Diversicare Healthcare Services, Inc. (Form: 10-K, Received: 03/03/2016 16:36:26)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-K

________________________________

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, 2015



¨	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)

________________________________



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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. ¨

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

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

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

The aggregate market value of Common Stock held by non-affiliates on June 30, 2015 (based on the closing price of such shares on the NASDAQ Capital Market) was approximately $52,442,000 . 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 16, 2016 , 6,280,506 shares of the registrant's $0.01 par value Common Stock were outstanding.

Documents Incorporated by Reference

Registrant's definitive proxy materials for its 2016 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	14
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	20
Item 4.	Mine Safety Disclosures	21

Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	22
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 8.	Financial Statements and Supplementary Data	40
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	40
Item 9A.	Controls and Procedures	40
Item 9B.	Other Information	40

Part III
Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation	40
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	40
Item 13.	Certain Relationships and Related Transactions, and Director Independence	40
Item 14.	Principal Accountant Fees and Services	40

Part IV
Item 15.	Exhibits and Financial Statement Schedules	44

PART 1

ITEM 1. BUSINESS

Introductory Summary.

Diversicare Healthcare Services, Inc. provides post-acute care services to skilled nursing center patients and residents in nine 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 facilities 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. The 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.

Another strategic operating initiative was to implement an Electronic Medical Records (“EMR”) platform. See description of our EMR implementation below. We completed the implementation of Electronic Medical Records in all our nursing centers in December 2011, and implement EMR at all new facilities near the time we commence operations.

As part of our strategic operating initiatives, we have continued our program for improving our physical plants. Since 2005, we have been completing strategic renovations of certain facilities that improve quality of care and profitability. We plan to continue these nursing center renovation projects and accelerate this strategy using the knowledge obtained in the first few years of this program. Our strategic operating initiatives will also include pursuing and investigating opportunities to acquire, lease or develop new facilities, focusing primarily on opportunities within our existing geographic areas of operation.

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 growth strategy are to:

Increase revenues and profitability at existing facilities. 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. In addition to our nursing center renovation program, 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.

Improve physical plants . Our nursing centers have an average age of approximately 40 years as of December 31, 2015 . During 2005, we began an initiative to complete strategic renovations of certain facilities to improve occupancy, quality of care and profitability. We developed a plan to identify those facilities with the greatest potential for benefit and began the renovation program during the third quarter of 2005. Major renovations result in significant cosmetic upgrades, including new flooring, wall coverings, lighting, ceilings and furniture throughout the nursing center. Renovations also usually include certain external work to improve curb appeal, such as concrete work, landscaping, roof and signage enhancements. Many of our renovation projects will include adding functionality and space for our rehabilitation therapy offerings.

Development of additional specialty services . Our strategy includes the development of additional specialty units and programming in facilities 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 facilities 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.

Acquisition, leasing and development of new centers . We continue to pursue and investigate opportunities to acquire, lease or develop new facilities, focusing primarily on opportunities that can leverage our existing infrastructure.

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, 2015 , our continuing operations consist of 55 nursing centers with 6,060 licensed nursing beds. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 496 licensed assisted living beds. Our continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, 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, 2015 :



	Number of Centers	Licensed Nursing Beds ⁽¹⁾	Available Nursing Beds ⁽¹⁾
Operating Locations:
Alabama	7	846	838
Florida	1	79	79
Indiana	1	158	158
Kansas	6	503	498
Kentucky	13	1,127	1,123
Missouri	3	339	339
Ohio	6	546	536
Tennessee	5	617	563
Texas	13	1,845	1,722
	55	6,060	5,856
Classification:
Owned	15	1,370	1,338
Leased	40	4,690	4,518
Total	55	6,060	5,856

____________

(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 facilities, 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 496 Licensed Assisted Living/Residential Beds, all of which are also available, and the number of centers excludes one stand-alone Assisted Living Facility in Ohio. 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 compliment 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 complimented 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 facilities 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.

Implement Electronic Medical Records . We completed the initial implementation of EMR in our nursing centers in December 2011. 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. We originally invested approximately $112,000 per nursing center to deploy EMR in all our facilities at the time of implementation. We currently implement EMR at each of the facilities we acquire or at which time we assume operations during the transition process.

