except as set forth on Exhibit 3.4 , to Sellers’ Knowledge, since December 31, 2017, there has been no:

(1) Material change in the condition, financial or otherwise, of Sellers, the Facilities or the Assets that has, or could reasonably be expected to have, a material adverse effect on any of the Assets, the Facilities or future prospects of the Facilities, or the results of the operations of Sellers;

(2) Uninsured loss, damage or destruction in excess of Fifty Thousand and No/100 Dollars ($50,000.00) of or to any of the Assets;

(3) Sale, lease, transfer or other disposition by Sellers of, or mortgages or pledges of or the imposition of any lien or encumbrance on, any portion of the Assets;

(4) Material increase in the compensation payable by any Seller to any of its employees other than those made in the ordinary course of business, or any increase in, or institution of, any bonus, insurance, pension, profit-sharing or other employee benefit plan or arrangements; or

(5) Strike, work stoppage, labor organizational efforts, complaints other than grievance procedures in the ordinary course of business, or any collective bargaining agreements with any union or other labor dispute at the Facility;

(6) Material change in any method of accounting or accounting practice not required under GAAP;

(7) Extraordinary losses, canceled debts or waiver of any claims or rights of substantial value not shown in the Financial Statements; or

(8) Increase in the regular rate of compensation payable by it to any employee, member, or any physician other than normal merit and cost of living increases granted in the ordinary course of business.

3.5 Employment Discrimination . Seller is in material compliance with all material federal and state laws respecting employment and employment practices, terms and conditions of employment, wages and hours and nondiscrimination in employment, and is not engaged in any unfair labor practice. No person or party (including, without limitation, any governmental agency) has asserted, or threatened to assert, any claim for any action or proceeding against any Seller (or any officer, director, employee, agent or member of any Seller) arising out of any statute, ordinance or regulation relating to wages, collective bargaining, discrimination in employment or employment practices or occupational safety and health standards including, without limitation, the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, as amended, the Occupational Safety and Health Act, the Age Discrimination in Employment Act of 1967, the Americans With Disabilities Act and the Family and Medical Leave Act.

3.6 Licenses and Permits . Each Facility has all licenses, permits, registrations, certificates and accreditations (collectively, the “ Licenses and Permits ”) necessary for the applicable OpCo Seller to occupy and operate such Facility as a nursing facility. There is no material default under any of the Licenses and Permits, nor do Sellers know of any grounds for revocation, suspension or limitation of any of the Licenses or Permits. No written or, to Seller’s Knowledge, verbal notices have been received by any Seller with respect to any threatened or pending revocation, termination, suspension or limitation of any of the Licenses and Permits.

3.7 Compliance with Zoning, Land Use and Other Laws . To Sellers’ Knowledge, none of the Real Estate is in violation of any zoning, building code or other similar land use law applicable thereto, except where there exist applicable variances, conditional use permits, waivers or exemptions with respect to any non-conforming use or other zoning, building codes or similar land use matters. To Sellers’ Knowledge, the consummation of the transactions contemplated herein will not result in the termination of any applicable zoning variance, conditional use permit, waiver or exemption relating to the Real Estate with respect to any such non-conforming use or other zoning, land use or building codes matters.

3.8 Title to Assets .

(1) Except as set forth on Exhibit 3.8(1) , Sellers are the sole legal and beneficial owners of, or have the exclusive, unrestricted right and authority to use and transfer to Buyers, the personal property included in the Assets, free and clear of all mortgages, security interests, liens, leases, covenants, assessments, easements, options, rights of refusal, restrictions, reservations, defects in the title, encroachments and other encumbrances.

(2) The descriptions of the Real Estate contained in Exhibit 1.1(1) hereto include all real property owned by Sellers in connection with the Facilities. At Closing, the PropCo Sellers will be the sole and exclusive holder of all right, title and interest in the Real Estate and at Closing will have, good, marketable and insurable title, and will be in possession of, all of the Real Estate used in connection with the Facilities. At Closing, the Real Estate shall be free and clear of all mortgages, liens, leases, assessments, easements, covenants, options, rights of refusal, restrictions, reservations, defects in title, encroachments and other encumbrances or claims of any other person or party, except for (i) any lien to secure the payment of real estate taxes, including special assessments, not delinquent, (ii) all applicable laws, ordinances, rules and governmental regulations affecting the use and occupancy of the Real Estate, (iii) easements for the installation or maintenance of utilities serving the Real Estate, (iv) easements, restrictions and other matters applicable to the Real Estate that do not hinder, interfere with or prohibit the use and occupancy of the Real Estate as skilled nursing facility, and (v) those matters which are approved, waived or deemed approved in accordance with Section 8.8(3) hereof (the “ Permitted Exceptions ”). The PropCo Sellers have, and will at Closing have, the full right and authority to transfer and convey the Real Estate to the PropCo Buyers as contemplated by the terms of this Agreement, and to vest in the PropCo Buyers good, marketable and insurable title and the lawful right to possess and use the Real Estate.

3.9 Contracts .

(1) Exhibit 3.9 attached hereto sets forth a complete and accurate list of all contracts, agreements, purchase orders, leases, subleases, options and commitments, oral or written, and all assignments, amendments, schedules, exhibits and appendices thereof, affecting or relating to the Facilities or any Asset to which any Seller is a party or by which any Seller, the Assets or a Facility is bound or affected, including, without limitation, service contracts, management agreements and equipment leases (collectively, the “ Contracts ”). At least thirty (30) days prior to the Closing Date, Buyers shall notify Sellers of which Contracts it intends to assume, and such Contracts shall hereinafter be the “ Assumed Contracts ”; provided, however, that no Contracts held by the Sellers pursuant to any national or regional contract benefitting multiple facilities owned or operated by affiliates of the Sellers shall constitute Assumed Contracts. All Contracts not included in the Assumed Contracts shall be retained by Sellers.

(2) None of the Contracts have been materially modified, amended, assigned, transferred or subordinated except as described on Exhibit 3.9 and each is in full force and effect and is valid, binding and enforceable in accordance with its respective terms.

(3) To Sellers’ Knowledge, no event or condition has happened or presently exists that constitutes a default or breach or, after notice or lapse of time or both, would constitute a default or breach by any party under any of the Assumed Contracts. To Sellers’ Knowledge, there are no counterclaims or offsets under any of the Assumed Contracts.

3.10 Environmental Matters .

(1) Hazardous Substances . As used in this Section, the term “ Hazardous Substances ” means any hazardous or toxic substance, medical or biologic material or waste or other material or waste including, but not limited to, those substances, materials, and wastes defined in Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“ CERCLA ”), listed in the United States Department of Transportation Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances pursuant to 40 CFR Part 302, or which are regulated under any other Environmental Law (as defined herein), or any hydrocarbons, petroleum, petroleum products, asbestos, polychlorinated biphenyls, formaldehyde, radioactive substances, flammables or explosives.

(2) Compliance with Laws and Regulations . To Sellers’ Knowledge, (i) the Real Estate is not subject to any material environmental hazards, risks, or liabilities and (ii) the Real Estate is not in violation of any federal, state or local statutes, regulations, laws or orders pertaining to the protection of human health and safety or the environment (collectively, “ Environmental Laws ”), including, without limitation, CERCLA, and the Resource Conservation and Recovery Act, as amended (“ RCRA ”) and (iii) Sellers have not received any notice alleging or asserting either a violation of any Environmental Laws or an obligation to investigate, assess, remove, or remediate any Hazardous, Substances in or on the Real Property under or pursuant to any Environmental Laws. All operations, use or occupancy of the Real Estate, or any portion thereof, by Sellers and any agent, contractor or employee of any agent or contractor of any Seller (collectively, “ Agents ”), or any tenant or subtenant of any Seller of any part of the Real Estate, have been in material compliance with any and all Environmental Laws Sellers, Affiliates and Agents have kept the Real Estate free of any lien imposed pursuant to Environmental Law.

(3) No Investigation . Sellers: (i) have not either received or been issued a notice, demand, request for information, citation, summons or complaint regarding an alleged failure to comply with Environmental Law; or (ii) is not subject to any existing, pending, or threatened investigation or inquiry by any governmental authority for failure to comply with, or any remedial obligations under, Environmental Law, and there are no circumstances known to Sellers which could serve as a basis therefor. Sellers have not assumed any liability of any third party for clean up under, or noncompliance with, Environmental Law.

(4) No Disposal, Discharge or Release . Sellers have not disposed of, discharged or released any Hazardous Substances on, in, under or upon, or from the Real Estate, except for uses and temporary storage of Hazardous Substances reasonably necessary to the customary operation of a skilled nursing facility in material compliance with applicable Environmental Laws (including the presence of asbestos maintained in compliance with applicable Environmental Laws).

Sellers shall promptly notify Buyers in writing of any order of which any Seller is aware, receipt of any notice of violation or noncompliance with any Environmental Law, any threatened or pending action of which either is aware by any regulatory agency or governmental authority, or any claims made by any third party of which it is aware relating to Hazardous Substances on, emanations on or from, releases on or from, the Real Estate; and shall promptly furnish Buyers with copies of any written correspondence, notices or legal pleadings and written summaries of any oral communications or notices in connection therewith.

3.11 Condemnation . No part of the Real Estate is currently subject to condemnation proceedings and, to Sellers’ Knowledge, no condemnation or taking is threatened or contemplated. No part of the Real Estate is subject to any pending or threatened plans to modify or realign any street or highway that would result in the taking of all or any part of any adjacent street or highway that would adversely affect the current use of the Real Estate.

3.12 Litigation . Except as set forth on Exhibit 3.12 , Sellers have received no written notice of any material violation of any law, rule, regulation, ordinance or order of any court or federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality. Except as set forth in Exhibit 3.12 attached hereto, there are no lawsuits, proceedings, actions, arbitrations, governmental investigations, claims, inquiries or proceedings pending or, to Seller’s knowledge, threatened involving Sellers, any of the Assets or the Facilities and Sellers know of no basis therefor. A list of each lawsuit, administrative proceeding, governmental investigation, arbitration or other action commenced against any Seller during the past three (3) years is set forth on Exhibit 3.12 attached hereto.

3.13 Sellers’ Employees . Exhibit 3.13 attached hereto sets forth: (1) a complete list of all of Sellers’ employees at the Facilities (collectively, the “ Employees ”) and rates of pay; (2) categorization of each such person as a full-time or part-time employee of a Seller; (3) the employment dates and job titles of each such person; and (4) a list of any and all fringe benefits and personnel policies. For purposes of this Section, “ part-time employee ” means an employee who is employed for an average of fewer than twenty (20) hours per week or who has been employed for fewer than six (6) of the twelve (12) months preceding the date on which notice is required pursuant to the Worker Adjustment and Retraining Notification Act (“ WARN ”), 29 U.S.C. § 2102 et seq. Except as provided in Exhibit 3.13 , no Seller has any employment agreements with the Employees and all such Employees are employed on an “at will” basis. Sellers will terminate all of the Employees at Closing. The parties expressly agree that Sellers shall retain responsibility for and timely pay all salaries and wages, paid time off benefits, related payroll taxes and all retention bonuses, retirement and other fringe benefits that have accrued to the Employees through Closing; provided that Buyers shall assume accrued vacation and paid time off obligations pursuant to Section 1.3(1) above.

3.14 Labor Relations . Sellers are not a party to any labor contract, collective bargaining agreement, contract, Letter of Understanding, or any other arrangement, with any labor union or organization which obligates such Seller to compensate its employees at prevailing rates or union scale nor are any of its employees represented by any labor union or organization. There is no pending or threatened labor dispute, work stoppage, unfair labor practice complaint, strike, administrative or court proceeding or order between any Seller and any present or former employee(s) of such Seller.

3.15 Insurance . A complete and accurate list of all insurance policies held by Sellers with respect to the Facilities is set forth on Exhibit 3.15 attached hereto. True and complete copies of such policies have previously been provided to Buyers. Exhibit 3.15 also sets forth a summary of Sellers’ current insurance coverage (listing type, carrier and limits), and includes a list of any pending insurance claims relating to Sellers. No Seller is in material default or material breach with respect to any provision of any such insurance policies nor has any Seller failed to give any notice or to present any claim thereunder in due and timely fashion.

3.16 Broker’s or Finder’s Fee . Sellers have not employed and are not liable for the payment of any fee to any finder, broker, consultant or similar person in connection with the transactions contemplated by this Agreement, except that the parent corporation of Sellers has retained and will owe a fee to Blueprint Healthcare Real Estate Advisors, LLC, in cooperation with Kentucky Select Properties, LLC. Sellers shall indemnify and hold Buyers harmless from any breach of this representation.

3.17 Employee Benefit Plans .

(1) Exhibit 3.17 lists all deferred compensation, incentive compensation, stock purchase, stock option or other equity-based, retention, change in control, severance or termination pay, hospitalization or other medical, life, dental, vision, disability or other insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plans, programs, agreements or arrangements, and each other fringe or other employee benefit plan, program, agreement or arrangement (including any “employee benefit plan”, within the meaning of Section 3(3) of ERISA), sponsored, maintained or contributed to or required to be contributed to by Seller or any of its Subsidiaries for the benefit of any current or former employee or director (and/or their dependents or beneficiaries) of Seller or its Subsidiaries, or with respect to which Seller or its Subsidiaries otherwise has any material liabilities or material obligations (the “ Employee Benefit Plans ”).

(2) No Employee Benefit Plan is (i) a “multiemployer plan,” as such term is defined in Section 3(37) of ERISA or (ii) a plan that is subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code, and neither Seller or any of its Subsidiaries, has maintained, contributed to, or been required to contribute to any Employee Benefit Plan described in clauses (i) or (ii) above within the last six years.

(3) None of the Employee Benefit Plans that are “welfare benefit plans,” within the meaning of Section 3(1) of ERISA, provide for continuing benefits or coverage after retirement, except for COBRA rights under a “group health plan” as defined in Section 4980B(g) of the Code and Section 607 of ERISA.

3.18 Compliance with Laws . Sellers have received no written or, to Sellers’ Knowledge, verbal notices of non-compliance with any laws, rules and regulations applicable to the Assets or Facilities. Sellers are in material compliance with all federal, state and local laws, rules and regulations which relate to the operations of the Facilities.

3.19 WARN Act . Within the period ninety (90) days prior to Closing, Sellers have not temporarily or permanently closed or shut down any single site of employment or any facility or any operating unit, department or service within a single site of employment, as such terms are used in WARN.

3.20 Tax Returns; Taxes . Sellers have filed all federal, state and local tax returns and tax reports required by such authorities to be filed. Sellers have paid all taxes, assessments, governmental charges, penalties, interest and fines due or claimed to be due (including, without limitation, taxes on properties, income, franchises, licenses, sales and payrolls) by any federal, state or local authority. There is no pending tax examination or audit of, nor any action, suit, investigation or claim asserted or, to Sellers’ Knowledge, threatened against Sellers by any federal, state or local authority. All tax returns are (and with respect to the final returns will be) at the time of filing complete and accurate and in accordance with the tax laws applicable thereto and disclose all taxes required to be paid for the periods covered thereby. Proper amounts have been collected or withheld by Sellers for all income, franchise, property, sales, employment or other taxes payable or anticipated to be payable and for the payment of all other taxes (including without limitation all employment, sales or use taxes). Proper amounts have been withheld or collected from each payment made or to be made to each employee of any Seller for all taxes required to be withheld therefrom.

3.21 Medicaid . In connection with the Facilities, the OpCo Sellers participate in the Medicaid Program (the “ Program ”) under valid Medicaid contracts and reimbursement agreements (collectively, the “ Program Agreements ”). Each OpCo Seller is in material compliance with rules and policies respecting the Program, and there is no threatened or pending revocation, suspension, termination, probation, restriction, limitation or non-renewal affecting any of the OpCo Sellers’ Program Agreements.

3.22 Medicare .

(1) Each Facility is fully qualified as a provider of, and is in compliance, in all material respects, with all conditions for participation in Medicare.

(2) Each Seller has timely filed all cost reports required to be filed in connection with Medicare, and has delivered to Buyers true, correct and complete copies of all such cost reports filed for each of the last three (3) completed fiscal years, together with all claims and adjustments asserted by the applicable governmental authority and any settlement thereof.

(3) Except for reviews conducted by the applicable regulatory authorities in the ordinary course of business, Sellers have not been notified of any validation review or program integrity review related to the Facility, and no such review has been conducted or is currently pending by any regulatory authority relating to Medicare.

(4) Neither Sellers nor, to the Sellers’ knowledge any employee of Sellers, has been convicted of or pleaded guilty or no contest to any criminal offense related to the operation of the Facilities, and, to the knowledge of Sellers, no person has committed any offense that could serve as the basis for suspension, restriction or exclusion of the Facilities from Medicare.

(5) Sellers have not received written notice of any proceeding, and Sellers have no knowledge or reason to believe that any proceeding has been recommended or is threatened by any applicable regulatory authority to investigate, revoke, limit, suspend or take any adverse action against any Seller’s participation in Medicare.

3.23 Accreditation; Survey Reports . No Seller has received any written notice of material deficiency from The Joint Commission or any other crediting organization with respect to its Facility’s current accreditation period that require any material action or response by such Seller that have not been corrected or otherwise remedied. Sellers have made available to the Buyers true and complete copies of (i) each Facility’s most recent Joint Commission or other accreditation survey report and deficiency list, if any and (ii) each Facility’s (A) most recent Statement and Deficiencies and Plan of Correction on Form HCFA-2567, (B) most recent state licensing report and list of deficiencies, if any, and (C) the most recent fire marshal’s survey and deficiency list, if any, and the corresponding plans of correction or other responses.

3.24 Inventory . The inventory of Sellers located at the Facilities on the Closing Date will be of a quantity consistent with prior practices, and will include at least a five (5) day supply of food and at least a seven (7) day supply of medical and pharmaceutical inventories and supplies.

3.25 Assets Necessary to Business . The Assets together with the Excluded Assets are all of the assets used by Sellers to carry on the business of the Facilities as presently conducted. Since the date of the most recent Financial Statements, neither Sellers nor the Facilities have sold any of the Facilities’ Assets except sales of inventory in the ordinary course of business.