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 and 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 Initiatives ("BPI"), 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, BPIs, 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, Development Projects and Divestitures.

Acquisitions and Development

On February 1, 2015, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Barren County Health Care Center, Inc. to acquire certain land, improvements, furniture, fixtures and equipment, personal property and intangible property, together comprising a 94 -bed skilled nursing center in Glasgow, Kentucky, for an aggregate purchase price of $7,000,000 , partially financed through a $5,000,000 mortgage loan with The PrivateBank with the balance paid in cash consideration. As a result of the consummation of the transaction, the Company allocated the purchase price of $7,000,000 between the assets based on the fair value of the acquired net assets.

On November 1, 2015, the Company entered into an Asset Purchase Agreement with Haws Fulton Investors, LLC to acquire certain land, improvements, furniture, fixtures and equipment, personal property and intangible property, together comprising a 60 -bed skilled nursing center in Fulton, Kentucky, for an aggregate purchase price of $3,900,000 , financed temporarily through a draw on the Company's revolving credit facility, in anticipation of the Company's refinancing of the Mortgage Loan in February 2016 as disclosed in Note 12, "Subsequent Event" to our consolidated financial statements. As a result of the consummation of the transaction, the Company allocated the purchase price of $3,900,000 between the assets based on the fair value of the acquired net assets.

Lease Agreements and Assumption of Operations

During 2015 and 2014, the Company assumed operations at nine facilities comprising a total increase of 1,024 licensed beds. See table below for details of the 2015 and 2014 operations acquired by the Company:



Facility	Location	Effective Date	Licensed Bed Count*
Diversicare of Big Springs	Huntsville, Alabama	March 1, 2014	135
Diversicare of Nicholasville	Nicholasville, Kentucky	June 1, 2014	73
Diversicare of St. Joseph	St. Joseph, Missouri	July 1, 2014	196
Riverside Place	St. Joseph, Missouri	July 1, 2014	190
St. Joseph Chateau	St. Joseph, Missouri	July 1, 2014	69
Avon Place	Avon, Ohio	August 1, 2014	142
Ontario Pointe	Ontario, Ohio	August 1, 2014	42
Diversicare of Greenville	Greenville, Kentucky	October 1, 2014	92
Diversicare of Hutchinson	Hutchinson, Kansas	February 1, 2015	85

* Bed count includes skill nursing beds and other licensed beds, including assisted-living and residential.

Discontinued Operations

Effective April 3, 2014, the Company entered into an asset purchase agreement with Rose Terrace Acq., LLC to sell its skilled nursing facility in Culloden, West Virginia. The original asset purchase agreement was subject to a number of conditions including an amendment to the Master Lease with Omega Health Investors, Inc. ("Omega") to terminate the lease only with respect to two other skilled nursing facilities in West Virginia, state licensure and regulatory approval.

Effective July 1, 2014, the Company completed the transaction with Rose Terrace Acq., LLC to sell Rose Terrace, a 90-bed skilled nursing facility in Culloden, West Virginia for a sales price of $16,500,000 . The Company also entered into the Fifteenth Amendment to the Master Lease with Omega to terminate the lease only with respect to two other skilled nursing facilities in Danville and Ivydale, West Virginia, and concurrently entered into an operations transfer agreement with American Health Care Management, LLC, an affiliate of the purchaser with respect to the two skilled nursing facilities located in Danville and Ivydale, West Virginia. The amendment effectively reduced the annual rent payments due under the Master Lease by $1,900,000. Upon completion of the transaction, Diversicare no longer operates any skilled nursing centers in the state of West Virginia. In conjunction with the closing of the sale, the Company paid the balance of the $8,000,000 mortgage loan outstanding on the Rose Terrace facility. The Company will continue to defend, and make cash payments related to professional liability claims asserted against these nursing centers for events occurring prior to July 1, 2014.

Effective September 1, 2013, the Company entered into an agreement with Omega to terminate its lease with respect to eleven nursing centers and 1,181 licensed beds located in Arkansas and concurrently entered into operation transfer agreements to transfer the operations of each of those eleven centers to an operator selected by Omega. Upon the completion of the transaction, the Company no longer operates any skilled nursing centers in the State of Arkansas. In connection with the closing of this transaction, the Company and Omega entered into the Thirteenth Amendment to the Master Lease. This amendment effectively modifies the terms of the Master Lease to terminate the terms surrounding the eleven nursing centers in Arkansas, and only as to those eleven centers, and effectively reduces the annual rent payable under the Master Lease by $5,000,000 . In addition to the expenses associated with the discontinued operations, the Company also incurred $1,446,000 in restructuring expenses in 2013 that represent corporate expenses and exit costs associated with the Arkansas disposition, but not classified as discontinued operations. The Company will continue to defend, and make cash payments related to, professional liability claims asserted against these nursing centers for events occurring prior to September 1, 2013.

Nursing Center Profession.

We believe there are a number of significant trends within the post-acute care industry that will support the continued growth of the nursing home 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. The federal government had previously acted to curtail increases in health care costs under Medicare by limiting acute care hospital reimbursement for specific services to pre-established fixed amounts. Other third-party payors have begun to limit reimbursement for medical services in general to predetermined reasonable charges, and Managed Care organizations (such as health maintenance organizations) are attempting to limit hospitalization costs by negotiating for discounted rates for hospital and acute care services and by monitoring and reducing hospital use. In response, 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. In addition, third-party payors are increasingly becoming involved in determining the appropriate health care settings for their insureds or clients based primarily on cost and quality of care.

Limited supply of centers. As the nation's population of seniors continues to grow, life expectancy continues to expand, and there continue to be limitations on granting Certificates of Need (“CON”) for new skilled nursing centers, so we believe that there will be continued demand for skilled nursing beds in the markets in which we operate. The majority of states have adopted CON or similar statutes requiring that prior to adding new skilled beds or any new services, or making certain capital expenditures, a state agency must determine that a need exists for the new beds or proposed activities. We believe that this 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. At the same time, skilled nursing center operators are continuing to focus on improving occupancy and expanding services to include high acuity patients who require significantly higher levels of skilled nursing personnel and care.

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 facilities in their respective markets, including rehabilitation hospitals and other skilled and personal care residential facilities. In the few urban markets in which we operate, some of the long-term care providers with which our facilities compete are significantly larger and have or may obtain greater financial and marketing resources than our facilities. 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 facilities 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 from patients and residents into four major categories: Medicaid, Medicare, Managed Care, and private pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide 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 of the Medicare program. Managed Care revenues include payments for patients who are insured by a third-party entity or are Medicare beneficiaries who assign their Medicare benefits to a Managed Care replacement plan, often referred to as Medicare replacement products. 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):



	Year Ended December 31,
	2015				2014				2013
Medicaid	$	188,323	48.6	%	$	166,497	48.4	%	$	137,388	52.8	%
Medicare	112,305		29.0	%	101,806		29.6	%	71,662		27.5	%
Managed Care	27,856		7.2	%	23,178		6.7	%	15,580		6.0	%
Private Pay and other	59,111		15.2	%	52,711		15.3	%	35,591		13.7	%
Total	$	387,595	100.0	%	$	344,192	100.0	%	$	260,221	100.0	%

The following table sets forth average daily skilled nursing census by payor source for our continuing operations for the periods presented:



	Year Ended December 31,
	2015			2014			2013
Medicaid	3,104	67.1	%	2,844	67.0	%	2,392	69.6	%
Medicare	577	12.5	%	540	12.7	%	395	11.5	%
Managed Care	173	3.7	%	151	3.6	%	103	3.0	%
Private Pay and other	772	16.7	%	709	16.7	%	548	15.9	%
Total	4,626	100.0	%	4,244	100.0	%	3,438	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.

Medicare and Medicaid Reimbursement

A significant portion of our revenues are derived from government-sponsored health insurance programs. Our nursing centers derive revenues under Medicaid, Medicare, Managed Care, Private Pay and other third party sources. 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. It is generally recognized that all government-funded programs have been and will continue to be under cost containment pressures, but the extent to which these pressures will affect our future reimbursement is unknown.