3.26 Compliance Program . Seller has provided to Buyer a copy of its current compliance program materials. Except as set forth on Exhibit 3.26 , Seller (a) is not a party to a Corporate Integrity Agreement with the Office of Inspector General of the Department of Health and Human Services, (b) has no reporting obligations pursuant to any settlement agreement entered into with any Governmental Entity, (c) has not been, to Sellers’ knowledge, the subject of any government payor program investigation conducted by any federal or state enforcement agency, (d) has not been a defendant in any qui tam/False Claims Act or similar litigation, (e) has not been served with or received any search warrant, subpoena, civil investigative demand, contact letter, or telephone or personal contact by or from any federal or state enforcement agency (except in connection with medical services provided to third-parties who may be defendants or the subject of investigation into conduct unrelated to the operation of the Facility or any other health care businesses conducted by Seller), and (f) to Seller’s knowledge, has not received any written complaints or complaints through their telephonic hotlines from employees, independent contractors, vendors, physicians, or any other person that would indicate that Seller has in the past violated, or is currently in violation of, any law or regulation. Buyer has been provided with a description of each audit and investigation conducted by Seller pursuant to its compliance program with respect to the Facility during the last three years. For purposes of this Agreement, the term “Compliance Program” refers to provider programs of the type described in the Compliance Program Guidance published by the Office of Inspector General of the Department of Health and Human Services.

3.27 Reimbursement Matters . All Medicare and Medicaid cost reports filed by Sellers for the past four (4) years, either not audited by the fiscal intermediary or audited and not formally settled are listed on Exhibit 3.27 . A statement setting forth the audit status of such Medicare cost reports is set forth in Exhibit 3.27 . Except as set forth in Exhibit 3.27 , to Sellers’ Knowledge, the amounts set up as provisions for Medicare and Medicaid adjustments and adjustments by any other third-party payors on the Financial Statements are sufficient to pay any amounts for which Sellers may be liable. Sellers are aware of no basis for any claims against Sellers by any third-party payors other than routine Medicare and Medicaid audit adjustments.

3.28 Non-Foreign Status; Patriot Act . Sellers are not a “foreign person” as such term is defined in Section 1445(f) of the Code. Seller is a “United States person” within the meaning of Section 7701(a)(30) of the Code. Seller is in compliance with the requirements of Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) (the “ Order ”) and other similar requirements contained in the rules and regulations of the Office of Foreign Assets Control, Department of the Treasury (OFAC) and in any enabling legislation or other Executive Orders or regulations in respect thereof (the Order and such other rules, regulations, legislation, or orders are collectively called the “ Orders ”). Neither Seller nor any beneficial owner of Seller: (i) is listed on the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to the Order and/or on any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Orders (such lists are collectively referred to as the “ Lists ”); (ii) is a Person who has been determined by competent authority to be subject to the prohibitions contained in the Orders; or (iii) is owned or controlled by, or acts for or on behalf of, any Person on the Lists or any other Person who has been determined by competent authority to be subject to the prohibitions contained in the Orders.

3.29 Program Compliance . Neither Sellers nor any Affiliate of Sellers is a party to, or the beneficiary of, any agreement, contract, understanding or business venture with any provider or referral source that violates the Medicare/Medicaid Fraud and Abuse amendments or any regulations thereunder adopted by the U.S. Department of Health and Human Services or any regulations adopted by any other federal or state agency or that results in overutilization of health care services by residents of the Facility.

3.30 Life Care Contracts . Sellers are not party to any endowment, “life care,” or other lump sum monetary payment contract or agreement in connection with the use or occupancy of the Facility by any person . N o person using or occupying any part of the Facility has paid any entrance fee, investment fee, endowment, “life care” fee, or other lump sum monetary payment in connection with his or her use or occupancy of the Facility, and no person using or occupying ay part of the Facility has been promised any special concessions or care.

3.31 Certain Representations with Respect to the Facility .

(1) The Facilities do not currently, and have not during the period operated by Sellers, participated in the TriCare (formerly known as CHAMPUS) program.

(2) Sellers have no Knowledge of any unresolved fire code violations at the Facilities.

(3) During the three (3) year period prior to the Closing Date, Sellers have not received any of the following with respect to the Facilities:

(a) A notice of a material Life Safety Code deficiency cited by Center for Medicare and Medicaid Services or any other Governmental Entity, or state or local building, fire safety or health authorities that have not been corrected as of the date hereof;

(b) A notice that any Facility is not in substantial compliance with the requirements for participation on the Medicare and/or Medicaid reimbursement program, which notice has not been cured; and

(c) A notice of imposition of civil monetary penalties or other intermediate sanctions in accordance with 42 CFR § 488.430 et seq.

Article 4. REPRESENTATIONS AND WARRANTIES OF BUYERS

As an inducement to Sellers to enter into this Agreement and to consummate the transactions contemplated herein, Buyers hereby represent and warrant to Sellers, which representations and warranties shall be true and correct on the date hereof and on the date of Closing, as follows:

4.1 Organization, Qualification and Authority . Each Buyer is a limited liability company duly organized under the laws of the State of Kentucky, validly existing and in good standing under the laws of the State of Kentucky. Each Buyer has the full power and authority to own, lease and operate its properties and assets as presently owned, leased and operated and to carry on its business as it is now being conducted. Each Buyer has the full right, power and authority to execute, deliver and carry out the terms of this Agreement and all documents and agreements necessary to give effect to the provisions of this Agreement and to consummate the transactions contemplated on the part of Buyer hereby. The execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith by Buyers has been duly authorized by all necessary corporate action on the part of each Buyer. No other action on the part of Buyers or any other person or entity is necessary to authorize the execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith. This Agreement, and all other agreements and documents executed in connection herewith by Buyers, upon due execution and delivery thereof, shall constitute the valid binding obligations of Buyers, enforceable in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally and by general principles of equity.

4.2 Absence of Default . The execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith by Buyers will not constitute a violation of, be in conflict with, or, with or without the giving of notice or the passage of time, or both, result in a breach of, constitute a default under, or create (or cause the acceleration of the maturity of) any debt, indenture, obligation or liability or result in the creation or imposition of any security interest, lien, charge or other encumbrance upon any of the Assets under: (1) any term or provision of the Articles of Organization or other governing documents of Buyer; (2) any judgment, decree, order, regulation or rule of any court or regulatory authority; or (3) any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or governmental authority or arbitration tribunal to which Buyer is subject.

4.3 Broker’s or Finder’s Fee . Buyers have not employed and are not liable for the payment of any fee to any finder, broker, government official, consultant or similar person in connection with the transactions contemplated by this Agreement. Buyers shall indemnify and hold Sellers harmless from any breach of this representation.

Article 5. COVENANTS OF PARTIES

5.1 Preservation of Facilities and Assets . From the date hereof through Closing, Sellers shall use commercially reasonable efforts to preserve, protect and maintain intact the operation of the Facilities and Assets as a going concern consistent with prior practice and not other than in the ordinary course of business. Buyers and Sellers shall use commercially reasonable efforts to facilitate the consummation of the transactions contemplated under this Agreement. Until termination of this Agreement, Sellers agree that they will not sell or transfer, or negotiate the sale or transfer of, the Assets or the Facilities. From the date hereof until Closing, Sellers will not sell, discard or dispose of any of the Assets other than in the ordinary course of business. From the date hereof through Closing, Sellers will not make any material change or improvement upon or about the Real Estate without the prior written consent of Buyers. From the date hereof through Closing, Sellers will maintain and keep the Assets in a sanitary, well-maintained condition and in good order and repair.

5.2 Absence of Material Change . From the date hereof through Closing, Sellers shall not make any material change in the operations of the Facilities without the prior written consent of Buyers.

5.3 Access to Books and Records .

(1) From the date hereof through Closing, Sellers shall give Buyers and Buyers’ counsel, accountants and other representatives reasonable access to all of Sellers’ offices, properties, books, contracts and records relating to the Facilities so that Buyers may inspect and audit them and shall furnish to Buyers a copy of all documents and information concerning the Facilities as Buyers may request. If any such books, records and materials are in the custody of third parties, Sellers shall direct such third parties to promptly provide them to Buyers. Copies of documents furnished to Buyers by Sellers will be returned by Buyers upon request if the transaction is not consummated. Sellers shall provide Buyers promptly with interim financial statements of Sellers and any other management reports, as and when they are available.

(2) Following Closing, Buyers shall permit Sellers’ representatives (including, without limitation, its counsel and auditors), during normal business hours, to have reasonable access to, and examine and make copies of, all books and records of the Facilities which relate to transactions or events occurring through Closing. For a period of five (5) years after Closing or such longer period as may be mandated by law, Buyers agree that, prior to the destruction or disposition of any such books or records, Buyers shall provide not less than forty-five (45) days, nor more than ninety (90) days, prior written notice to Sellers of such proposed destruction or disposal. If Sellers desire to obtain any such documents or records, they may do so by notifying Buyers in writing at any time prior to the date scheduled for such destruction or disposal. In such event, Buyers shall not destroy such documents or records and the parties shall then promptly arrange for the delivery of such documents or records to Sellers, their successors or assigns. Buyers’ reasonable out-of-pocket costs associated with the delivery of the requested documents or records shall be paid by Sellers.

(3) Following Closing, Sellers shall permit Buyers and their representatives (including, without limitation, its counsel and auditors), to have access to, and examine and make copies of, all books and records relating to the Facilities, which books and records are retained by Sellers and which relate to transactions or events occurring prior to Closing.

5.4 Risk of Loss . In the event there is any damage to or loss of any of the Assets (whether by fire, theft, vandalism, terrorism, act of God or other cause or casualty, damage or loss) between the date hereof and Closing, the Purchase Price shall be reduced by the amount necessary to repair the damage, which reduction shall be offset by any amounts paid by Sellers’ insurance company and assigned to Buyers; provided, however, that in the event of a material casualty that affects any Facility and renders it unusable for its intended purposes, either party may elect to terminate this Agreement in its entirety without penalty or obligation.

5.5 Condemnation . From the date hereof through Closing, in the event any Facility becomes subject to or is threatened with any condemnation or eminent domain proceedings that threatens to render such Facility unusable for its intended purposes then Buyers, in their sole discretion, may elect to terminate this Agreement in its entirety without obligation or penalty. In the event that any Facility becomes subject to or is threatened with any condemnation or eminent domain proceedings which do not threaten to render any Facility unusable for its intended purposes, then the parties shall proceed to Closing and Buyers shall be entitled to any condemnation award or damages paid with respect to such proceeding.

5.6 Preserve Accuracy of Representations and Warranties . Sellers shall refrain from taking any action which would render any representation and warranty contained in Article 3 hereof untrue, inaccurate or misleading as of Closing. Sellers will promptly notify Buyers of any lawsuit, claim, administrative action or other proceeding asserted or commenced against Sellers that may involve or relate in any way to Sellers, the Assets or the operation of the Facilities. Sellers shall promptly notify Buyers of any facts or circumstances that come to Sellers’ attention and that cause, or through the passage of time or the giving of notice or either, may cause any of Sellers’ representations and warranties to be untrue at any time from the date hereof through Closing.

5.7 Maintain Books and Accounting Practices . From the date hereof through Closing, Sellers shall maintain their books of account in the usual, regular and ordinary manner on a basis consistent with prior years and shall make no change in its accounting methods or practices.

5.8 Maintain Insurance Coverage . From the date hereof through Closing, Sellers shall maintain and cause to be maintained the existing insurance on the Assets and the operations of the Facilities.

5.9 Licensure and Certification . The OpCo Buyers shall within ten (10) days of the date of this Agreement file all initial applications and other documents required by the State of Kentucky (the “ State ”) for the issuance of the licenses, certifications and approvals required by the State for the operation of the Facilities by the OpCo Buyers (the “ Licensure Approvals ”) and the OpCo Buyers shall diligently proceed with securing the Licensure Approvals, including providing the State with any supplemental or additional information required for the State to deem any such applications to be complete. The OpCo Buyers shall not use or bill under any Medicaid provider numbers used by the OpCo Sellers, and the OpCo Buyers shall be responsible for obtaining a new Medicaid provider agreement and number and/or Medicaid certification as may be necessary for the continued operations of the Facilities (“ New Provider Number ”). The OpCo Sellers’ Medicaid provider account numbers for the Facilities shall remain the sole and exclusive property of Sellers.

5.10 Performance . Sellers and Buyers shall take all reasonable steps to satisfy their respective obligations, and the conditions to Closing, including without limitation the application for necessary licenses and permits.

5.11 WARN Act; Hiring of Employees . Prior to Closing, Sellers will not temporarily or permanently close or shut down any “single” site of “employment” or any “facility” or any “operating unit,” department or service within a single site of employment, as such terms are used in WARN. At Closing, Buyers shall offer employment to a sufficient number of the Employees, and on such terms, and for such periods, as may be necessary to avoid triggering any obligations on behalf of Sellers under WARN or any similar state law or regulation.

5.12 Consents . Sellers shall use reasonable efforts to obtain all consents required for the assignment of the Assumed Contracts and Buyers shall assist Sellers in such efforts. Anything contained herein to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign any of the Contracts if an attempted assignment thereof without the consent of another party thereto would constitute a breach thereof, unless such consent is obtained. If such consent is not obtained, or if an attempted assignment would be ineffective or would materially affect Sellers’ rights thereunder so that Buyers would not in fact receive all such rights, Sellers shall cooperate in any reasonable arrangement designed to provide Buyers the benefit under any such Assumed Contracts, including without limitation enforcement, at no out-of-pocket cost to Sellers, of any and all rights of Sellers against the other party or parties thereto arising out of the breach or cancellation by such other party or otherwise.

5.13 Cost Reports . Sellers shall timely prepare and file with the appropriate Medicare and Medicaid agencies any final cost reports with respect to its operation of the Facilities which are required to be filed by law under the terms of the Medicare and Medicaid Programs. Sellers shall provide Buyers with copies of such cost reports, together with copies of any amendments.

5.14 Prohibited Actions Pending Closing . Unless otherwise expressly provided for herein or approved by Buyers in writing, from the date of this Agreement until the Closing Date, Sellers shall not:

(1) Make any capital improvements to the Real Estate in excess of $50,000 or incur any other obligations to make any such capital improvements in excess of $50,000;

(2) Sell or otherwise dispose of, or agree to sell or dispose of any of the Assets, except in the ordinary course of business as permitted by this Agreement; and

(3) Take any action prior to the Closing Date which would breach any of the representations and warranties contained in this Agreement or otherwise take any action outside of the ordinary course of business of Sellers.

5.15 Sale “As-Is” . TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, AND EXCEPT FOR SELLERS’ REPRESENTATIONS AND WARRANTIES IN ARTICLE III OF THIS AGREEMENT AND ANY WARRANTIES OF TITLE CONTAINED IN THE DEED (“ SELLERS’ WARRANTIES ”), THIS SALE IS MADE AND WILL BE MADE WITHOUT REPRESENTATION, COVENANT, OR WARRANTY OF ANY KIND (WHETHER EXPRESS, IMPLIED, OR, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, STATUTORY) BY SELLERS. BUYERS AGREE TO ACCEPT THE REAL PROPERTY AND PERSONAL PROPERTY ON AN “AS IS” AND “WHERE IS” BASIS, WITH ALL FAULTS, AND WITHOUT ANY REPRESENTATION OR WARRANTY, ALL OF WHICH SELLERS HEREBY DISCLAIM. EXCEPT FOR SELLERS’ WARRANTIES, NO WARRANTY OR REPRESENTATION IS MADE BY SELLERS AS TO FITNESS FOR ANY PARTICULAR PURPOSE, MERCHANTABILITY, DESIGN, QUALITY, CONDITION, OPERATION OR INCOME, COMPLIANCE WITH DRAWINGS OR SPECIFICATIONS, ABSENCE OF DEFECTS, ABSENCE OF HAZARDOUS OR TOXIC SUBSTANCES, ABSENCE OF FAULTS, FLOODING, OR COMPLIANCE WITH LAWS AND REGULATIONS INCLUDING, WITHOUT LIMITATION, THOSE RELATING TO HEALTH, SAFETY, AND THE ENVIRONMENT. BUYERS ACKNOWLEDGE THAT BUYERS HAVE MADE THEIR OWN INVESTIGATION OF THE PHYSICAL, ENVIRONMENTAL, ECONOMIC USE, COMPLIANCE, AND LEGAL CONDITION OF THE PROPERTY AND EXCEPT FOR SELLERS’ WARRANTIES BUYERS ARE NOT NOW RELYING, AND WILL NOT LATER RELY, UPON ANY REPRESENTATIONS AND WARRANTIES MADE BY SELLERS OR ANYONE ACTING OR CLAIMING TO ACT, BY, THROUGH OR UNDER OR ON SELLERS’ BEHALF CONCERNING THE PROPERTY.

5.16 Confidentiality . The Parties agree that the terms of the Non-Disclosure Agreement, dated April 18, 2018, entered into by the Parties remain in full force and effect and are incorporated herein by reference.

Article 6. CLOSING

6.1 Closing . If all of the conditions to Closing set forth in Articles 7 and 8 hereof are satisfied, then the closing of the transaction contemplated by this Agreement (the “ Closing ”) shall occur on November 30, 2018, to be effective as of 12:01 a.m. on December 1, 2018 (the “ Closing Date ”). If the Closing does not occur by December 1, 2018, it shall be the first day of the first month after all of the conditions to Closing set forth in Articles 7 and 8 hereof have been satisfied. Closing shall take place through the offices of Title Company in an escrow style closing, whereby the parties hereto and their attorneys need not be present, or at such other time or place as the parties may mutually agree. Upon consummation, the Closing shall be deemed to be effective, and the transfer of the Assets shall be deemed to have occurred, as of 12:01 a.m. local time on the Closing Date. On the day of Closing, Buyers shall pay to Sellers or their designee (pursuant to wire instructions given to Buyers by Sellers) funds in an amount equal to the Purchase Price, as adjusted pursuant to Section 2.1. Notwithstanding the forgoing, the parties agree that if the Closing Date is not a business day, the Closing shall still be effective as of 12:01 a.m. local time on the Closing Date once all closing deliveries, including the Purchase Price, have been exchanged, despite the fact that the exchange of closing deliveries may take occur before or after the Closing Date; provided that all such deliveries have been provided to the Title Company in escrow prior to the Closing Date.

6.2 Termination . Notwithstanding anything in this Agreement to the contrary, this Agreement and the obligations of the parties hereunder may be terminated at or prior to Closing as follows:

(1) By Sellers : (a) in the event the transactions contemplated by this Agreement have been prohibited or enjoined by reason of any final judgment, decree or order entered or issued by a court of competent jurisdiction in litigation or proceedings involving either Buyers or Sellers; (b) pursuant to Section 12.15; or (c) in the event Buyers breach or violate any material provision of this Agreement or fail to perform any material covenant or agreement to be performed by Buyers under the terms of this Agreement and such breach, violation or failure is not cured prior to Closing or waived by Sellers at or prior to Closing.