Medicare

Effective October 1, 2011, Medicare rates were reduced by a nationwide average of 11.1%, the net effect of a reduction to restore overall payments to their intended levels on a prospective basis and the application of a 2.7% market basket increase and a negative 1.0% productivity adjustment required by the Affordable Care Act. The final Centers for Medicare and Medicaid Services (“CMS”) rule also adjusts the method by which group therapy is counted for reimbursement purposes and, for patients receiving therapy, changes the timing of reassessment for purposes of determining patient RUG categories. These October 2011 Medicare reimbursement changes decreased our Medicare revenue and our Medicare rate per patient day. The new regulations also resulted in an increase in costs to provide therapy services to our patients.

The Budget Control Act of 2011 (“BCA”), enacted on August 2, 2011, increased the United States debt ceiling and linked the debt ceiling increase to corresponding deficit reductions through 2021. The BCA also established a 12 member joint committee of Congress known as the Joint Select Committee on Deficit Reduction (“Super Committee”). The Super Committee’s objective was to create proposed legislation to reduce the United States federal budget deficit by $1.5 trillion for fiscal years 2012 through 2021. Part of the BCA required this legislation to be enacted by December 23, 2011, or approximately $1.2 trillion in spending reductions would automatically begin through sequestration on January 1, 2013, split between domestic and defense spending. As no legislation was passed that would achieve the targeted savings outlined in the BCA, payments to Medicare providers have been reduced by 2% from planned levels effective April 1, 2013.

In July 2015, CMS issued Medicare payment rates, effective October 1, 2015, that are expected to increase reimbursement to our skilled nursing centers by approximately 1.2% compared to the fiscal year ending September 30, 2014. The increase is the net effect of a 2.3% inflation increase as measured by the SNF market basket, offset by a 0.6% market basket update factor. The wage index budget neutrality factor resulted in an additional 0.2% downward adjustment in rates for the Company's facilities. This

adjustment is further offset by the ongoing sequestration from the BCA as mentioned above. The 2% sequestration is not applied to the payment rate, but rather it is applied to Medicare claims after determining coinsurance, any applicable deductibles, and any applicable Medicare secondary payment adjustments.

Therapy Services . There are annual Medicare Part B reimbursement limits on therapy services that can be provided to an individual. The limits impose a $1,940 per patient annual ceiling on physical and speech therapy services, and a separate $1,940 per patient annual ceiling on occupational therapy services. CMS established an exception process to permit therapy services in certain situations and we provide services that are reimbursed under the exceptions process. The exceptions process has been extended several times, most recently in April 2015 by the Medicare Access and CHIP Reauthorization Act, which extended this exception process through December 31, 2017. This allows Part B providers to continue delivering therapy services above the current $1,940 threshold for therapy services, provided the services were medically necessary. In addition, the legislation replaced the mandatory medical manual review of therapy claims exceeding the cap with a review process targeting providers with high denial rates and outlier billing patterns, new providers and certain medical conditions within group practices.

Related to the exceptions process discussed above, for services provided with dates of service, providers are required to submit a request for an exception for therapy services above the threshold of $3,700, which will then be manually medically reviewed, consistent with the treatment of these services historically. Similar to the therapy cap exceptions process, the threshold process will have a $3,700 per patient threshold on physical and speech therapy services, and a separate $3,700 per patient threshold on occupational therapy services. The exception reviews are conducted by Medicare Administrative Contractors.

On November 2, 2010, CMS released a final proposed rule as part of the Medicare Physician Fee Schedule (“MPFS”) that was effective January 1, 2011. The policy impacts the reimbursement we receive for Medicare Part B therapy services in our facilities. The policy provides that Medicare Part B pay the full rate for the therapy unit of service that has the highest Practice Expense ("PE") component for each patient on each day they receive multiple therapy treatments. Reimbursement for the second and subsequent therapy units for each patient each day they receive multiple therapy treatments is reimbursed at a rate equal to 75% of the applicable PE component through March 31, 2013. Effective April 1, 2013, the rate at which these services are reimbursed was reduced to 50% of the applicable PE component.

Medicare Part B therapy services in our centers are determined according to MPFS. Annually since 1997, the MPFS has been subject to a Sustainable Growth Rate Adjustment (“SGR”) intended to keep spending growth in line with allowable spending. Each year since the SGR was enacted, this adjustment produced a scheduled negative update to payment for physicians, therapists and other healthcare providers paid under the MPFS. In April 2015, as part of the Medicare Access and CHIP Reauthorization Act, Congress passed and the President signed into law the "permanent SGR fix" or "doc fix." Under this legislation, the Medicare formula for establishing physician payment rates was permanently replaced. The permanent fix is expected to remove a substantial annual risk of future payment reductions.

The Medicare Access and CHIP Reauthorization Act also extended several other elements of the Middle Class Tax Relief and Job Creation Act of 2012, including the reduction of bad debt treated as an allowable cost. Prior to this act, Medicare reimbursed providers for beneficiaries’ unpaid coinsurance and deductible amounts after reasonable collection efforts at a rate between 70 and 100 percent of beneficiary bad debt. This provision reduced bad debt reimbursement exposure for all providers to 65%. In addition to the provisions above, the legislation sets that for fiscal year 2018 (October 1, 2017 through September 30, 2018), all Medicare Part B providers will receive inflationary market basket increases not greater than 1%. This provision is expected to reduce Medicare payments to all post-acute providers by approximately $15.4 billion over the 2018-2025 period.

Medicaid

Several states in which we operate face budget shortfalls, which could result in reductions in Medicaid funding for nursing centers. The federal government made an effort to address the financial challenges state Medicaid programs are facing by increasing the amount of Medicaid funding available to states. Pressures on state budgets are expected to continue in the future and are expected to result in Medicaid rate reductions.

Effective February 1, 2015, the Company began participating in the Upper Payment Limit ("UPL") supplemental payment program in the state of Indiana that provides supplemental Medicaid payments for skilled nursing facilities that are licensed to non-state government entities such as county hospital districts. One skilled nursing facility previously operated by the Company entered into a transaction with one such hospital providing for the transfer of the license from the Company to the hospital district, and providing further for the Company's operating subsidiaries to retain the management of the facility on behalf of the hospital district, which is participating in the UPL program. The affected operating subsidiary therefore retains operations of its skilled nursing facility and the agreement between the hospital district and the Company is terminable by either party to fully restore the prior license status.

We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in 2015 and 2014 , along with increased Medicaid acuity in our acuity based states, were the primary contributor to our 3.6% increase in average rate per day for Medicaid patients in 2015 compared to 2014 . Based on the rate changes received during the third quarter of 2015 , we expect a favorable impact to our rate per day for Medicaid patients as we move into 2016 due to modest rate increases in many of the states within which we operate.

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, 2015 , we derived 29.0 % and 48.6% 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.

We will attempt to increase revenues from non-governmental sources to the extent capital is available to do so. 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.

Employees.

As of February 1, 2016 , we employed approximately 6,300 individuals in connection with our continuing operations, approximately 4,500 of which are considered full-time employees. We believe that our employee relations are good. Approximately 131 of our employees 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 employees and could increase our operating costs. We compete with other health care providers for both professional and non-professional employees and with non-health care providers for non-professional employees. This competition contributed to a significant increase in the salaries that we had to pay to hire and retain these employees. 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 2016 to be relatively the same or slightly lower than the increases we experienced in 2015 .

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 fraud and abuse statutes and regulations, false claims statutes, HIPAA violations, as well as laws and regulations governing quality of care issues in the skilled nursing profession in general. 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. 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 facilities or that we will not be required to expend significant sums in order to comply with regulatory requirements.

Health care and health insurance reform. On April 16, 2015, the President signed into law MACRA. This bill includes a number of provisions, including the replacement of the Sustainable Growth Rate formula used by Medicare to pay physicians with new systems for establishing annual payment rate updates for physicians' services, an extension of the outpatient therapy cap exception process until December 31, 2017; and payment updates for post-acute providers. In addition, it increases premiums for Part B and Part D of Medicare for beneficiaries with income above certain levels and makes numerous other changes to Medicare and Medicaid. On October 30, 2015, CMS released a final rule addressing the implementation of certain provisions of MACRA, including the implementation of the new Merit-Based Incentive Payment System ("MIPS"). The current Value-Based Payment Modifier program is set to expire in 2018, with MIPS to begin in 2019. The October 30, 2015 final rule added measures where gaps exist in the current Physician Quality Reporting System, which is used by CMS to track the quality of care provided to Medicare beneficiaries. The final rule also excludes services furnished in SNFs from the definition of primary care services for purposes of the Shared Savings Program. The final rule could impact our revenue in the future.