(2) By Buyers : (a) in the event the transactions contemplated by this Agreement have been prohibited or enjoined by reason of any final judgment, decree or order entered or issued by a court of competent jurisdiction in litigation or proceedings involving either Buyers or Sellers; (b) pursuant to Section 5.4, 5.5, 8.5(3) or 8.5(5); (c) in the event Buyers are dissatisfied with their due diligence review of the Facilities in any respect; provided that this termination right shall expire at 5:00 CT on the Due Diligence Termination Date (as defined in Section 8.6); or (d) in the event Sellers breach or violate any material provision of this Agreement or fail to perform any material covenant or agreement to be performed by either under the terms of this Agreement and such breach, violation or failure is not cured prior to Closing or waived by Buyers at or prior to Closing.

(3) By Buyers or Sellers if Closing hereunder shall not have taken place by February 1, 2019, or by such later date as shall be agreed upon by an appropriate amendment to this Agreement if the parties agree in writing to an extension, provided that a party shall not have the right to terminate under this Section 6.2(3) if the conditions precedent to such party’s obligation to close have been fully satisfied and such party has failed or refused to close after being requested in writing to close by the other party.

Article 7. SELLERS’ CONDITIONS TO CLOSE

The obligations of Sellers under this Agreement are subject to the satisfaction on or prior to Closing, of the following conditions (which may be waived in writing by Seller in whole or in part):

7.1 Representations and Warranties True at Closing; Compliance with Agreement . The representations and warranties of Buyers contained in this Agreement (including the Exhibits hereto) or in any certificate or document delivered by Buyers to Sellers pursuant hereto shall be deemed to have been made again at Closing and shall then be true in all material respects; and Buyers shall have performed and complied with all material covenants, agreements and conditions required by this Agreement to be performed or complied with by it prior to or at Closing.

7.2 No Action/Proceeding . No action or proceeding before a court or any other governmental agency or body shall have been instituted to restrain or prohibit the transaction herein contemplated, and no governmental agency or body or other entity shall have taken any other action as a result of which to proceed with the transactions hereunder will constitute a violation of law.

7.3 Order Prohibiting Transaction . No order shall have been entered in any action or proceeding before any court or governmental agency, and no preliminary or permanent injunction by any court shall have been issued which would have the effect of: (1) making the transactions contemplated by this Agreement illegal; or (2) otherwise preventing consummation of such transactions. There shall have been no United States federal or state statute, rule or regulations enacted or promulgated after the date of this Agreement that results in any of the consequences referred to in this Section.

7.4 Lender Approval . Sellers shall have received approval for the transactions contemplated hereby from its primary lender.

Article 8. BUYERS’ CONDITIONS TO CLOSE

The obligations of Buyers under this Agreement are subject to the satisfaction, on or prior to Closing, of the following conditions (which may be waived in writing by Buyers in whole or in part):

8.1 Representations and Warranties True at Closing; Compliance with Agreement . The representations and warranties of Sellers contained in this Agreement (including the Exhibits hereto) or in any certificate or document delivered to Buyers in connection herewith, shall be deemed to have been made again at Closing and shall then be true in all material respects; and Sellers shall have performed and complied with all material covenants, agreements and conditions required by this Agreement to be performed or complied with by them prior to or at Closing.

8.2 No Loss, Damage of Destruction . In the event there is any damage to or loss of any of the Assets (whether by fire, theft, vandalism or other cause or casualty), the terms of Sections 5.4 and 5.5 shall have been complied with.

8.3 Regulatory Approvals . Buyers shall have obtained or have reasonable assurance that they will obtain (at their own cost) (a) certification for participation in the Medicaid Programs of the State under a new provider agreement and provider number, and (b) all other licenses, permits, approvals or certificates necessary for the ownership and operation of the Facilities; provided that the OpCo Buyers have promptly made application for such certifications, consents, licenses, etc.

8.4 No Action/Proceeding . No action or proceeding before a court or any other governmental agency or body shall have been instituted to restrain or prohibit the transaction herein contemplated, and no governmental agency or body or other entity shall have taken any other action as a result of which to proceed with the transactions hereunder constitute a violation of law. The waiting periods specified under the Antitrust Improvements Act with respect to the transactions contemplated by this Agreement shall have lapsed or been terminated.

8.5 Title Work and Surveys; Defects and Cure; Title Policy; Environmental Inspections . The obligations of Buyers to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment prior to or at Closing of each of the following conditions, any and all of which may be waived, in whole or in part, by Buyers to the extent permitted by applicable Law:

(1) Title Work . Sellers have furnished to Buyers copies of all existing title insurance policies insuring title to the Real Estate listed on Exhibit 1.1(1) (the “ Existing Title Work ”). Buyers have ordered, at Buyers’ expense, commitments from the Title Insurance Company to issue (i) updates to the Existing Title Work or (ii) new policies of title insurance for those portions of the Real Estate as to which there is no existing Title Work, together with legible copies of all exceptions to title referenced therein (the “ New Title Work ”). The New Title Work shall set forth the state of title as of each commitment’s effective date to the Real Estate together with all exceptions or conditions to such title, and all other encumbrances of record affecting such Real Estate, which would appear in an owner’s title policy of title insurance, if issued. Buyers shall furnish Sellers with copies of any New Title Work.

(2) Survey . Sellers have furnished to Buyers copies of all existing land title surveys of the Real Estate listed on Exhibit 1.1(1) (the “ Existing Surveys ”). Within five (5) days following the date of this Agreement, Buyers may, at Buyers’ option and expense, obtain (i) updates to the Existing Surveys or (ii) current, as-built surveys for those portions of the Real Estate as to which there are no Existing Surveys (the “ New Surveys ”). Buyers shall furnish Sellers with copies of any New Surveys.

(3) Defects and Cure . The Existing Title Work, the New Title Work, the Existing Surveys and the New Surveys are collectively referred to as “ Title Evidence ”. Buyers shall notify Sellers in writing within twenty (20) days after the date hereof of any claims, encumbrances, exceptions or defects disclosed in the Title Evidence, other than Permitted Exceptions, to which Buyers object (the “ Defects ”). Any matters disclosed in the Title Evidence as to which Buyers do not so object shall be deemed to be Permitted Exceptions. Sellers, at their sole cost and expense, shall cure any such Defects on or before Closing (“ cure ” shall include an endorsement by the Title Company reasonably acceptable to Buyers, either eliminating the Defect, insuring over the Defect or insuring against the effect of the Defect or Sellers may elect to not cure the Defect and shall give written notice to Buyers within ten (10) days of its receipt of Buyers’ notice of Defects of their decision. Within ten (10) days of Buyers’ receipt of Sellers’ election not to cure any Defects, Buyers may, at their election, (i) waive such uncured Defects and close (in which event such Defects shall be deemed Permitted Exceptions), or (ii) terminate this Agreement. If Sellers fail to timely give such notice, Sellers shall be deemed to have elected not to cure the Defects, whereupon Buyers may waive such Defects and close or may terminate this Agreement as provided in the immediately preceding sentence.

(4) Title Policy . At the Closing, Buyers may obtain a current ALTA Form Owner’s Policy of Title Insurance (the “ Title Policy ”) for the Real Estate issued by the Title Company. The Title Policy shall be issued as of the Closing Date in an amount equal to the portion of the Purchase Price being allocated to the Real Estate and shall insure to Buyers good and marketable leasehold title to the Real Estate, subject only to (i) Permitted Exceptions and (ii) taxes for the current and subsequent years “not yet due and payable.” The Title Policy shall have all standard and general exceptions deleted so as to afford full “extended form coverage” and shall contain such available endorsements as Buyers shall reasonably require in connection with its review of the Title Evidence. Sellers shall execute such certificates and affidavits as may be reasonably necessary in connection with the issuance of the Title Policy as described in this Section 8.6. Buyers and Sellers shall share equally in the premiums, costs and expenses of the Title Policy. Buyers shall pay all charges, costs and expenses for any endorsements to the Title Policy requested by Buyers or their lender.

(5) Environmental Inspections . For a period of twenty (20) days following the execution of this Agreement (the “ Environmental Inspection Period ”), Buyers and Buyers’ agents, representatives and contractors shall have the right to enter upon the Real Estate for the purpose of conducting such tests, assessments, evaluations and investigations as Buyers may determine in their sole discretion, in order to evaluate and determine the current environmental condition of the Real Estate, including without limitation Phase I or Phase II environmental assessments of the Real Estate. Within ten (10) days after the expiration of the Environmental Inspection Period, Buyers shall give written notice to Sellers if Buyers have identified any breach of Section 3.10 (“ Environmental Conditions ”). Buyers shall provide Sellers with a copy of Buyers’ Environmental Inspections reflecting such Environmental Conditions. If Buyers give notice of any Environmental Conditions to Sellers, and if such Environmental Conditions constitute a breach of Section 3.10, then Sellers (i) shall, at their sole cost and expense, cure or remedy such Environmental Conditions to Buyers’ reasonable satisfaction on or before Closing or (ii) may elect not to cure or remedy such Environmental Conditions, and shall give written notice of its election to Buyers within ten (10) days after Buyers’ notice of Environmental Conditions. Within ten (10) days of Buyers’ receipt of Sellers’ notice that Sellers have elected not to cure or remedy any Environmental Conditions, Buyers may elect to (i) waive such Environmental Conditions and close or (ii) elect to terminate this Agreement. If Sellers fail to timely give notice of its election as herein provided, Sellers shall be deemed to have elected not to cure or remedy the Environmental Conditions, whereupon Buyers may elect to waive such Environmental Conditions and close or terminate this Agreement as provided in the immediately preceding sentence.

8.6 Due Diligence Review . On or before the twentieth (20 ^th ) day following the execution of this Agreement (the “ Due Diligence Termination Date ”), Buyers shall have completed their due diligence investigations and review of the Facilities (including its review of any third party reports as Buyers may elect to obtain, at Buyers’ expense) with results acceptable to Buyers, in Buyers’ sole discretion. Notwithstanding the foregoing, Buyers and Sellers acknowledge that Buyers have obtained property condition assessments (the “ PCAs ”) with respect to the Facilities prior to the date of this Agreement. In order to resolve any matters identified by the PCA, including the condition of the roof of the Glasgow Facility, Sellers have agreed to give Buyers a credit towards the Purchase Price at Closing in the amount of One Hundred Thousand Dollars ($100,000) (the “ PCA Credit ”).

Article 9. OBLIGATIONS OF SELLERS AT CLOSING

At Closing, Sellers shall deliver or cause to be delivered to Buyers the following in form and substance reasonably satisfactory to Buyers:

9.1 Performance of Covenants . Sellers shall have performed the covenants and obligations required of Sellers by this Agreement in all material respects.

9.2 Documents Relating to Title . Sellers shall execute, acknowledge, deliver and cause to be executed, acknowledged and delivered to Buyers:

(1) A special warranty (the “ Deed ”) conveying to each PropCo Buyer fee simple title to the Real Estate of the applicable Facility subject to the Permitted Exceptions.

(2) A Bill of Sale and Assignment conveying to each PropCo Buyer good and valid title to the Equipment and Furnishings.

(3) A Bill of Sale and Assignment conveying to each OpCo Buyer good and valid title to the Assets other than the Real Estate and the Equipment and Furnishings.

(4) An Assignment and Assumption Agreement conveying to each OpCo Buyer the applicable Assumed Contracts.

(5) Certificates of title to all vehicles that constitute Assets endorsed by Sellers together with completed originals of any forms required by all applicable states to transfer the same.

9.3 Possession . Sellers shall deliver to Buyers full possession and control of the Facilities and Assets, free and clear of all liens, mortgages, pledges, security interests, restrictions, encumbrances and burdens of any kind whatsoever, including, without limitation, limitations on use and rights of reclamation by donees.

9.4 Corporate Good Standing and Resolutions . Sellers shall deliver to Buyers certificates of good standing from the Secretary of State of their state of organization, and from the State of Kentucky, and certified copies of the resolutions of the sole member of each Seller authorizing the execution, delivery and consummation of this Agreement and the execution, delivery and consummation of all other agreements and documents executed in connection herewith.

9.5 Closing Certificate . Sellers shall deliver to Buyers certificates of officers of Sellers, dated as of Closing, certifying that: (1) each covenant and obligation of Sellers has been complied with by Sellers; and (2) each representation and warranty of Sellers is true and correct at Closing as if made on and as of Closing.

9.6 Taxes and Other Payments . Sellers shall deliver to Buyers:

(1) A certificate of non-foreign status signed by the appropriate party and sufficient in form and substance to relieve Buyers of all withholding obligations under Section 1445 of the Code. In the event that any Seller cannot furnish such a certificate or any Buyer is not entitled to rely upon such a certificate under the provisions of Section 1445 and the regulations thereunder, such Seller shall take and/or permit each Buyer or its nominee to take any and all steps necessary to allow such Buyer or its nominee to satisfy the requirements of Section 1445.

(2) Executed releases of all mortgages, security interests, liens, pledges, restrictions or other encumbrances on or applicable to the Assets, other than the Permitted Exceptions.

Article 10. OBLIGATIONS OF BUYERS AT CLOSING

At Closing, each Buyer shall deliver or cause to be delivered to the appropriate Seller the following in a form and substance reasonably satisfactory to Sellers:

10.1 Performance of Covenants . Buyers shall have performed the covenants and obligations required of Buyers by this Agreement in all material respects.

10.2 Purchase Price . Buyers shall pay to Sellers the Purchase Price upon the terms specified in Section 2.1 hereof.

10.3 Good Standing and Resolutions . Buyers shall deliver to Sellers a certificate of good standing from the Secretary of State of Kentucky, dated the most recent practical date prior to Closing, together with a certified copy of the resolutions of Buyers approving this Agreement and the consummation of the transactions intended hereby.

10.4 Closing Certificate . Buyers shall deliver to Sellers a certificate of officers of Buyers, dated as of Closing, certifying that: (1) each covenant and obligation of Buyers has been complied with by Buyers; and (2) each representation and warranty of Buyers is true and correct at Closing as if made on and as of Closing.

10.5 Assumption Documents .

(1) A Bill of Sale and Assignment conveying to each ProCo Buyer good and valid title to the Equipment and Furnishings.

(2) A Bill of Sale and Assignment conveying to each OpCo Buyer good and valid title to the Assets other than the Real Estate and the Equipment and Furnishings.

(3) Assumption of Liabilities. An Assignment and Assumption Agreement pursuant to which Buyers shall covenant to perform and comply with all of the Assumed Liabilities, subject to the provisions of this Agreement, from and after Closing.

10.6 Use of Name . From and after Closing, Buyers shall discontinue all use of the name “Diversicare” and any related marks or derivatives thereof in connection with the operation of the Facilities; provided, however, that Buyers will be permitted to use such names and marks on existing signage and office supplies at the Facilities for a period not to exceed thirty (30) days.

Article 11. SURVIVAL OF PROVISIONS AND INDEMNIFICATION

11.1 Survival . The covenants, obligations, representations and warranties of Buyers and Sellers contained in this Agreement, or in any certificate or document delivered pursuant to this Agreement, shall be deemed to be material and to have been relied upon by the parties hereto notwithstanding any investigation prior to Closing, and shall survive Closing for a period of one (1) year (except as provided in Section 5.3(3) above) and shall not be merged into any documents delivered in connection with Closing.

11.2 Indemnification by Sellers . Subject to Section 11.4, Sellers shall jointly, severally and promptly indemnify, defend, and hold harmless Buyers, the directors, officers, shareholders, employees and agents of Buyers, and the Assets against any and all losses, costs, and expenses (including reasonable costs of investigation, court costs and legal fees) and other damages resulting from: (1) any breach by Sellers of any of the covenants, obligations, representations or warranties or breach or untruth of any representation, warranty, fact or conclusion contained in this Agreement or any certificate or document of Sellers delivered pursuant to this Agreement; (2) any liability of Sellers not expressly assumed by Buyers pursuant to Section 1.3 hereof; (3) any claim (whether or not disclosed herein) that is brought or asserted by any third party(s) against Buyers arising out of the ownership, licensing, operation or conduct of the Facilities or Assets relating to all periods of time through Closing; and (4) the determination by Medicare, Medicaid, any fiscal intermediary, or any federal or state governmental authority that any amounts paid to any Seller by Medicare, Medicaid, any fiscal intermediary, or any federal or state governmental authority for any services provided by a Facility prior to the Closing Date resulted in an overpayment or other determination that funds previously paid by Medicare, Medicaid, any fiscal intermediary, or any federal or state governmental authority to Licensee must be repaid, which determination results in an offset against amounts owed to a Buyer.

11.3 Indemnification by Buyers . Subject to Section 11.4, Buyers shall promptly indemnify, defend, and hold Sellers harmless against any and all losses, costs, and expenses (including reasonable cost of investigation, court costs and legal fees) and other damages resulting from: (1) any breach by Buyers of any covenants, obligations, representations or warranties or breach or untruth of any representation, warranty, fact or conclusion contained in this Agreement or any certificate or document of Buyers delivered pursuant to this Agreement; (2) any claim which is brought or asserted by any third party(s) against Sellers for failure to pay or perform any of the Assumed Liabilities; and (3) subject to the other provisions of this Agreement, any claim that is brought or asserted by any third party(s) against Sellers arising out of or relating to the ownership, licensing, operation or conduct of the Facilities or Assets relating to all periods of time subsequent to Closing.

11.4 Rules Regarding Indemnification . The obligations and liabilities of each party which may be subject to indemnification liability hereunder (the “ indemnifying party ”) to the other party (the “ indemnified party ”) shall be subject to the following terms and conditions:

(1) Claims by Non-parties . The indemnified party shall give written notice within a reasonably prompt period of time to the indemnifying party of any written claim by a third party which is likely to give rise to a claim by the indemnified party against the indemnifying party based on the indemnity agreements contained in this Article, stating the nature of said claim and the amount thereof, to the extent known. The indemnified party shall give notice to the indemnifying party that pursuant to the indemnity, the indemnified party is asserting against the indemnifying party a claim with respect to a potential loss from the third party claim, and such notice shall constitute the assertion of a claim for indemnity by the indemnified party. If, within thirty (30) days after receiving such notice, the indemnifying party advises the indemnified party that it will provide indemnification and assume the defense at its expense, then so long as such defense is being conducted, the indemnified party shall not settle or admit liability with respect to the claim and shall afford to the indemnifying party and defending counsel all reasonable assistance in defending against the claim, but the indemnified party shall remain entitled to notice and an opportunity to participate in any proceedings relating to the claim. If the indemnifying party assumes the defense, counsel shall be selected by such party and if the indemnified party then retains its own counsel, it shall do so at its own expense. If the indemnified party does not receive a written objection to the notice from the indemnifying party within thirty (30) days after the indemnifying party’s receipt of such notice, the claim for indemnity shall be conclusively presumed to have been assented to and approved, and in such case the indemnified party may control the defense of the matter or case and, at its sole discretion, settle or admit liability. If, within the aforesaid thirty (30) day period, the indemnified party shall have received written objection to a claim (which written objection shall briefly describe the basis of the objection to the claim or the amount thereof, all in good faith), then for a period of ten (10) days after receipt of such objection the parties shall attempt to settle the dispute as between the indemnified and indemnifying parties. If they are unable to settle the dispute, the unresolved issue or issues may be resolved in conjunction with the underlying action that gave rise to the claim for indemnification.

(2) Claims by a Party . The determination of a claim asserted by a party hereunder (other than as set forth in subsection (1) above) pursuant to this Article shall be made as follows: The indemnified party shall give written notice within a ten (10) days to the indemnifying party of any claim by the indemnified party which has not been made pursuant to subsection (1) above, stating the nature and basis of such claim and the amount thereof, to the extent known. The claim shall be deemed to have resulted in a determination in favor of the indemnified party and to have resulted in a liability of the indemnifying party in an amount equal to the amount of such claim estimated pursuant to this Section if within forty-five (45) days after the indemnifying party’s receipt of the claim the indemnified party shall not have received written objection to the claim. In such event, the claim shall be conclusively presumed to have been assented to and approved. If, within the aforesaid forty-five (45) day period, the indemnified party shall have received written objection to a claim (which written objection shall briefly describe the basis of the objection to the claim or the amount thereof, all in good faith), then for a period of sixty (60) days after receipt of such objection the parties shall attempt to settle the disputed claim as between the indemnified and indemnifying parties. If they are unable to settle the disputed claim, the unresolved issue or issues be resolved in conjunction with the underlying action that gave rise to the claim for indemnification.

(3) Indemnification Maximum . The maximum aggregate liability of Sellers for indemnification under this Agreement with respect to claims made or arising under Section 11.2 shall be equal to One Million Eight Hundred and Seventy Thousand Dollars ($1,870,000); provided that with respect to any claim arising under Section 11.2(4), the maximum aggregate liability shall be Three Million Dollars ($3,000,000).

(4) Indemnification Threshold . Buyers agree not to seek recourse against, and shall not recover from Sellers under Section 11.2 on account of any Loss arising out of a breach of Sellers’ representations and warranties in Article 3 hereof, unless and until the aggregate amount thereof with respect to Losses exceeds Fifty Thousand Dollars ($50,000) (the “ Indemnification Threshold ”), after which Sellers shall only be liable for amounts above the Indemnification Threshold. Notwithstanding the foregoing, the Indemnification Threshold shall not be applicable if the indemnification claim relates to an Excluded Liability, or any proration of real estate taxes.

11.5 Guaranty . Diversicare Holding Company, LLC (“ Guarantor ”) hereby guaranties the obligations of Sellers (i) to forward to Buyer the payments set forth in Section 2.6(2) and shall join in the execution of this Agreement solely for such purposes, and (ii) with respect to any claim for indemnification arising under Section 11.2(4) above.

Article 12. MISCELLANEOUS

12.1 Assignment . Except as otherwise provided below, neither Sellers nor Buyers may assign any rights or delegate any obligations under this Agreement without the prior written consent of the other party, and any prohibited assignment or delegation will be null and void. Notwithstanding the foregoing, Buyers may assign their rights to an affiliate so long as Buyers remain obligated hereunder. This Agreement shall be binding upon and shall inure to the exclusive benefit of the parties hereto and their respective permitted heirs, legal representatives, successors and assigns.

12.2 Other Expenses . Except as otherwise provided in this Agreement, Sellers shall pay all of their expenses in connection with the negotiation, execution, and implementation of the transactions contemplated by this Agreement and Buyers shall pay all of their expenses in connection with the negotiation, execution, and implementation of the transactions contemplated by this Agreement. Any real property transfer taxes shall be paid by Sellers. The costs of the procurement of the Title Policy and the related closing fees of the Title Company incurred in connection with the transactions contemplated within this Agreement shall be borne equally by Buyers and Sellers at Closing. The cost of any endorsement to the Title Policy shall be paid by Buyers. All costs associated with any real property surveys, environmental reports, or document recording fees incurred in connection with the transactions contemplated within this Agreement shall be borne solely by Buyers and paid by Closing. All real estate taxes, other than those described above, incurred in connection with the transactions contemplated within this Agreement shall be prorated at Closing. All other costs incurred in connection with the transactions contemplated within this agreement shall be prorated at Closing.

12.3 Notices . All notices, requests, demands, waivers and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given: (1) if delivered personally or sent by facsimile, on the date received; (2) if delivered by overnight courier, on the day after mailing; and (3) if mailed, five (5) days after mailing with postage prepaid. Any such notice shall be sent as follows:

To Sellers:

Diversicare Healthcare Services

1621 Galleria Boulevard

Brentwood, Tennessee 37027

Attn: President

(615) 771-7575

(615) 771-7409 (fax)

with a copy to:

Bass Berry & Sims, PLC

150 Third Avenue South, Suite 2800

Nashville, Tennessee 37201

Attn: Michael R. Hill

(615) 742-6249

(615) 742-0461 (fax)

To Buyers:

c/o The Portopiccolo Group

440 Sylvan Avenue, Suite 240

Englewood Cliffs, NJ 07632

Attn: Simcha Hyman

with a copy to:

Simcha D. Schonfeld, Esq.

Koss & Schonfeld, LLP

90 John Street, Suite 503

New York, NY 10038

12.4 Confidentiality . All parties agree to maintain the confidentiality of the existence of this Agreement and the transactions contemplated hereunder, unless disclosure is required by law, except that Buyers shall be entitled to disclose the terms of this Agreement to their attorneys, accountants, financing sources, third party agents, investors, and other advisors, provided, such persons agree to keep the terms of this Agreement confidential.

12.5 Controlling Law . This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Kentucky without regard to its choice or conflicts of law provisions.

12.6 Headings . Table of contents and Section headings in this Agreement are for convenience of reference only and shall not be considered or referred to in resolving questions of interpretation.

12.7 Partial Invalidity . The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

12.8 Waiver . Neither the failure nor any delay on the part of any party hereto in exercising any rights, power or remedy hereunder shall operate as a waiver thereof, or of any other right, power or remedy; nor shall any single or partial exercise of any right, power or remedy preclude any further or other exercise thereof, or the exercise of any other right, power or remedy. No waiver of any of the provisions of this Agreement shall be valid unless it is in writing and signed by the party against which it is sought to be enforced.

12.9 Counterparts . This Agreement may be executed simultaneously in two or more counterparts each of which shall be deemed an original and all of which together shall constitute but one and the same instrument.

12.10 Interpretation; Knowledge . All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as the identity of the person or entity, or the context, may require. Further, it is acknowledged by the parties that this Agreement has undergone several drafts with the negotiated suggestions of both; and, therefore, no presumptions shall arise favoring either party by virtue of the authorship of any of its provisions or the changes made through revisions. Whenever in this Agreement the term “to Sellers’ Knowledge”, “to the knowledge of Sellers” or the like is used, Sellers shall be deemed to have the actual knowledge of each Facility’s administrator, and the officers of the sole member of each Seller.

12.11 Entire Agreement . This Agreement, including the Exhibits hereto, constitutes the entire agreement between the parties hereto with regard to the matters contained herein and it is understood and agreed that all previous undertakings, negotiations, letters of intent and agreements between the parties are merged herein. This Agreement may not be modified orally, but only by an agreement in writing signed by Buyers and Sellers.

12.12 Legal Fees and Costs . In the event any party incurs legal expenses to enforce or interpret any provision of this Agreement, the prevailing party will be entitled to recover such legal expenses, including, without limitation, attorney’s fees, costs and necessary disbursements, in addition to any other relief to which such party shall be entitled.

12.13 No Third Party Beneficiaries . The provisions of this Agreement are solely for the benefit of the parties hereto. It shall create no rights in any persons other than as set forth in the immediately preceding sentence.

12.14 Exclusivity . Until and unless this Agreement is terminated by Buyers, Sellers will not solicit any offers or proposals, or enter into letters of intent, negotiations or contracts with any third-party with respect to a transaction relating to the sale, transfer, conveyance, merger or any other transaction of similar import with respect to Sellers or any of the Assets.

12.15 Supplements to Exhibits and Schedules . After the date of this Agreement, the Sellers may supplement any of the Exhibits and Schedules with respect to matters of which they become aware after the most recent accepted version of such Exhibit or Schedule by written notice (including appropriate supporting documentation). Submission of supplemental Exhibits and Schedules shall be in writing delivered via overnight courier to the Buyers. The submitted supplemental Exhibits and Schedules shall be deemed accepted and thereby become an Exhibit or Schedule to this Agreement unless: (i) such proposed Exhibit or Schedule would, individually or in aggregate with the effect of items disclosed in other supplemental Exhibits and Schedules which were first submitted after signing of this Agreement, constitute a material adverse effect, and (ii) within five (5) business days after receipt of such proposed supplemental Exhibit or Schedule, the Buyers provide written notice to Sellers reasonably detailing the objection thereof and changes in such proposed Exhibit or Schedule which would make the same acceptable. Should the parties not be able to resolve written objections within ten (10) business days thereafter, then either party may withdraw from this Agreement and terminate it without any obligation or liability of any sort and this Agreement shall be treated as never having been executed or delivered. In the event the Closing occurs, any such newly completed Exhibits or Schedules or supplements shall be effective, they shall represent the final version of the Exhibit or Schedule for all purposes.

12.16 Business Days . To the extent that the expiration of any time period hereunder falls on a day that is not a business day, the expiration of such time period shall be extended to 5:00 pm CT on the following business day.

The parties hereto have executed this Agreement as of the date first above written.

SELLERS :

DIVERSICARE OF FULTON, LLC

By: /s/James R. McKnight, Jr.

Title: President & CEO

DIVERSICARE FULTON PROPERTIES, LLC

By: /s/James R. McKnight, Jr.

Title: President & CEO

DIVERSICARE CLINTON, LLC

By: /s/James R. McKnight, Jr.

Title: President & CEO

DIVERSICARE CLINTON PROPERTIES, LLC

By: /s/James R. McKnight, Jr.

Title: President & CEO

DIVERSICARE OF GLASGOW, LLC

By: /s/James R. McKnight, Jr.

Title: President & CEO

DIVERSICARE GLASGOW PROPERTIES, LLC

By: /s/James R. McKnight, Jr.

Title: President & CEO

BUYERS :

FULTON NURSING AND REHABILITATION, LLC

By: /s/Simcha Hyman

Title: Manager

HOLIDAY FULTON PROPCO LLC

By: /s/Simcha Hyman

Title: Manager

BIRCHWOOD NURSING AND REHABILITATION LLC

By: /s/Simcha Hyman

Title: Manager

PADGETT CLINTON PROPCO LLC

By: /s/Simcha Hyman

Title: Manager

WESTWOOD NURSING AND REHABILITATION LLC

By: /s/Simcha Hyman

Title: Manager

WESTWOOD GLASGOW PROPCO LLC

By: /s/Simcha Hyman

Title: Manager

GUARANTOR: (for purposes of Section 11.5):

DIVERSICARE HOLDING COMPANY, LLC

By: /s/James R. McKnight, Jr.

Title: President & CEO

List of Exhibits

Exhibit A Facilities

1.1(1) Real Estate

1.1(8) Deposits

1.2 Excluded Assets

3.3 Financial Statements

3.4 Material Change in Condition of Sellers

3.8(1) Personal Property Liens

3.9 Contracts

3.12 Litigation

3.13 Sellers’ Employees

3.15 Insurance

3.17 Employee Benefit Plans

3.26 Compliance Exceptions

3.27 Reimbursement Matters

EXHIBIT A

FACILITIES



Facility	Address	OpCo Seller	PropCo Seller	OpCo Buyer	PropCo Buyer
Diversicare of Fulton	1004 Holiday Lane Fulton, KY 42041	Diversicare of Fulton, LLC	Diversicare Fulton Properties, LLC	Fulton Nursing and Rehabilitation LLC	Holiday Fulton Propco LLC
Diversicare of Clinton Place	106 Padgett Drive Clinton, KY 42031	Diversicare Clinton, LLC	Diversicare Clinton Properties, LLC	Birchwood Nursing and Rehabilitation LLC	Padgett Clinton Propco LLC
Diversicare of Glasgow	300 Westwood Street Glasgow, KY 42141	Diversicare of Glasgow, LLC	Diversicare Glasgow Properties, LLC	Westwood Nursing and Rehabilitation LLC	Westwood Glasgow Propco LLC

25237508.13

GUARANTY

(OHI - Diversicare)

This GUARANTY (“ Guaranty ”) is given as October 1, 2018 by DIVERSICARE HEALTHCARE SERVICES, INC., a Delaware corporation, formerly known as Advocat, Inc., ADVOCAT FINANCE, INC., a Delaware corporation, DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, and DIVERSICARE LEASING COMPANY II, LLC, a Delaware limited liability company (collectively referred to herein as “ Guarantor ”), in favor of the entities listed on Schedule 1 to this Guaranty (collectively, “ Landlord ”), with reference to the following facts:

RECITALS

A. The entities listed on Schedule 2 to this Guaranty (collectively, “ Tenant ”) have executed and delivered to Landlord a Master Lease dated as of the date of this Agreement (as such agreement may from time to time be amended, modified or supplemented, the “ Master Lease ”), pursuant to which Tenant is leasing from Landlord certain healthcare facilities identified therein (each a “ Facility ,” and collectively, the “ Facilities ”).

B. Each Guarantor continues to maintain a direct financial interest in the Tenant and it is to the advantage of each Guarantor that Landlord enter into the Master Lease.

NOW THEREFORE, in consideration of the foregoing and in order to induce Landlord to enter into the Master Lease and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Defined Terms . All capitalized terms used herein and not defined herein shall have the meaning for such terms set forth in the Master Lease.

2. Guaranty . Guarantor hereby unconditionally and irrevocably guarantees to Landlord (i) the payment when due of all Rent and all other sums payable by the Tenant under the Master Lease, and (ii) the faithful and prompt performance when due of each and every one of the terms, conditions and covenants to be kept and performed by Tenant under the Lease Documents, any and all amendments, modifications, extensions and renewals of the Lease Documents, including without limitation all indemnification obligations, insurance obligations, and all obligations to operate, rebuild, restore or replace any facilities or improvements now or hereafter located on the real estate covered by the Master Lease. In the event of the failure of Tenant to pay any such amounts owed, or to render any other performance required of Tenant under the Lease Documents, when due, Guarantor shall forthwith perform or cause to be performed all provisions of the Lease Documents to be performed by Tenant thereunder, and pay all damages that may result from the non-performance thereof to the full extent provided under the Lease Documents (collectively with (i) and (ii) above, the “ Obligations ”). As to the Obligations, Guarantor's liability under this Guaranty is without limit.

3. Survival of Obligations . The obligations of Guarantor under this Guaranty with respect to the Lease Documents shall survive and continue in full force and effect (until and unless all Obligations, the payment and performance of which are hereby guaranteed, have been fully paid and performed) notwithstanding:

(a) any amendment, modification, or extension of any Lease Document;

(b) any compromise, release, consent, extension, indulgence or other action or inaction in respect of any terms of any Lease Document or any other guarantor;

(c) any substitution or release, in whole or in part, of any security for this Guaranty which Landlord may hold at any time;

(d) any exercise or nonexercise by Landlord of any right, power or remedy under or in respect of any Lease Document or any security held by Landlord with respect thereto, or any waiver of any such right, power or remedy;

(e) any bankruptcy, insolvency, reorganization, arrangement, adjustment, composition, liquidation, or the like of the Tenant or any other guarantor;

(f) any limitation of Tenant’s liability under any Lease Document or any limitation of Tenant’s liability thereunder which may now or hereafter be imposed by any statute, regulation or rule of law, or any illegality, irregularity, invalidity or unenforceability, in whole or in part, of any Lease Document or any term thereof;

(g) any sale, lease, or transfer of all or any part of any interest in any Facility (other than the assignment of the Master Leases to Tenant) to any other person, firm or entity other than to Landlord;

(h) any act or omission by Landlord with respect to any of the security instruments given or made as a part of the Lease Documents or any failure to file, record or otherwise perfect any of the same;

(i) any extensions of time for performance under the Lease Documents, whether prior to or after maturity;

(j) the release of any collateral from any lien in favor of Landlord, or the release of Tenant from performance or observation of any of the agreements, covenants, terms or conditions contained in any Lease Document by operation of law or otherwise;

(k) the fact that Tenant may or may not be personally liable, in whole or in part, under the terms of any Lease Document to pay any money judgment;

(l) the failure to give Guarantor any notice of acceptance, default or otherwise;

(m) any other guaranty now or hereafter executed by Guarantor or anyone else in connection with any Lease Document;

(n) any rights, powers or privileges Landlord may now or hereafter have against any other person, entity or collateral; or

(o) any other circumstances, whether or not Guarantor had notice or knowledge thereof, other than the payment or performance of all of the Obligations.

4. Primary Liability . The liability of Guarantor with respect to the Lease Documents shall be primary, direct and immediate, and Landlord may proceed against Guarantor: (i) prior to or in lieu of proceeding against Tenant, its assets, any security deposit, or any other guarantor; and (ii) prior to or in lieu of pursuing any other rights or remedies available to Landlord. All rights and remedies afforded to Landlord by reason of this Guaranty or by law are separate, independent and cumulative, and the exercise of any rights or remedies shall not in any way limit, restrict or prejudice the exercise of any other rights or remedies.