On February 20, 2015, CMS modified the Five Star Quality Rating System for nursing homes to include the use of antipsychotics in calculating the star ratings, modified calculations for staffing levels and reflect higher standards for nursing homes to achieve a high rating on the quality measure dimension. Since the standards for performance are more difficult to achieve, the number of our 4 and 5 star facilities could be reduced.

In March 2010, significant legislation concerning health care and health insurance was passed, including the “Patient Protection and Affordable Care Act” (“Patient Protection Act”), along with the “Health Care and Education Reconciliation Act of 2010” (“Reconciliation Act”), collectively defined as the “Legislation.” We expect this Legislation to impact our Company, our employees and our patients in a variety of ways. Some aspects of these new laws have been implemented while others will be phased in over the next several years when all mandates become effective. This Legislation significantly changes the future responsibility of employers with respect to providing health care coverage to employees in the United States. We have not estimated the financial impact of the Legislation and the costs associated with complying with the increased levels of health insurance we will be required to provide our employees and their dependents in future years. We expect the Legislation will result in increased operating expenses.

We also anticipate this Legislation will continue to impact our Medicaid and Medicare reimbursement as well, though the timing and ultimate level of that impact is currently unknown as we anticipate that many of the provisions of the Legislation may be subject to further clarification and modification through the rule making process. The Legislation expands the role of home-based and community services, which may place downward pressure on our sustaining population of Medicaid patients. These reforms include the 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. The provisions of the Legislation discussed above are examples of recently-enacted federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of the Legislation.

Skilled nursing facilities 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 facility responsible for billing Medicare for all care services delivered to the patient during the length of stay.

CMS has instituted a number of new exploratory 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. Today, these test programs for bundled reimbursement are confined to a small set of clinical conditions. This bundled form of reimbursement could be extended to a broader range of diagnosis related conditions in the future. Because of the untested nature of this new form of reimbursement, the potential impact on skilled nursing facility 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.

Medicare and Medicaid. 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 inpatient hospital services and certain services furnished by other institutional providers such as skilled nursing facilities. Part B covers the services of doctors, suppliers of medical items, various types of outpatient services and certain ancillary services of the type provided by long-term and acute care facilities. Medicare payments under Part A and Part B are subject to certain caps and limitations, as provided in Medicare regulations. Medicare benefits are not available for intermediate and custodial levels of nursing center care or for assisted living center arrangements.

Medicaid is a medical assistance program for the indigent, operated by individual states with financial participation by the federal government. Criteria for medical indigence and available Medicaid benefits and rates of payment vary somewhat from state to state, subject to certain federal requirements. Basic long-term care services are provided to Medicaid beneficiaries, including nursing, dietary, housekeeping and laundry, restorative health care services, room and board and medications. Federal law requires that a state Medicaid program must provide for a public process for determination of Medicaid rates of payment for nursing center services. Under this process, proposed rates, the methodologies underlying the establishment of such rates and the justification for the proposed rates are published. This public process gives providers, beneficiaries and concerned state patients a reasonable opportunity for review and comment. Certain of the states in which we now 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.

As a component of CMS administration of the government's reimbursement programs, a new ratings system was implemented in December 2008 to assist the public in choosing a skilled care provider. While data for the consumer has been available for several years, the display of quality with a “Star” ranking with a “5 Star” ranking being the highest and a “1 Star” ranking being the lowest was new in 2008. The “5 Star” system is an attempt to simplify all the data for each nursing center to a “Star” ranking. The overall Star rating is determined by three components (three years survey results, quality measure calculations, and staffing data), with each of the components receiving star rankings as well. As this initiative becomes a bigger part of our business environment, we remain diligent in continuing to provide outstanding patient care to achieve high rankings for our facilities, as well as assuring that our rankings are correct and appropriately reflect our quality results.