In the event of any default under any Lease Document, a separate action or actions may be brought and prosecuted against Guarantor whether or not Tenant is joined therein or a separate action or actions are brought against Tenant. Landlord may maintain successive actions for other defaults. Landlord's rights hereunder shall not be exhausted by its exercise of any of its rights or remedies or by any such action or by any number of successive actions until and unless all indebtedness and obligations the payment and performance of which are hereby guaranteed have been paid and fully performed.

5. Obligations Not Affected . In such manner, upon such terms and at such times as Landlord in its sole discretion deems necessary or expedient, and without notice to Guarantor, Landlord may: (a) amend, alter, compromise, accelerate, extend or change the time or manner for the payment or the performance of any obligation hereby guaranteed; (b) extend, amend or terminate any of the Lease Documents; or (c) release Tenant by consent to any assignment (or otherwise) as to all or any portion of the obligations hereby guaranteed. Any exercise or non-exercise by Landlord of any right hereby given Landlord, dealing by Landlord with Guarantor or any other guarantor, Tenant or any other person, or change, impairment, release or suspension of any right or remedy of Landlord against any person including Tenant and any other guarantor will not affect any of the obligations of Guarantor hereunder or give Guarantor any recourse or offset against Landlord.

6. Waiver . With respect to the Lease Documents, Guarantor hereby waives and relinquishes all rights and remedies accorded by applicable law to sureties and/or guarantors or any other accommodation parties, under any statutory provisions, common law or any other provision of law, custom or practice, and agrees not to assert or take advantage of any such rights or remedies including, but not limited to:

(a) any right to require Landlord to proceed against the Tenant or any other person or to proceed against or exhaust any security held by Landlord at any time or to pursue any other remedy in Landlord's power before proceeding against Guarantor or to require that Landlord cause a marshaling of Tenant’s assets or the assets, if any, given as collateral for this Guaranty or to proceed against Tenant and/or any collateral, including collateral, if any, given to secure Guarantor's obligation under this Guaranty, held by Landlord at any time or in any particular order;

(b) any defense that may arise by reason of the incapacity or lack of authority of any other person or persons;

(c) notice of the existence, creation or incurring of any new or additional indebtedness or obligation or of any action or non-action on the part of Tenant, Landlord, any creditor of Tenant or Guarantor or on the part of any other person whomsoever under this or any other instrument in connection with any obligation or evidence of indebtedness held by Landlord or in connection with any obligation hereby guaranteed;

(d) any defense based upon an election of remedies by Landlord which destroys or otherwise impairs the subrogation rights of Guarantor or the right of Guarantor to proceed against Tenant for reimbursement, or both;

(e) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal;

(f) any duty on the part of Landlord to disclose to Guarantor any facts Landlord may now or hereafter know about Tenant, regardless of whether Landlord has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume or has reason to believe that such facts are unknown to Guarantor or has a reasonable opportunity to communicate such facts to Guarantor, it being understood and agreed that Guarantor is fully responsible for being and keeping informed of the financial condition of Tenant and of all circumstances bearing on the risk of non-payment or non-performance of any obligations or indebtedness hereby guaranteed;

(g) any defense arising because of Landlord's election, in any proceeding instituted under the federal Bankruptcy Code, of the application of Section 1111 (b)(2) of the federal Bankruptcy Code; and

(h) any defense based on any borrowing or grant of a security interest under Section 364 of the federal Bankruptcy Code.

(i) any extension of time conferred by any law now or hereafter in effect and any requirement or notice of acceptance of this Guaranty or any other notice to which the undersigned may now or hereafter be entitled to the extent such waiver of notice is permitted by applicable law.

7. Warranties . With respect to the Lease Documents, Guarantor warrants that: (a) this Guaranty is executed at Tenant’s request; and (b) Guarantor has established adequate means of obtaining from Tenant on a continuing basis financial and other information pertaining to Tenant’s financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor's risks hereunder, and Guarantor further agrees that Landlord shall have no obligation to disclose to Guarantor information or material acquired in the course of Landlord's relationship with Tenant.

8. No-Subrogation . Guarantor shall have no right of subrogation and waives any right to enforce any remedy which Landlord now has or may hereafter have against Tenant and any benefit of, and any right to participate in, any security now or hereafter held by Landlord with respect to the Master Lease.

9. Subordination . Upon the occurrence of an Event of Default under any Lease Document, which is not cured by Guarantor, the indebtedness or obligations of Tenant to Guarantor shall not be paid in whole or in part nor will Guarantor accept any payment of or on account of any amounts owing, without the prior written consent of Landlord and at Landlord's request, Guarantor shall cause Tenant to pay to Landlord all or any part of the subordinated indebtedness until the obligations under the Lease Documents have been paid in full. Any payment by Tenant in violation of this Guaranty shall be received by Guarantor in trust for Landlord, and Guarantor shall cause the same to be paid to Landlord immediately on account of the amounts owing from Tenant to Landlord. No such payment will reduce or affect in any manner the liability of Guarantor under this Guaranty.

10. No Delay . Any payments required to be made by Guarantor hereunder shall become due on demand in accordance with the terms hereof immediately upon the happening of an Event of Default under any Lease Document.

11. Application of Payments . With respect to the Lease Documents, and with or without notice to Guarantor, Landlord, in Landlord's sole discretion and at any time and from time to time and in such manner and upon such terms as Landlord deems appropriate, may (a) apply any or all payments or recoveries from Tenant or from any other guarantor under any other instrument or realized from any security, in such manner and order of priority as Landlord may determine, to any indebtedness or other obligation of the Tenant with respect to the Lease Documents and whether or not such indebtedness or other obligation is guaranteed hereby or is otherwise secured or is due at the time of such application, and (b) refund to Tenant any payment received by Landlord under the Lease Documents.

12. Guaranty Default .

(a) As used herein, the term Guaranty Default shall mean one or more of the following events (subject to applicable cure periods):


i)	the failure of Guarantor to pay the amounts required to be paid hereunder at the times specified herein;

ii)

the failure of Guarantor to observe and perform any covenants, conditions or agreement on its part to be observed or performed under the Lease Documents, other than as referred to in Subsection (i) above, for a period of thirty (30) days after written notice of such failure has been given to Guarantor by Landlord, unless Landlord agrees in writing to an extension of such time prior to its expiration.

(b) Upon the occurrence of a Guaranty Default, Landlord shall have the right to bring such actions at law or in equity, including appropriate injunctive relief, as it deems appropriate to compel compliance, payment or deposit, and among other remedies to recover its attorneys' fees in any proceeding, including any appeal therefrom and any post-judgment proceedings.

13. Intentionally omitted.

14. Miscellaneous .

(a) No term, condition or provision of this Guaranty may be waived except by an express written instrument to that effect signed by Landlord. No waiver of any term, condition or provision of this Guaranty will be deemed a waiver of any other term, condition or provision, irrespective of similarity, or constitute a continuing waiver of the same term, condition or provision, unless otherwise expressly provided.

(b) If any one or more of the terms, conditions or provisions contained in this Guaranty is found in a final award or judgment rendered by any court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining terms, conditions and provisions of this Guaranty shall not in any way be affected or impaired thereby, and this Guaranty shall be interpreted and construed as if the invalid, illegal, or unenforceable term, condition or provision had never been contained in this Guaranty.

(c) THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND, EXCEPT THAT THE LAWS OF THE STATE IN WHICH A FACILITY IS LOCATED SHALL GOVERN THIS AGREEMENT TO THE EXTENT NECESSARY (i) TO OBTAIN THE BENEFIT OF THE- RIGHTS AND REMEDIES SET FORTH HEREIN WITH RESPECT TO SUCH FACILITY, AND (ii) FOR PROCEDURAL REQUIREMENTS WHICH MUST BE GOVERNED BY THE LAWS OF THE STATE IN WHICH SUCH FACILITY IS LOCATED. GUARANTOR CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS OF MARYLAND AND AGREES THAT ALL DISPUTES CONCERNING THIS GUARANTY BE HEARD IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OR STATES IN WHICH THE FACILITY OR FACILITIES ARE LOCATED OR IN MARYLAND. GUARANTOR AGREES THAT SERVICE OF PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE STATE OR STATES IN WHICH THE FACILITY OR FACILITIES ARE LOCATED OR MARYLAND AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF THE STATE OR STATES IN WHICH THE FACILITY OR FACILITIES ARE LOCATED AND OF MARYLAND.

(d) GUARANTOR AND LANDLORD HEREBY WAIVE TRIAL BY JURY AND THE RIGHT THERETO IN ANY ACTION OR PROCEEDING OF ANY KIND ARISING ON, UNDER, OUT OF, BY REASON OF OR RELATING IN ANY WAY TO THIS GUARANTY OR THE INTERPRETATION, BREACH OR ENFORCEMENT THEREOF.

(e) In the event of any suit, action, arbitration or other proceeding to interpret this Guaranty, or to determine or enforce any right or obligation created hereby, the prevailing party in the action shall recover such party's actual costs and expenses reasonably incurred in connection therewith, including, but not limited to, attorneys' fees and costs of appeal, post judgment enforcement proceedings (if any) and bankruptcy proceedings (if any). Any court, arbitrator or panel of arbitrators shall, in entering any judgment or making any award in any such suit, action, arbitration or other proceeding, in addition to any and all other relief awarded to such prevailing party, include in such-judgment or award such party's costs and expenses as provided in this paragraph.

(f) Guarantor (i) represents that it has been represented and advised by counsel in connection with the execution of this Guaranty; (ii) acknowledges receipt of a copy of the Lease Documents; and (iii) further represents that Guarantor has been advised by counsel with respect thereto. This Guaranty shall be construed and interpreted in accordance with the plain meaning of its language, and not for or against Guarantor or Landlord, and as a whole, giving effect to all of the terms, conditions and provisions hereof.

(g) Except as provided in any other written agreement now or at any time hereafter in force between Landlord and Guarantor, this Guaranty shall constitute the entire agreement of Guarantor with Landlord with respect to the subject matter hereof, and no representation, understanding, promise or condition concerning the subject matter hereof will be binding upon Landlord or Guarantor unless expressed herein.

(h) All stipulations, obligations, liabilities and undertakings under this Guaranty shall be binding upon Guarantor and its respective successors and assigns and shall inure to the benefit of Landlord and to the benefit of Landlord's successors and assigns.

(i) Whenever the singular shall be used hereunder, it shall be deemed to include the plural (and vice-versa) and reference to one gender shall be construed to include all other genders, including neuter, whenever the context of this Guaranty so requires. Section captions or headings used in the Guaranty are for convenience and reference only, and shall not affect the construction thereof.

15. Other Guarantors . If more than one person or entity executes this Guaranty, their duties and obligations under this Guaranty shall be joint and several. All references to Guarantor shall be to each or any two or more of them.

(Signature Pages Follow)

IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated Guaranty as of the date first written above.

GUARANTOR:

DIVERSICARE HEALTHCARE SERVICES, INC., a Delaware corporation f/k/a Advocat, Inc.

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Title: President and Chief Executive Officer

ADVOCAT FINANCE INC.,

a Delaware corporation

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Title: President and Chief Executive Officer

DIVERSICARE MANAGEMENT SERVICES CO.,

a Tennessee corporation

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Title: President and Chief Executive Officer

DIVERSICARE LEASING COMPANY II, LLC

a Delaware limited liability company

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Title: President and Chief Executive Officer

Schedule 1

List of Entities comprising Landlord

Sterling Acquisition, LLC, the successor by conversion to Sterling Acquisition Corp.

Stevens Avenue Property, L.L.C.

St. Joseph Missouri Property, L.L.C.

Ohio Indiana Property, L.L.C.

Nicholasville Kentucky Property, L.L.C.

Louisville Dutchmans Property, L.L.C.

Greenville Kentucky Property, L.L.C.

SCHEDULE 2

List of Entities comprising Tenant

Diversicare Leasing Corp.

Diversicare Highlands, LLC

Diversicare of Chateau, LLC

Diversicare of Riverside, LLC

Diversicare of St. Joseph, LLC

Diversicare of Bradford Place, LLC

Diversicare of Providence, LLC

Diversicare of Siena Woods, LLC

Diversicare of St. Theresa, LLC

Diversicare of Nicholasville, LLC

Diversicare of Seneca Place, LLC

Diversicare of Greenville, LLC

BBS – 9-7-19

FOURTH AMENDMENT TO
SECOND AMENDED AND RESTATED TERM LOAN AND SECURITY AGREEMENT AND OMNIBUS RELEASE

THIS FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED TERM LOAN AND SECURITY AGREEMENT AND OMNIBUS RELEASE (this “ Amendment ”) dated as of December 1, 2018, by and among CIBC BANK USA , formerly known as The PrivateBank and Trust Company, an Illinois banking corporation (together with its successors and assigns, “ Administrative Agent ”) in its capacity as administrative agent for the Lenders (as defined below), the Lenders, and the Affiliates of DIVERSICARE HEALTHCARE SERVICES, INC. identified on the signature pages as “Borrower” (individually and collectively, “ Borrower ”).

WHEREAS , Borrower, Administrative Agent, and the financial institutions signatories thereto (the “ Lenders ”) are parties to that certain Second Amended and Restated Term Loan and Security Agreement dated as of February 26, 2016 (as the same has been, and may hereafter be, amended, restated, supplemented or otherwise modified from time to time, the “ Loan Agreement ”; all capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement as amended by this Amendment);

WHEREAS , pursuant to that certain Asset Purchase Agreement dated October 30, 2018 (as amended, restated, supplemented or otherwise modified from time to time up to the date hereof, the “ Purchase Agreement ”), DIVERSICARE OF FULTON, LLC, a Delaware limited liability company (“ Fulton OpCo ”), DIVERSICARE FULTON PROPERTY, LLC, a Delaware limited liability company (“ Fulton PropCo ”), DIVERSICARE CLINTON, LLC, a Delaware limited liability company (“ Clinton OpCo ”), DIVERSICARE CLINTON PROPERTY, LLC, a Delaware limited liability company (“ Clinton PropCo ”), DIVERSICARE OF GLASGOW, LLC, a Delaware limited liability company (“ Glasgow OpCo ”) and DIVERSICARE GLASGOW PROPERTY, LLC, a Delaware limited liability company (“ Glasgow PropCo ” and, together with Fulton OpCo, Fulton PropCo, Clinton OpCo, Clinton PropCo and Glasgow OpCo, collectively, the “ Released Borrower ”) have agreed to sell the Facilities located at 1004 Holiday Lane, Fulton, Kentucky 42041 (known as Diversicare of Fulton) (the “ Fulton Facility ”), 106 Padgett Drive, Clinton, Kentucky 42031 (known as Diversicare of Clinton Place) (the “ Clinton Facility ”) and 300 Westwood Street, Glasgow, Kentucky 42141 (known as Diversicare of Glasgow) (the “ Glasgow Facility ”) (collectively, the “ Facility Sale ”), and concurrent with the Facility Sale, Borrower will make a prepayment of (i) the Acquisition Loans in an amount equal to $2,100,000 of the Net Proceeds from the Facility Sale (the “ Fourth Amendment Sale Acquisition Loans Prepayment ”) and (ii) the Term Loan in an amount equal to $11,100,000 of the Net Proceeds from the Facility Sale (the “ Fourth Amendment Sale Term Loan Prepayment ”); for purposes of this Amendment, the term “Net Proceeds” means the gross sales proceeds payable to the Released Borrower pursuant to the terms and conditions of the Purchase Agreement, less the Released Borrower’s transaction expenses and other closing costs, holdbacks

required under the Purchase Agreement and all other amounts payable by the Released Borrower pursuant to the Purchase Agreement and the transactions contemplated thereby;

WHEREAS , Borrower has requested that the Released Borrower be removed as a party to the Loan Agreement and the Financing Agreements to which it is a party and Administrative Agent release all Liens in favor of Administrative Agent, for the benefit of the Lenders, in the assets and property of the Released Borrower and Administrative Agent and the Lenders have agreed to such removal and release, in each case as provided in, and subject to the terms and conditions of, this Agreement; and

WHEREAS , Borrower, Administrative Agent and Lenders desire to amend the Loan Agreement as provided in and subject to the terms and conditions of this Amendment.

NOW, THEREFORE , for and in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

1. Amendments to Loan Agreement . Subject to the satisfaction of the conditions set forth in Section 5 below and in reliance upon the representations and warranties set forth in Section 4 below, Borrower, Administrative Agent and Lenders hereby amend the Loan Agreement as follows:

(a) The definition of “Acquisition Loan Availability” in Section 1.1 of the Loan Agreement shall be amended and restated in its entirety as follows:

““ Acquisition Loan Availability ” means the Maximum Acquisition Loan Facility minus the Acquisition Loan Outstandings minus the Acquisition Loan Reserve.”

(b) The following additional definition is hereby added to Section 1.1 of the Loan Agreement in alphabetical order:

““ Acquisition Loan Reserve ” means a reserve in an amount established by Administrative Agent from time to time in the Administrative Agent’s reasonable discretion. As of December 1, 2018, the amount of the Acquisition Loan Reserve is $2,100,000.

2. Release . Subject to the terms and conditions contained herein and notwithstanding anything contained in the Financing Agreements to the contrary:

(a) From and after the date hereof, (i) each Released Borrower is released as a Borrower under the Loan Agreement and Subsidiary under the applicable Pledge Agreement and all references to “Borrower” in the Loan Agreement or any of the Financing Agreements to which it is a party or “Subsidiary” under the applicable Pledge Agreement are amended to remove such

Released Borrower from therewith, and (ii) all Liens in favor of Administrative Agent, for the benefit of the Lenders, on the assets and property of each Released Borrower are released.

(b) All obligations of the Released Borrower (other than contingent indemnification obligations), in its capacity as a Borrower, created by the Financing Agreements, or in its capacity as a Subsidiary, created under the applicable Pledge Agreement, are hereby released without any further action by any party hereto.

(c) On or promptly after the date hereof, Administrative Agent will file or record such Uniform Commercial Code termination or amendment statements necessary to terminate, release or amend, as applicable, any Uniform Commercial Code financing statements to the extent necessary or desirable to evidence the termination of the liens set forth in Sections 2(a) and (b) herein.

(d) Notwithstanding the foregoing Sections 2(a) , (b) and (c) herein, for the avoidance of doubt, each Released Borrower shall only be released as a “Subsidiary” under the applicable Pledge Agreement as security for the Liabilities under the Loan Agreement and the Financing Agreement. Each Released Borrower shall remain a “Subsidiary” under the applicable Pledge Agreement as security for the Affiliate Revolving Loan Liabilities under the Affiliate Revolving Loan Financing Agreements.

3. No Other Amendments . Borrower acknowledges and expressly agrees that this Amendment is limited to the extent expressly set forth herein and shall not constitute a modification or amendment of the Loan Agreement or any other Financing Agreements or a course of dealing at variance with the terms or conditions of the Loan Agreement or any other Financing Agreements (other than as expressly set forth in this Amendment and the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith).

4. Representations and Warranties . In order to induce Administrative Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Administrative Agent and Lenders (which representations and warranties shall survive the execution and delivery hereof), both before and after giving effect to this Amendment that:

(a) Each of the representations and warranties of each Borrower contained in the Loan Agreement and the other Financing Agreements to which Borrower is a party are true and correct in all material respects (without duplication of any materiality carve out already provided therein) on and as of the date hereof, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date);

(b) Borrower has the corporate or limited liability company (as applicable) power and authority (i) to enter into the Loan Agreement as amended by this Amendment and (ii) to do all acts and things as are required or contemplated hereunder to be done, observed and performed by Borrower;

(c) This Amendment has been duly authorized, validly executed and delivered by one or more duly authorized officers of Borrower, and each of this Amendment, the Loan Agreement as amended hereby, and each of the other Financing Agreements to which Borrower is a party, constitutes the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, subject to bankruptcy, insolvency or other similar laws affecting the enforcement of creditor’s rights and remedies generally;

(d) The execution and delivery of this Amendment and performance by Borrower under this Amendment, the Loan Agreement and each of the other Financing Agreements to which Borrower is a party do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over Borrower that has not already been obtained, nor be in contravention of or in conflict with the organizational documents of Borrower, or any provision of any statute, judgment, order, indenture, instrument, agreement, or undertaking, to which Borrower is party or by which Borrower’s respective assets or properties are bound; and

(e) No Default or Event of Default will result after giving effect to this Amendment, and no event has occurred that has had or could reasonably be expected to have a Material Adverse Effect after giving effect to this Amendment.

5. Conditions Precedent to Effectiveness of this Amendment . The amendments contained in Sections 1 and the release contained in Section 2 of this Amendment shall become effective on the date hereof as long as each of the following conditions precedent is satisfied as determined by Administrative Agent:

(a) all of the representations and warranties of Borrower under Section 4 hereof, which are made as of the date hereof, are true and correct;

(b) receipt by Administrative Agent of duly executed signature pages to this Amendment from Borrower and Lenders;

(c) Administrative Agent shall have received a duly executed Reaffirmation of Second Amended and Restated Guaranty in the form attached hereto;

(d) receipt by Administrative Agent of a duly executed Reaffirmation of Pledge Agreements in the form attached hereto;

(e) receipt by Administrative Agent of the fully-executed Purchase Agreement, certified by a duly authorized officer of the Borrower as being true, correct and complete;

(i) receipt by Administrative Agent of funds in an amount equal to the Fourth Amendment Sale Acquisition Loans Prepayment, which funds shall be applied on the date hereof to repay the Acquisition Loans in accordance with the terms and conditions of this Amendment and the Loan Agreement (including being subject to Section 12.9 of the Loan Agreement);

(ii) receipt by Administrative Agent of funds in an amount equal to the Fourth Amendment Sale Term Loan Prepayment, which funds shall be applied on the date hereof to repay the Term Loan in accordance with the terms and conditions of this Amendment and the Loan Agreement (including being subject to Section 12.9 of the Loan Agreement); and

(f) receipt by Administrative Agent of such other certificates, schedules, exhibits, documents, opinions, affidavits, instruments, reaffirmations, amendments, or consents Administrative Agent may reasonably require, if any.

1. Reaffirmation; References to Loan Agreement; Additional Agreements and Covenants; Etc.

(a) Borrower acknowledges and agrees that all of Borrower’s obligations and Liabilities under the Loan Agreement and the other Financing Agreements, as amended hereby, are and shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. The first priority perfected security interests and Liens and rights in the Collateral securing payment of the Liabilities are hereby ratified and confirmed by Borrower in all respects.

(b) Upon the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import shall mean and be a reference to the Loan Agreement, as amended by this Amendment.

(c) The failure by Administrative Agent, at any time or times hereafter, to require strict performance by any Borrower of any provision or term of the Loan Agreement, this Amendment or any of the Financing Agreements shall not waive, affect or diminish any right of Administrative Agent hereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver by Administrative Agent of a breach of this Amendment or any Event of Default under or pursuant to the Loan Agreement shall not, except as expressly set forth in a writing signed by Administrative Agent, suspend, waive or affect any other breach of this Amendment or any Event of Default under or pursuant to the Loan Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of any Borrower contained in

this Amendment, shall be deemed to have been suspended or waived by Administrative Agent unless such suspension or waiver is (i) in writing and signed by Administrative Agent (and, if applicable, the Required Lenders) and (ii) delivered to Borrower by Administrative Agent or its counsel.

(d) In no event shall Administrative Agent’s execution and delivery of this Amendment establish a course of dealing among Administrative Agent, any Borrower, pledgor or Guarantor or any other obligor, or in any other way obligate Administrative Agent to hereafter provide any amendments or modifications or, if at any time applicable, consents or waivers with respect to the Loan Agreement or any other Financing Agreement. The terms and provisions of this Amendment shall be limited precisely as written and shall not be deemed (x) to be a consent to any amendment or modification of any other term or condition of the Loan Agreement or of any of the Financing Agreements (except as expressly provided herein or in any of the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith); or (y) to prejudice any right or remedy which Administrative Agent or the Lenders may now have under or in connection with the Loan Agreement or any of the other Financing Agreements. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

(e) Except as expressly provided herein (or in any of the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith), the Loan Agreement and all of the other Financing Agreements shall remain unaltered, and the Loan Agreement and all of the other Financing Agreements shall remain in full force and effect and are hereby ratified and confirmed in all respects.

2. Release .

(a) In consideration of, among other things, the consent and amendments provided for herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower and Guarantor (on behalf of themselves and their respective subsidiaries, Affiliates, successors and assigns), and, to the extent permitted by applicable law and the same is claimed by right of, through or under the above, for their past, present and future employees, directors, members, managers, partners, agents, representatives, officers, directors, and equity holders (all collectively, with Borrower and Guarantor, the “ Releasing Parties ”), do hereby unconditionally, irrevocably, fully, and forever remise, satisfy, acquit, release and discharge Administrative Agent and Lenders and each of Administrative Agent’s and Lender’s past, present and future officers, directors, agents, employees, attorneys, parent, shareholders, successors, assigns, subsidiaries and Affiliates and all other persons and entities to whom Administrative Agent or Lenders would be liable if such persons or entities were found in any way to be liable to any of

the Releasing Parties (collectively, the “ Lender Parties ”), of and from any and all manner of action and actions, cause and causes of action, claims, cross-claims, charges, demands, counterclaims, suits, proceedings, disputes, debts, dues, sums of money, accounts, bonds, covenants, contracts, controversies, damages, judgments, liabilities, damages, costs, expenses, executions, liens, claims of liens, claims of costs, penalties, attorneys’ fees, or any other compensation, recovery or relief on account of any liability, obligation, demand, proceedings or cause of action of whatever nature, whether in law, equity or otherwise (including, without limitation, those arising under 11 U.S.C. §§ 541-550 and interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses, and incidental, consequential and punitive damages payable to third parties), whether known or unknown, fixed or contingent, joint and/or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, contractual or tortious, direct, indirect, or derivative, asserted or unasserted, foreseen or unforeseen, suspected or unsuspected, now existing, heretofore existing or which may have heretofore accrued against any or all of Lender Parties, whether held in a personal or representative capacity, that the Releasing Parties (or any of them) have or may have against the Lender Parties or any of them (whether directly or indirectly) and which are based on any act, fact, event, action or omission or any other matter, condition, cause or thing occurring at or from any time prior to and including the date hereof in any way, directly or indirectly arising out of, connected with or relating to this Amendment, the Loan Agreement or any other Financing Agreement and the transactions contemplated hereby and thereby, the Collateral or the Liabilities, and all other agreements, certificates, instruments and other documents and statements (whether written or oral) related to any of the foregoing, other than any applicable good faith claim as to which a final determination is made in a judicial proceeding (in which Administrative Agent and any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that Administrative Agent acted in a grossly negligent manner or with actual willful misconduct or illegal activity. Borrower and Guarantor each acknowledges that Administrative Agent and Lenders are specifically relying upon the representations, warranties and agreements contained herein and that such representations, warranties and agreements constitute a material inducement to Administrative Agent and Lenders in entering into this Amendment.

(b) Borrower and Guarantor each understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.

(c) To the furthest extent permitted by law, Borrower and Guarantor each hereby knowingly, voluntarily, intentionally and expressly waives and relinquishes any and all rights and benefits that it respectively may have as against Lender Parties under any law, rule or regulation of any jurisdiction that would or could have the effect of limiting the extent to which a general release extends to claims which a Lender Party or Releasing Party does not know or suspect to exist as of the date hereof. Borrower and Guarantor each hereby acknowledges that the waiver set forth in the

prior sentence was separately bargained for and that such waiver is an essential term and condition of this Amendment (and without which the amendment in Section 1 and the release in Section 2 hereof would not have been agreed to by Administrative Agent and Lenders).

3. Costs and Expenses . Without limiting the obligation of Borrower to reimburse Administrative Agent for all costs, fees, disbursements and expenses incurred by Administrative Agent as specified in the Loan Agreement, Borrower agrees to and shall pay on demand all reasonable costs, fees, disbursements and expenses of Administrative Agent in connection with the preparation, negotiation, revision, execution and delivery of this Amendment and the other agreements, amendments, modifications, reaffirmations, instruments and documents contemplated hereby, including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses. All obligations provided herein shall survive any termination of this Amendment and the Loan Agreement as amended hereby.

4. Financing Agreement . This Amendment shall constitute a Financing Agreement.

5. Titles. Titles and section headings herein shall be without substantive meaning and are provided solely for the convenience of the parties.

6. Severability; Etc. Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Amendment. The parties hereto have participated jointly in the negotiation and drafting of this Amendment. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

7. Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided , however , no Borrower may assign any of its respective rights or obligations under this Amendment without the prior written consent of Administrative Agent.

8. Further Assurances . Borrower shall, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, certificates, instruments, reaffirmations, amendments, documents and assurances as may from time to time be necessary or as Administrative Agent may from time to time reasonably request in order to more fully carry out the intent and purposes of this Amendment or any of the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith.

9. Counterparts; Faxes . This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes.

10. Governing Law . This Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles that would require the application of any other laws.

[Signature Pages Follow]

IN WITNESS WHEREOF, the parties hereto have duly executed this Fourth Amendment to Second Amended and Restated Term Loan and Security Agreement and Omnibus Release as of the day and year first above written.

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release



BORROWER :
DIVERSICARE AFTON OAKS, LLC
DIVERSICARE BRIARCLIFF, LLC
DIVERSICARE CHISOLM, LLC
DIVERSICARE HARTFORD, LLC
DIVERSICARE WINDSOR HOUSE, LLC
DIVERSICARE HILLCREST, LLC
DIVERSICARE LAMPASAS, LLC
DIVERSICARE YORKTOWN, LLC

By:	Diversicare Leasing Corp. , its sole member
	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: President and Chief Executive Officer
DIVERSICARE OF CHANUTE, LLC
DIVERSICARE OF COUNCIL GROVE, LLC
DIVERSICARE OF HAYSVILLE, LLC
DIVERSICARE OF SEDGWICK, LLC
DIVERSICARE OF HUTCHINSON, LLC
DIVERSICARE OF LARNED, LLC
By:	Diversicare Kansas, LLC , its sole member
	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: President and Chief Executive Officer

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release



DIVERSICARE PROPERTY CO., LLC

	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: President and Chief Executive Officer

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release



DIVERSICARE AFTON OAKS PROPERTY, LLC
DIVERSICARE BRIARCLIFF PROPERTY, LLC
DIVERSICARE CHANUTE PROPERTY, LLC
DIVERSICARE CHISOLM PROPERTY, LLC
DIVERSICARE COUNCIL GROVE PROPERTY, LLC
DIVERSICARE HAYSVILLE PROPERTY, LLC
DIVERSICARE HARTFORD PROPERTY, LLC
DIVERSICARE HILLCREST PROPERTY, LLC
DIVERSICARE LAMPASAS PROPERTY, LLC
DIVERSICARE LARNED PROPERTY, LLC
DIVERSICARE SEDGWICK PROPERTY, LLC
DIVERSICARE WINDSOR HOUSE PROPERTY, LLC
DIVERSICARE YORKTOWN PROPERTY, LLC
DIVERSICARE HUTCHINSON PROPERTY, LLC
DIVERSICARE SELMA PROPERTY, LLC
By:	Diversicare Property Co., LLC , its sole member
	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: President and Chief Executive Officer

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release



DIVERSICARE OF SELMA, LLC
By:	Diversicare Holding Company, LLC , its sole member
	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: President and Chief Executive Officer

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release



RELEASED BORROWER :
DIVERSICARE GLASGOW PROPERTY, LLC
DIVERSICARE CLINTON PROPERTY, LLC
DIVERSICARE FULTON PROPERTY, LLC
By: Diversicare Property Co., LLC , its sole member
By:	/s/James R. McKnight, Jr.
Name: James R. McKnight, Jr.
Its: President and Chief Executive Officer

DIVERSICARE OF GLASGOW, LLC

DIVERSICARE OF FULTON, LLC


By:	DIVERSICARE HOLDING COMPANY, LLC , its sole member

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer



DIVERSICARE CLINTON, LLC
By:	DIVERSICARE LEASING CORP. , its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		President and Chief Executive Officer

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release

Acknowledged and Agreed :

DIVERSICARE HEALTHCARE SERVICES, INC.

By: /s/James R. McKnight, Jr.
Name: James R. McKnight, Jr.
Its: President and Chief Executive Officer

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release

ADMINISTRATIVE AGENT :

CIBC BANK USA , formerly known as The PrivateBank and Trust Company, in its capacity as administrative agent

By: /s/Adam D. Panos ________________________

Name: Adam D. Panos

Its: Managing Director

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release

LENDER :

CIBC BANK USA , formerly known as The PrivateBank and Trust Company

By: /s/Adam D. Panos

Name: Adam D. Panos

Its: Managing Director

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release

LENDER :

BOKF, NA D/B/A BANK OF OKLAHOMA

By: /s/Ky Chaffin ___________________________

Name: Ky Chaffin

Its: Senior Vice President

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release

LENDER :

CIT BANK, N.A.

By: /s/Tom Gatsios __________________________

Name: Tom Gatsios

Its: Vice President

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release



LENDER :
OPUS BANK , a California commercial bank
By:	/s/Randy Boba
	Name: Randy Boba
	Its: SVP, Healthcare Banking

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release



LENDER :
FRANKLIN SYNERGY BANK
By:	/s/Lisa Fletcher
	Name: Lisa Fletcher
	Its: Senior Vice President

Signature Page to Fourth Amendment to
Second Amended and Restated Term Loan and Security Agreement and Omnibus Release

REAFFIRMATION OF SECOND AMENDED AND RESTATED GUARANTY

Dated as of December 1, 2018

The undersigned (“ Guarantor ”) hereby (i) confirms and agrees with CIBC BANK USA, formerly known as The PrivateBank and Trust Company, an Illinois banking corporation, in its capacity as administrative agent (together with its successors and assigns, “ Administrative Agent ”) that Guarantor’s Second Amended and Restated Guaranty dated as of February 26, 2016 made in favor of Administrative Agent (as amended or modified, “ Guaranty ”), remains in full force and effect and is hereby ratified and confirmed in all respects, including with regard to the Second Amended and Restated Term Loan and Security Agreement dated as of February 26, 2016, as amended prior to the date hereof and as further amended by the foregoing Fourth Amendment to Second Amended and Restated Term Loan and Security Agreement and Omnibus Release (“ Amendment ”), and each reference to the “Loan Agreement” shall refer to the Loan Agreement as amended by the Amendment; (ii) represents and warrants to Administrative Agent, which representations and warranties shall survive the execution and delivery hereof, that Guarantor’s representations and warranties contained in the Guaranty are true and correct as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations expressly related solely to an earlier date, in which case such representations were true and correct on and as of such earlier date (and except for the representations in Section 10(b) thereof which were true and correct on and as of the date when made); (iii) agrees and acknowledges that such ratification and confirmation is not a condition to the continued effectiveness of the Amendment or the Guaranty; and (iv) agrees that neither such ratification and confirmation, nor Administrative Agent’s solicitation of such ratification and confirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or confirmation from the undersigned with respect to subsequent amendments or modifications, if any, to the Loan Agreement, as amended by the Amendment or any other Financing Agreement (as defined in the Loan Agreement, as amended by the Amendment). The execution, delivery and effectiveness of this instrument shall not operate as a waiver of any right, power or remedy of Administrative Agent under or pursuant to the Guaranty. Guarantor acknowledges and agrees that Guarantor has received and reviewed a fully-executed copy of the Amendment (and any other instrument, document or agreement executed or delivered in connection therewith) and understands the contents thereof. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes. This instrument shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles that would require the application of any other laws.

[Signature Page Follows]

IN WITNESS WHEREOF, the undersigned has duly executed this Reaffirmation of Second Amended and Restated Guaranty on and as of the date above.

DIVERSICARE HEALTHCARE SERVICES, INC. (F/K/A ADVOCAT INC.)