Health Insurance Portability and Accountability Act of 1996 Compliance . 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 of individually identifiable 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 detailed 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. We implemented or upgraded computer and information systems as we believe necessary to comply with the new regulations.

The HIPAA regulations related to privacy establish comprehensive federal standards relating to the use and disclosure of individually identifiable health information (“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. 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 which 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.

Reporting Obligations under Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”). Since January 1, 2010, we have reported 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. This does 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. Copies of our reports filed with the SEC may be obtained by the public at the SEC's Public Reference Room located at 100 F Street, NE, Washington, DC 20549 on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. 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.

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. 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 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.

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, 2015 , 2014 and 2013 , we recorded professional liability expense of $ 8.1 million , $ 7.2 million and $ 5.7 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 $60.3 million at December 31, 2015 . 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, 2015 , 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 April 2013 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, 2015 , we are engaged in 55 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.

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

A substantial majority of our facilities are leased from third parties. The terms of such leases generally require us to operate such facilities as skilled nursing facilities, 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 facilities as skilled nursing facilities even if doing so becomes unprofitable.

We are highly dependent on reimbursement by third-party payors.

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, 2015 , our patient revenues from continuing operations derived from Medicaid, Medicare, Managed Care and private pay (including private insurers) sources were approximately 48.6% , 29.0 %, 7.2 %, and 15.2 %, respectively. 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 and future changes could significantly reduce the reimbursement we receive. Also, a number of state governments, including several of the states in which we operate, have announced projected budget shortfalls and/or deficit spending situations. Possible actions by these states include reductions of Medicaid reimbursement to providers such as us or the failure to increase Medicaid reimbursements to cover increased operating costs, or implementation of alternatives to long-term care, such as community and home-based 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 unable to predict what reform proposals or reimbursement limitations will be adopted in the future or the effect such changes will have on our operations. We are limited in our ability to reduce the direct costs of providing care when decreases in reimbursement rates are imposed. 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.”

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 and Medicare and Medicaid fraud and abuse. 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 adversely affect our growth and could prevent us from offering our existing or additional services. 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.”

The health care industry has been the subject of increased regulatory scrutiny recently.

The Office of Inspector General (“OIG”), the enforcement arm of the Medicare and Medicaid programs, formulates a formal work plan each year for nursing centers. The OIG's most recent work plan indicates that quality of care, assessment and monitoring, poorly performing nursing facilities, hospitalizations, criminal background checks, Medicare part B services, accuracy of nursing facilities Minimum Data, transparency of ownership, and civil monetary penalty funds will be the investigative focus in 2016 . We cannot predict the likelihood, scope or outcome of any such investigations on our facilities.

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

In the United States, various state and federal laws regulate the relationships between providers of health care services, physicians, and other clinicians. These self-referral 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 state health care program 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. The false claims act authorizes individuals to file legal actions to recover improper reimbursement received from governmental payors. To the extent that we, any of our facilities 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. 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. 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.

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 rules and 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 except under certain circumstances, and give patients a right to access and amend their personal 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 new patients, and thereby have a material adverse effect on our revenues, financial position, results of operations and cash flows.

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 facilities. In turn, our facilities face competition for patients. Our ability to compete is based on several factors and include, but are not limited to building age, 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. Some hospitals that provide long-term care services are also a potential source of competition. 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.

Increased competition for qualified healthcare professionals could affect our costs.

In many of the regions where we operate, the market for qualified nurses and other healthcare professionals has been and continues to be very competitive. In order to hire and retain such qualified professionals going forward, we may be required to offer higher wages or greater benefits, and in such event, higher average labor costs may result. Wages represent the largest component of our operating expenses. Therefore, our ability to manage labor costs will significantly influence our results of operations and cash flow.

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 facilities, 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 facilities, and the availability of employees to provide services at our facilities. If the delivery of goods or the ability of employees to reach our facilities were interrupted in any material respect due to a natural disaster or other reasons, it would have a significant impact on our facilities 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 facilities, 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 facilities, harm our business, reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

Healthcare reform legislation could adversely affect our revenue and financial condition.