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Its: President and Chief Executive Officer

Signature Page to Reaffirmation of Second Amended and Restated Guaranty

REAFFIRMATION OF PLEDGE AGREEMENTS

Dated as of December 1, 2018

For good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the undersigned, respectively and as applicable hereby (a) confirms and agrees with CIBC BANK USA, formerly known as The PrivateBank and Trust Company, an Illinois banking corporation, in its capacity as administrative agent (together with its successors and assigns, “ Administrative Agent ”), that (i) Second Amended and Restated Pledge Agreement by and between Diversicare Management Services Co. and Administrative Agent dated as of February 26, 2016, (ii) Second Amended and Restated Pledge Agreement by and between Advocat Finance, Inc. and Administrative Agent dated as of February 26, 2016, (iii) Second Amended and Restated Pledge Agreement by and between Diversicare Leasing Corp. and Administrative Agent dated as of February 26, 2016, (iv) Second Amended and Restated Pledge Agreement by and between Senior Care Florida Leasing Corp. and Administrative Agent dated as of February 26, 2016, (v) Amended and Restated Pledge Agreement by and between Diversicare Leasing Company II, LLC and Administrative Agent dated as of February 26, 2016, (vi) Amended and Restated Pledge Agreement by and between Diversicare Kansas, LLC and Administrative Agent dated as of February 26, 2016, (vii) Second Amended and Restated Pledge Agreement by and between Diversicare Healthcare Services, Inc. (f/k/a Advocat Inc.) and Administrative Agent dated as of February 26, 2016, (viii) Pledge Agreement by and between Diversicare Leasing Company III, LLC and Administrative Agent dated as of October 1, 2016 and effective as of October 3, 2016, (ix) Amended and Restated Pledge Agreement by and between Diversicare Property Co., LLC and Administrative Agent dated as of February 26, 2016 and (x) Amended and Restated Pledge Agreement by and between Diversicare Holding Company, LLC and Administrative Agent dated as of February 26, 2016 (the foregoing, as the same may be amended, restated, supplemented or otherwise modified from time to time, individually, “ Pledge Agreement ” and, collectively, “ Pledge Agreements ”), each remains in full force and effect and is hereby ratified and confirmed in all respects, including with regard to the Second Amended and Restated Term Loan and Security Agreement dated as of February 26, 2016 by and among those certain affiliates of Diversicare Healthcare Services, Inc. that are signatories thereto as borrowers, Administrative Agent and the Lenders, as the same has been amended prior to the date hereof and as amended by the foregoing Fourth Amendment to Second Amended and Restated Term Loan and Security Agreement and Omnibus Release dated of even date herewith (“ Amendment ”), and each reference to the “Loan Agreement” shall refer to the Loan Agreement as amended by the Amendment, and all of the undersigned’s respective liabilities and obligations under and pursuant to the respective Pledge Agreement, as modified by the Amendment (if and as applicable), are and shall be valid and enforceable and shall not be impaired or limited in any way by the execution, delivery or effectiveness of the Amendment; (b) represents and warrants to Administrative Agent and Lenders, which representations and warranties shall survive the execution and delivery hereof, that each of the undersigned’s representations and warranties contained in the Pledge Agreement are true and correct as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations expressly related solely to an earlier date, in which case such representations were true and correct on and as of such

earlier date, each of the undersigned has the full right, authority and power to enter into this Reaffirmation and this Reaffirmation constitutes the legal, valid and binding obligation of each of the undersigned, enforceable against each of the undersigned in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar law affecting creditor’s rights generally and general principles of equity; (c) agrees and acknowledges that such ratification and confirmation is not a condition to the continued effectiveness of the Amendment or the Pledge Agreement; and (d) agrees that neither such ratification and confirmation, nor the solicitation of such ratification and confirmation by Administrative Agent and Lenders, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or confirmation from the undersigned with respect to subsequent amendments or modifications, if any, to the Loan Agreement, as amended by the Amendment or any other Financing Agreement (as defined in the Loan Agreement). The execution, delivery and effectiveness of this instrument shall not operate as a waiver of any right, power or remedy of Administrative Agent or Lenders under the Pledge Agreements. Each of the undersigned acknowledges and agrees that it has received and reviewed a fully-executed copy of the Amendment and understands the contents thereof. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes. Illinois law shall govern the construction, interpretation and enforcement of this instrument.

[Signature Page Follows]

IN WITNESS WHEREOF, each of the undersigned has duly executed this Reaffirmation of Pledge Agreements on and as of the date above.

DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Its: President and Chief Executive Officer

ADVOCAT FINANCE INC., a Delaware corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Its: President and Chief Executive Officer

DIVERSICARE LEASING CORP .,
a Tennessee corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company

By: Diversicare Leasing Corp. , its sole member

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE LEASING COMPANY II, LLC , a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

Signature Page to Reaffirmation of Pledge Agreements

DIVERSICARE KANSAS, LLC , a Delaware limited liability company

By: DIVERSICARE HOLDING COMPANY, LLC , its sole member

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE LEASING COMPANY III, LLC ,
a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE HEALTHCARE SERVICES, INC. , a Delaware corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE PROPERTY CO., LLC ,
a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE HOLDING COMPANY, LLC , a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

Signature Page to Reaffirmation of Pledge Agreements

SIXTH AMENDMENT TO
THIRD AMENDED AND RESTATED
REVOLVING LOAN AND SECURITY AGREEMENT

THIS SIXTH AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT (this “ Amendment ”) dated as of December 1, 2018, is by and among CIBC BANK USA , formerly known as The PrivateBank and Trust Company, an Illinois banking corporation (together with its successors and assigns, “ Administrative Agent ”) in its capacity as administrative agent for the Lenders (as defined below), the Lenders, DIVERSICARE MANAGEMENT SERVICES CO. , a Tennessee corporation, and certain of its affiliates parties hereto identified on the signature pages as “Borrower” (individually and collectively, “ Borrower ”).

RECITALS :

WHEREAS , Borrower, Administrative Agent, and the financial institutions signatories thereto (the “ Lenders ”) are parties to that certain Third Amended and Restated Revolving Loan and Security Agreement dated as of February 26, 2016 (as the same has been, and may hereafter be, amended, restated, supplemented or otherwise modified from time to time, the “ Loan Agreement ”; all capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement as amended by this Amendment);

WHEREAS , pursuant to that certain Asset Purchase Agreement dated October 30, 2018 (as amended, restated, supplemented or otherwise modified from time to time up to the date hereof, the “ Purchase Agreement ”), DIVERSICARE OF FULTON, LLC, a Delaware limited liability company (“ Fulton OpCo ”), DIVERSICARE FULTON PROPERTY, LLC, a Delaware limited liability company (“ Fulton PropCo ”), DIVERSICARE CLINTON, LLC, a Delaware limited liability company (“ Clinton OpCo ”), DIVERSICARE CLINTON PROPERTY, LLC, a Delaware limited liability company (“ Clinton PropCo ”), DIVERSICARE OF GLASGOW, LLC, a Delaware limited liability company (“ Glasgow OpCo ”) and DIVERSICARE GLASGOW PROPERTY, LLC, a Delaware limited liability company (“ Glasgow PropCo ” and, together with Fulton OpCo, Fulton PropCo, Clinton OpCo, Clinton PropCo and Glasgow OpCo, collectively, the “ Sellers ”) have agreed to sell the Facilities located at 1004 Holiday Lane, Fulton, Kentucky 42041 (known as Diversicare of Fulton), 106 Padgett Drive, Clinton, Kentucky 42031 (known as Diversicare of Clinton Place) and 300 Westwood Street, Glasgow, Kentucky 42141 (known as Diversicare of Glasgow) (collectively, the “ Facility Sale ”), and concurrent with the Facility Sale, Borrower will make a prepayment of the Revolving Loans in an amount equal to $4,947,215.17 of the Net Proceeds from the Facility Sale (the “ Sixth Amendment Sale Prepayment ”); for purposes of this Amendment, the term “Net Proceeds” means the gross sales proceeds payable to the Sellers pursuant to the terms and conditions of the Purchase Agreement, less the Sellers’ transaction expenses and other closing

costs, holdbacks required under the Purchase Agreement and all other amounts payable by the Sellers pursuant to the Purchase Agreement and the transactions contemplated thereby; and

WHEREAS , Borrower, Administrative Agent and Lenders desire to amend the Loan Agreement as provided in and subject to the terms and conditions of this Amendment.

1. Amendments to Loan Agreement . Subject to the satisfaction of the conditions set forth in Section 4 below and in reliance upon the representations and warranties set forth in Section 3 below, Borrower, Administrative Agent and Lenders hereby amend the Loan Agreement as follows:

(a) The definition of “Maximum Revolving Facility” in Section 1.1 of the Loan Agreement shall be amended and restated in its entirety as follows:

““ Maximum Revolving Facility ” means an amount equal to Forty-Two Million Two Hundred Fifty Thousand and No/100 Dollars ($42,250,000.00).”

(b) Annex A (Lenders, Pro Rata Shares/Dollar Allocations, and Notice Information) to the Loan Agreement shall be amended and restated and replaced with Annex A attached hereto.

2. No Other Amendments . Borrower acknowledges and expressly agrees that this Amendment is limited to the extent expressly set forth herein and shall not constitute a modification or amendment of the Loan Agreement or any other Financing Agreements or a course of dealing at variance with the terms or conditions of the Loan Agreement or any other Financing Agreements (other than as expressly set forth in this Amendment and the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith).

3. Representations and Warranties . In order to induce Administrative Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Administrative Agent and Lenders (which representations and warranties shall survive the execution and delivery hereof), both before and after giving effect to this Amendment that:

representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date);

(c) This Amendment has been duly authorized, validly executed and delivered by one or more Duly Authorized Officers of Borrower, and each of this Amendment, the Loan Agreement as amended hereby, and each of the other Financing Agreements to which Borrower is a party, constitutes the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, subject to bankruptcy, insolvency or other similar laws affecting the enforcement of creditor’s rights and remedies generally;

4. Conditions Precedent to Effectiveness of this Amendment . The amendments contained in Section 1 of this Amendment shall become effective on the date hereof as long as each of the following conditions precedent is satisfied as determined by Administrative Agent:

(a) all of the representations and warranties of Borrower under Section 3 hereof, which are made as of the date hereof, are true and correct;

(b) receipt by Administrative Agent of duly executed signature pages to this Amendment from Borrower and Lenders;

(c) Administrative Agent shall have received a duly executed Reaffirmation of Second Amended and Restated Guaranty in the form attached hereto;

(d) Administrative Agent shall have received a duly executed Reaffirmation of Pledge Agreements in the form attached hereto;

(e) receipt by Administrative Agent of the fully-executed Purchase Agreement, certified by a duly authorized officer of the Borrower as being true, correct and complete;

(f) receipt by Administrative Agent of funds in an amount equal to the Sixth Amendment Sale Prepayment, which funds shall be applied on the date hereof to repay the Revolving Loans in accordance with the terms and conditions of this Amendment and the Loan Agreement (including being subject to Section 12.9 of the Loan Agreement); and

(g) receipt by Administrative Agent of such other certificates, schedules, exhibits, documents, opinions, instruments, reaffirmations, amendments or consents Administrative Agent may reasonably require, if any.

5. Reaffirmation; References to Loan Agreement; Additional Agreements and Covenants; Etc .

such suspension or waiver is (i) in writing and signed by Administrative Agent (and, if applicable, the Required Lenders) and (ii) delivered to Borrower by Administrative Agent or its counsel.

6. Release .

(a) In consideration of, among other things, the consent and amendments provided for herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower and Guarantor (on behalf of themselves and their respective subsidiaries, Affiliates, successors and assigns), and, to the extent permitted by applicable law and the same is claimed by right of, through or under the above, for their past, present and future employees, directors, members, managers, partners, agents, representatives, officers, directors, and equity holders (all collectively, with Borrower and Guarantor, the “ Releasing Parties ”), do hereby unconditionally, irrevocably, fully, and forever remise, satisfy, acquit, release and discharge Administrative Agent, Issuing Lender, and Lenders and each of Administrative Agent’s, Issuing Lender’s and Lender’s past, present and future officers, directors, agents, employees, attorneys, parent, shareholders, successors, assigns, subsidiaries and Affiliates and all other persons and entities to whom Administrative Agent or Lenders would be liable if such persons or entities were found in any way to be liable to any of the Releasing Parties (collectively, the “ Lender Parties ”),

of and from any and all manner of action and actions, cause and causes of action, claims, cross-claims, charges, demands, counterclaims, suits, proceedings, disputes, debts, dues, sums of money, accounts, bonds, covenants, contracts, controversies, damages, judgments, liabilities, damages, costs, expenses, executions, liens, claims of liens, claims of costs, penalties, attorneys’ fees, or any other compensation, recovery or relief on account of any liability, obligation, demand, proceedings or cause of action of whatever nature, whether in law, equity or otherwise (including, without limitation, those arising under 11 U.S.C. §§ 541-550 and interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses, and incidental, consequential and punitive damages payable to third parties), whether known or unknown, fixed or contingent, joint and/or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, contractual or tortious, direct, indirect, or derivative, asserted or unasserted, foreseen or unforeseen, suspected or unsuspected, now existing, heretofore existing or which may have heretofore accrued against any or all of Lender Parties, whether held in a personal or representative capacity, that the Releasing Parties (or any of them) have or may have against the Lender Parties or any of them (whether directly or indirectly) and which are based on any act, fact, event, action or omission or any other matter, condition, cause or thing occurring at or from any time prior to and including the date hereof in any way, directly or indirectly arising out of, connected with or relating to this Amendment, the Loan Agreement or any other Financing Agreement and the transactions contemplated hereby and thereby, the Collateral or the Liabilities, and all other agreements, certificates, instruments and other documents and statements (whether written or oral) related to any of the foregoing, other than any applicable good faith claim as to which a final determination is made in a judicial proceeding (in which Administrative Agent and any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that Administrative Agent acted in a grossly negligent manner or with actual willful misconduct or illegal activity. Borrower and Guarantor each acknowledges that Administrative Agent and Lenders are specifically relying upon the representations, warranties and agreements contained herein and that such representations, warranties and agreements constitute a material inducement to Administrative Agent and Lenders in entering into this Amendment.

prior sentence was separately bargained for and that such waiver is an essential term and condition of this Amendment (and without which the amendments in Section 1 hereof would not have been agreed to by Administrative Agent and Lenders).

7. Costs and Expenses . Without limiting the obligation of Borrower to reimburse Administrative Agent for all costs, fees, disbursements and expenses incurred by Administrative Agent as specified in the Loan Agreement, Borrower agrees to and shall pay on demand all reasonable costs, fees, disbursements and expenses of Administrative Agent in connection with the preparation, negotiation, revision, execution and delivery of this Amendment and the other agreements, amendments, modifications, reaffirmations, instruments and documents contemplated hereby, including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses. All obligations provided herein shall survive any termination of this Amendment and the Loan Agreement as amended hereby.

8. Financing Agreement . This Amendment shall constitute a Financing Agreement.

9. Titles. Titles and section headings herein shall be without substantive meaning and are provided solely for the convenience of the parties.

10. Severability; Etc. Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Amendment. The parties hereto have participated jointly in the negotiation and drafting of this Amendment. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

11. Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided , however , no Borrower may assign any of its respective rights or obligations under this Amendment without the prior written consent of Administrative Agent.

12. Further Assurances . Borrower shall, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, certificates, instruments, reaffirmations, amendments, documents and assurances as may from time to time be necessary or as Administrative Agent may from time to time reasonably request in order to more fully carry out the intent and purposes of this Amendment or any of the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith.

13. Counterparts; Faxes . This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes.

14. Governing Law . This Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles that would require the application of any other laws.

[Signature Pages Follow]

IN WITNESS WHEREOF , the parties hereto have duly executed this Sixth Amendment to Third Amended and Restated Revolving Loan and Security Agreement as of the day and year first above written.



BORROWER : ADVOCAT FINANCE, INC. DIVERSICARE MANAGEMENT SERVICES CO. DIVERSICARE LEASING CORP. STERLING HEALTH CARE MANAGEMENT, INC. DIVERSICARE TEXAS I, LLC DIVERSICARE HOLDING COMPANY, LLC DIVERSICARE KANSAS, LLC DIVERSICARE LEASING COMPANY II, LLC DIVERSICARE PROPERTY CO., LLC
By:	/s/James R. McKnight, Jr.
Name:		James R. McKnight, Jr.
Its:		President and Chief Executive Officer



SENIOR CARE CEDAR HILLS, LLC SENIOR CARE GOLFCREST, LLC SENIOR CARE GOLFVIEW, LLC SENIOR CARE SOUTHERN PINES, LLC
BY:	SENIOR CARE FLORIDA LEASING, LLC , its sole member
	BY:	DIVERSICARE LEASING CORP. , its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		President and Chief Executive Officer

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement



SENIOR CARE FLORIDA LEASING, LLC DIVERSICARE AFTON OAKS, LLC DIVERSICARE BRIARCLIFF, LLC DIVERSICARE CHISOLM, LLC DIVERSICARE HARTFORD, LLC DIVERSICARE HILLCREST, LLC DIVERSICARE LAMPASAS, LLC DIVERSICARE PINEDALE, LLC DIVERSICARE WINDSOR HOUSE, LLC DIVERSICARE YORKTOWN, LLC DIVERSICARE ROSE TERRACE, LLC DIVERSICARE THERAPY SERVICES, LLC DIVERSICARE CLINTON, LLC DIVERSICARE HIGHLANDS, LLC
BY:	DIVERSICARE LEASING CORP. , its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		President and Chief Executive Officer



DIVERSICARE BALLINGER, LLC DIVERSICARE DOCTORS, LLC DIVERSICARE ESTATES, LLC DIVERSICARE HUMBLE, LLC DIVERSICARE KATY, LLC DIVERSICARE NORMANDY TERRACE, LLC DIVERSICARE TREEMONT, LLC DIVERSICARE PARIS, LLC
BY:	DIVERSICARE TEXAS I, LLC , its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		President and Chief Executive Officer

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

First Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement and Amendment to Financing Agreements



DIVERSICARE OF CHANUTE, LLC DIVERSICARE OF COUNCIL GROVE, LLC DIVERSICARE OF HAYSVILLE, LLC DIVERSICARE OF SEDGWICK, LLC DIVERSICARE OF HUTCHINSON, LLC DIVERSICARE OF LARNED, LLC
BY:	DIVERSICARE KANSAS, LLC its sole member

	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		President and Chief Executive Officer

DIVERSICARE OF SENECA PLACE, LLC

DIVERSICARE OF BRADFORD PLACE, LLC

DIVERSICARE OF PROVIDENCE, LLC

DIVERSICARE OF SIENA WOODS, LLC

DIVERSICARE OF ST. THERESA, LLC

DIVERSICARE OF BIG SPRINGS, LLC

DIVERSICARE OF NICHOLASVILLE, LLC

DIVERSICARE OF AVON, LLC

DIVERSICARE OF RIVERSIDE, LLC

DIVERSICARE OF CHATEAU, LLC

DIVERSICARE OF ST. JOSEPH, LLC
DIVERSICARE OF GREENVILLE, LLC


By:	DIVERSICARE LEASING COMPANY II, LLC, its sole member

By: /s/James R. McKnight, Jr.



Name:	James R. McKnight, Jr.
Its:	President and Chief Executive Officer

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

DIVERSICARE AFTON OAKS PROPERTY, LLC

DIVERSICARE BRIARCLIFF PROPERTY, LLC

DIVERSICARE CHANUTE PROPERTY, LLC

DIVERSICARE CHISOLM PROPERTY, LLC

DIVERSICARE COUNCIL GROVE PROPERTY, LLC

DIVERSICARE HAYSVILLE PROPERTY, LLC

DIVERSICARE HARTFORD PROPERTY, LLC

DIVERSICARE HILLCREST PROPERTY, LLC

DIVERSICARE HUTCHINSON PROPERTY, LLC

DIVERSICARE LAMPASAS PROPERTY, LLC

DIVERSICARE LARNED PROPERTY, LLC

DIVERSICARE SEDGWICK PROPERTY, LLC

DIVERSICARE WINDSOR HOUSE PROPERTY, LLC

DIVERSICARE YORKTOWN PROPERTY, LLC

DIVERSICARE GLASGOW PROPERTY, LLC

DIVERSICARE CLINTON PROPERTY, LLC

DIVERSICARE FULTON PROPERTY, LLC
DIVERSICARE SELMA PROPERTY, LLC


By:	DIVERSICARE PROPERTY CO., LLC , its sole member

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

DIVERSICARE OF GLASGOW, LLC

DIVERSICARE OF FULTON, LLC
DIVERSICARE OF SELMA, LLC


By:	DIVERSICARE HOLDING COMPANY, LLC , its sole member

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

DIVERSICARE LEASING COMPANY III, LLC

By: /s/James R. McKnight, Jr.



Name:	James R. McKnight, Jr.
Its:	President and Chief Executive Officer

DIVERSICARE OF ARAB, LLC

DIVERSICARE OF BOAZ, LLC

DIVERSICARE OF FOLEY, LLC

DIVERSICARE OF HUEYTOWN, LLC

DIVERSICARE OF LANETT, LLC

DIVERSICARE OF BESSEMER, LLC

DIVERSICARE OF MONTGOMERY, LLC

DIVERSICARE OF ONEONTA, LLC

DIVERSICARE OF OXFORD, LLC

DIVERSICARE OF PELL CITY, LLC

DIVERSICARE OF RIVERCHASE, LLC

DIVERSICARE OF WINFIELD, LLC

DIVERSICARE OF AMORY, LLC

DIVERSICARE OF BATESVILLE, LLC

DIVERSICARE OF BROOKHAVEN, LLC

DIVERSICARE OF CARTHAGE, LLC

DIVERSICARE OF EUPORA, LLC

DIVERSICARE OF MERIDIAN, LLC

DIVERSICARE OF RIPLEY, LLC

DIVERSICARE OF SOUTHAVEN, LLC

DIVERSICARE OF TUPELO, LLC

DIVERSICARE OF TYLERTOWN, LLC


By:	DIVERSICARE LEASING COMPANY III, LLC, its sole member

By: /s/James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement



Acknowledged and Agreed : DIVERSICARE HEALTHCARE SERVICES, INC. By: /s/James R. McKnight, Jr. Name: James R. McKnight, Jr. Its: President and Chief Executive Officer

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

ADMINISTRATIVE AGENT :

CIBC BANK USA , formerly known as The PrivateBank and Trust Company, in its capacity as administrative agent

By: /s/Adam D. Panos

Name: Adam D. Panos

Its: Managing Director

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

LENDER :

CIBC BANK USA , formerly known as The PrivateBank and Trust Company

By: /s/Adam D. Panos

Name: Adam D. Panos

Its: Managing Director

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement



LENDER : BOKF, NA D/B/A BANK OF OKLAHOMA
By: /s/Ky Chaffin _______________________
Name:	Ky Chaffin
Its:	Senior Vice President

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement



LENDER : CIT BANK, N.A.
By: /s/Tom Gatsios ____________________
Name:	Tom Gatsios
Its:	Vice President

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement



LENDER : OPUS BANK , a California commercial bank
By: /s/Randy Boba
Name:	Randy Boba
Its:	SVP, Healthcare Banking

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement



LENDER : FRANKLIN SYNERGY BANK
By: /s/Lisa Fletcher
Name:	Lisa Fletcher
Its:	Senior Vice President

Signature Page to Sixth Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

REAFFIRMATION OF SECOND AMENDED AND RESTATED GUARANTY

Dated as of December 1, 2018

The undersigned (“ Guarantor ”) hereby: (i) confirms and agrees with CIBC BANK USA, formerly known as CIBC BANK USA, formerly known as The PrivateBank and Trust Company, an Illinois banking corporation, in its capacity as administrative agent (together with its successors and assigns, “ Administrative Agent ”) that Guarantor’s Second Amended and Restated Guaranty dated as of February 26, 2016 made in favor of Administrative Agent (as amended or modified, “ Guaranty ”), remains in full force and effect and is hereby ratified and confirmed in all respects, including with regard to the Third Amended and Restated Revolving Loan and Security Agreement dated as of February 26, 2016, as amended prior to the date hereof and as further amended by the foregoing Sixth Amendment to Third Amended and Restated Revolving Loan and Security Agreement (“ Amendment ”), and each reference to the “Loan Agreement” shall refer to the Loan Agreement as amended by the Amendment; (ii) represents and warrants to Administrative Agent, which representations and warranties shall survive the execution and delivery hereof, that Guarantor’s representations and warranties contained in the Guaranty are true and correct as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations expressly related solely to an earlier date, in which case such representations were true and correct on and as of such earlier date (and except for the representations in Section 10(b) thereof which were true and correct on and as of the date when made); (iii) agrees and acknowledges that such ratification and confirmation is not a condition to the continued effectiveness of the Amendment or the Guaranty; and (iv) agrees that neither such ratification and confirmation, nor Administrative Agent’s solicitation of such ratification and confirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or confirmation from the undersigned with respect to subsequent amendments or modifications, if any, to the Loan Agreement, as amended by the Amendment or any other Financing Agreement (as defined in the Loan Agreement, as amended by the Amendment). The execution, delivery and effectiveness of this instrument shall not operate as a waiver of any right, power or remedy of Administrative Agent under or pursuant to the Guaranty. Guarantor acknowledges and agrees that Guarantor has received and reviewed a fully-executed copy of the Amendment (and any other instrument, document or agreement executed or delivered in connection therewith) and understands the contents thereof. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes. This instrument shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles that would require the application of any other laws.

[Signature Page Follows]

DIVERSICARE HEALTHCARE SERVICES, INC.

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Its: President and Chief Executive Officer

Signature Page to Reaffirmation and Amendment to Second Amended and Restated Guaranty

REAFFIRMATION OF PLEDGE AGREEMENTS

Dated as of December 1, 2018

For good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the undersigned, respectively and as applicable hereby (a) confirms and agrees with CIBC BANK USA, formerly known as The PrivateBank and Trust Company, an Illinois banking corporation, in its capacity as administrative agent (together with its successors and assigns, “ Administrative Agent ”), that (i) Second Amended and Restated Pledge Agreement by and between Diversicare Management Services Co. and Administrative Agent dated as of February 26, 2016, (ii) Second Amended and Restated Pledge Agreement by and between Advocat Finance, Inc. and Administrative Agent dated as of February 26, 2016, (iii) Second Amended and Restated Pledge Agreement by and between Diversicare Leasing Corp. and Administrative Agent dated as of February 26, 2016, (iv) Second Amended and Restated Pledge Agreement by and between Senior Care Florida Leasing Corp. and Administrative Agent dated as of February 26, 2016, (v) Amended and Restated Pledge Agreement by and between Diversicare Leasing Company II, LLC and Administrative Agent dated as of February 26, 2016, (vi) Amended and Restated Pledge Agreement by and between Diversicare Kansas, LLC and Administrative Agent dated as of February 26, 2016, (vii) Second Amended and Restated Pledge Agreement by and between Diversicare Healthcare Services, Inc. (f/k/a Advocat Inc.) and Administrative Agent dated as of February 26, 2016, (viii) Pledge Agreement by and between Diversicare Leasing Company III, LLC and Administrative Agent dated as of October 1, 2016 and effective as of October 3, 2016, (ix) Amended and Restated Pledge Agreement by and between Diversicare Property Co., LLC and Administrative Agent dated as of February 26, 2016 and (x) Amended and Restated Pledge Agreement by and between Diversicare Holding Company, LLC and Administrative Agent dated as of February 26, 2016 (the foregoing, as the same may be amended, restated, supplemented or otherwise modified from time to time, individually, “ Pledge Agreement ” and, collectively, “ Pledge Agreements ”), each remains in full force and effect and is hereby ratified and confirmed in all respects, including with regard to the Third Amended and Restated Revolving Loan and Security Agreement dated as of February 26, 2016 by and among Diversicare Management Services Co., a Tennessee corporation, and those certain affiliates of Diversicare Management Services Co. that are signatories thereto as borrowers, Administrative Agent and the Lenders, as the same has been amended prior to the date hereof and as amended by the foregoing Sixth Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated of even date herewith (“ Amendment ”), and each reference to the “Loan Agreement” shall refer to the Loan Agreement as amended by the Amendment, and all of the undersigned’s respective liabilities and obligations under and pursuant to the respective Pledge Agreement, as modified by the Amendment (if and as applicable), are and shall be valid and enforceable and shall not be impaired or limited in any way by the execution, delivery or effectiveness of the Amendment; (b) represents and warrants to Administrative Agent and Lenders, which representations and warranties shall survive the execution and delivery hereof, that each of the undersigned’s representations and warranties contained in the Pledge Agreement are true and correct as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations expressly related solely to an earlier date, in which case such representations were true and correct on and as of such earlier date, each of the undersigned has the full right, authority and power to enter into this Reaffirmation and this Reaffirmation constitutes

the legal, valid and binding obligation of each of the undersigned, enforceable against each of the undersigned in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar law affecting creditor’s rights generally and general principles of equity; (c) agrees and acknowledges that such ratification and confirmation is not a condition to the continued effectiveness of the Amendment or the Pledge Agreement; and (d) agrees that neither such ratification and confirmation, nor the solicitation of such ratification and confirmation by Administrative Agent and Lenders, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or confirmation from the undersigned with respect to subsequent amendments or modifications, if any, to the Loan Agreement, as amended by the Amendment or any other Financing Agreement (as defined in the Loan Agreement). The execution, delivery and effectiveness of this instrument shall not operate as a waiver of any right, power or remedy of Administrative Agent or Lenders under the Pledge Agreements. Each of the undersigned acknowledges and agrees that it has received and reviewed a fully-executed copy of the Amendment and understands the contents thereof. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes. Illinois law shall govern the construction, interpretation and enforcement of this instrument.

[Signature Page Follows]

IN WITNESS WHEREOF, each of the undersigned has duly executed this Reaffirmation of Pledge Agreements on and as of the date above.

DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

ADVOCAT FINANCE INC., a Delaware corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE LEASING CORP .,
a Tennessee corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company

By: Diversicare Leasing Corp. , its sole member

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE LEASING COMPANY II, LLC , a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.

Signature Page to Reaffirmation of Pledge Agreements


Its:	President and Chief Executive Officer

Signature Page to Reaffirmation of Pledge Agreements

DIVERSICARE KANSAS, LLC , a Delaware limited liability company

By: DIVERSICARE HOLDING COMPANY, LLC , its sole member

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE LEASING COMPANY III, LLC ,
a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE HEALTHCARE SERVICES, INC. , a Delaware corporation

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE PROPERTY CO., LLC ,
a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

DIVERSICARE HOLDING COMPANY, LLC , a Delaware limited liability company

By: /s/ James R. McKnight, Jr.

Name: James R. McKnight, Jr.


Its:	President and Chief Executive Officer

Signature Page to Reaffirmation of Pledge Agreements

ANNEX A

(LENDERS, PRO RATA SHARES/DOLLAR ALLOCATIONS, AND NOTICE INFORMATION)



Lender	Contact Information	Pro Rata Shares

CIBC Bank USA	120 South LaSalle Street Chicago, IL 60603 Attn.: Adam D. Panos Managing Director Tel.: (312) 564-1278 Fax: (312) 683-0446 Dollar Allocation : $15,565,789.47	36.84210526%
CIT Bank, N.A.	11 West 42 ^nd Street New York, NY 10036 Attn.: Edward Shuster Director Tel.: (212) 771-9303 Dollar Allocation : $8,894,736.84	21.05263158%
Bankers Trust Company	453 7th Street Des Moines, IA 50304-0897 Attn.: Jon M. Doll Vice President Tel.: (515) 245-2837 Fax: (515) 245-5216 Dollar Allocation : $6,671,052.63	15.78947368%



BOKF, NA d/b/a Bank of Oklahoma	One Williams Center, Suite 8NE Tulsa, OK 74172 Attn.: Ky Chaffin Senior Vice President Tel.: (918) 588-6866 Fax: (918) 280-3368 Dollar Allocation : $2,223,684.21	5.26315789%



Opus Bank	19900 MacArthur Blvd. 12 ^th Floor Irvine, CA 92612 Attn.: Randy Boba SVP, Healthcare Banking Tel.: (949) 251-8123 Fax: (949) 250-9988 Dollar Allocation : $4,447,368.42	10.52631579%
Franklin Synergy Bank	722 Columbia Ave. Franklin, TN 37064 Chicago, IL 60606 Attn.: Lisa Fletcher Senior Vice President Tel.: (615) 564-6374 Fax: (312) 564-7375 Dollar Allocation : $4,447,368.42	10.52631579%

Exhibit 21

Subsidiaries

Advocat Finance, Inc.

Diversicare Afton Oaks, LLC

Diversicare Afton Oaks Property, LLC

Diversicare Ballinger, LLC

Diversicare Briarcliff, LLC

Diversicare Briarcliff Property, LLC

Diversicare Chanute Property, LLC

Diversicare Chisolm, LLC

Diversicare Chisolm Property, LLC

Diversicare of Clinton, LLC

Diversicare of Clinton Property, LLC

Diversicare Council Grove Property, LLC

Diversicare Doctors, LLC

Diversicare Estates, LLC

Diversicare Hartford, LLC

Diversicare Hartford Property, LLC

Diversicare Haysville Property, LLC

Diversicare Highlands, LLC

Diversicare Hillcrest, LLC

Diversicare Hillcrest Property, LLC

Diversicare Holding Company, LLC

Diversicare Humble, LLC

Diversicare Hutchinson Property, LLC

Diversicare Kansas, LLC

Diversicare Katy, LLC

Diversicare Lampasas, LLC

Diversicare Lampasas Property, LLC

Diversicare Larned Property, LLC

Diversicare Leasing Company II, LLC

Diversicare Leasing Company III, LLC

Diversicare Leasing Corp.

Diversicare Management Services Co.

Diversicare Normandy Terrace, LLC

Diversicare of Avon, LLC

Diversicare of Big Springs, LLC

Diversicare of Bradford Place, LLC

Diversicare of Chanute, LLC

Diversicare of Chateau, LLC

Diversicare of Council Grove, LLC

Diversicare of Fulton, LLC

Diversicare of Glasgow, LLC

Diversicare of Greenville, LLC

Diversicare of Haysville, LLC

Diversicare of Hutchinson, LLC

Diversicare of Larned, LLC

Diversicare of Nicholasville, LLC

Diversicare of Providence, LLC

Diversicare of Riverside, LLC

Diversicare of Sedgwick, LLC

Diversicare of Selma, LLC

Diversicare of Seneca Place, LLC

Diversicare of Siena Woods, LLC

Diversicare of St. Joseph, LLC

Diversicare of St. Theresa, LLC

Diversicare Paris, LLC

Diversicare Pharmacy Holdings, LLC

Diversicare Pinedale, LLC

Diversicare Property Co., LLC

Diversicare Rose Terrace, LLC

Diversicare Sedgwick Property, LLC

Diversicare Selma Property, LLC

Diversicare Texas I, LLC

Diversicare Therapy Services, LLC

Diversicare Treemont, LLC

Diversicare Windsor House, LLC

Diversicare Windsor House Property, LLC

Diversicare Yorktown, LLC

Diversicare Yorktown Property, LLC

Diversicare of Amory, LLC

Diversicare of Arab, LLC

Diversicare of Batesville, LLC

Diversicare of Bessemer, LLC

Diversicare of Boaz, LLC

Diversicare of Brookhaven, LLC

Diversicare of Eupora, LLC

Diversicare of Foley, LLC

Diversicare of Hueytown, LLC

Diversicare of Lanett, LLC

Diversicare of Montgomery, LLC

Diversicare of Oneonta, LLC

Diversicare of Oxford, LLC

Diversicare of Pell City, LLC

Diversicare of Ripley, LLC

Diversicare of Riverchase, LLC

Diversicare of Southaven, LLC

Diversicare of Tupelo, LLC

Diversicare of Tylertown, LLC

Diversicare of Winfield, LLC

Diversicare of Meridian, LLC

Senior Care Cedar Hills, LLC

Senior Care Florida Leasing, LLC

Senior Care Golfcrest, LLC

Senior Care Golfview, LLC

Senior Care Southern Pines, LLC

SHC Risk Carrier, Inc.

Sterling Health Care Management, Inc.

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Diversicare Healthcare Services, Inc.

Brentwood, Tennessee

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-134905, 333-151565, 333-167630, 333-212928 and 333-219696) of Diversicare Healthcare Services, Inc. of our report dated February 28, 2019 , relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K.

/s/ BDO USA, LLP

Nashville, Tennessee

February 28, 2019

Exhibit 31.1

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

(i) CERTIFICATION

I, James R. McKnight, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Diversicare Healthcare Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2019

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

(ii) CERTIFICATION

I, Kerry D. Massey, certify that:

1. I have reviewed this annual report on Form 10-K of Diversicare Healthcare Services, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 28, 2019

/s/ Kerry D. Massey

Kerry D. Massey

Executive Vice President and Chief Financial Officer

Exhibit 32

CERTIFICATION OF ANNUAL REPORT ON FORM 10-K

OF DIVERSICARE HEALTHCARE SERVICES, INC.

FOR THE YEAR ENDED DECEMBER 31, 2018

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned's best knowledge and belief, the Annual Report on Form 10-K for Diversicare Healthcare Services, Inc. (the “Company”) for the period ending December 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”):

(a) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification is executed as of February 28, 2019 .

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

President and Chief Executive Officer

/s/ Kerry D. Massey

Kerry D. Massey

Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.