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. In March 2010, significant legislation concerning health care and health insurance was passed which will significantly change the future of health care in the United States. If the reforms are phased in over the next ten years as currently enacted, they may significantly increase our costs to provide employee health insurance and have an adverse effect on our financial condition and results of operations. It is also expected that this new legislation will impact our operations and reimbursement from Federal programs such as Medicare and Medicaid as well as private insurance. The timing and ultimate level of that impact is currently unknown as we anticipate that many of the provisions of such legislation may be subject to further clarification and modification through the rule making process.

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

While we maintain information technology security and safeguards, complex medical systems can be targeted for cyber attacks, and as a result, the potential exists for unauthorized parties to obtain access to our computer systems and networks. Such cyber attacks could result in the misappropriation of our patient information protected by privacy laws, 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 disclosure of significant proprietary information, it could require notice to state and federal agencies of such a breach, cause damage to our reputation and affect our relationships with our patients, may result in 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.

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. 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.

The success of previous and future investments in acquisitions cannot be guaranteed and such acquisitions may consume substantial capital and other resources.

We have in the past and plan to in the future make investments in additional facilities, whether by opening new facilities or acquiring existing facilities. Such acquisitions may require substantial cash investments and incurrence of additional debt. Our ability to make future acquisitions will therefore depend on our being able to obtain the necessary capital through equity or debt financing on reasonable terms. Our ability to make future acquisitions will also depend on our being able to identify strategic acquisitions that meet our criteria for expansion and to negotiate such acquisitions on reasonable terms. The success of future acquisitions will depend on our ability to efficiently integrate newly acquired businesses into our own as well as on whether such acquired businesses ultimately achieve our goals for financial performance. The process of acquiring and integrating new businesses may divert management's time that would otherwise be spent on our existing operations. Acquisitions that prove unsuccessful may have a material adverse effect on our financial position, results of operations, and cash flows.

Our ability and intent to pay cash dividends in the future may be limited.

We currently pay a $0.055 quarterly dividend on our common shares, and while the Board of Directors intends to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, our financial condition, funds from operations, the level of our capital expenditures and future business prospects. The Company is restricted by its debt agreements in its ability to pay dividends.

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

Our Certificate of Incorporation (the “Certificate”) provides for the classification of our Board into three classes, with each class of directors serving staggered terms of three years. Our 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 795,000 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 40 long-term care facilities as discussed in “Item 1 Business - Nursing Centers and Services.” See further details below.

Our current operations include 40 nursing centers subject to operating leases, including 36 owned by Omega and four owned by other parties. Effective April 1, 2015, Omega acquired Aviv REIT, who owned 13 of our centers at the time of acquisition, which subsequently are owned by Omega. 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 40 leased facilities are “triple net” leases, requiring us to maintain the premises, provide insurance, pay taxes and pay for all utilities. The average remaining term of our lease agreements, including renewal options, is approximately 16 years. 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
Alabama	7	643	203	846
Florida	1	79	—	79
Indiana	1	172	—	172
Kansas	6	85	444	529
Kentucky	13	1,015	154	1,169
Missouri	3	455	—	455
Ohio	6	844	—	844
Tennessee	5	497	120	617
Texas	13	1,370	475	1,845
Total	55	5,160	1,396	6,556

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 facilities range up to three years. Regional executives for Kansas work from an office of approximately 1,500 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 facility. 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, 2015 , we are engaged in 55 professional liability lawsuits. Ten 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.

Between July 2013 and early February 2016, the Company received three civil investigative demands, a form of subpoena, relating to a civil investigation of our practices and policies for rehabilitation, and other services, and our preadmission evaluation forms (PAEs) required by TennCare. We previously responded to the first two requests and are now responding to the third request. The DOJ’s investigation now covers all of the Company’s facilities, but thus far only documents from six of our facilities have been requested. The Company intends to continue cooperating with the DOJ and the OIG in the investigation. The Company cannot predict the outcome of this investigation or any possible related proceedings, and the outcome could have a materially adverse effect on the Company, including the imposition of damages, fines, penalties and/or a corporate integrity agreement, but 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 “Facility”). The complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Facility 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 facilities. 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 under the symbol “AVCA.” Effective March 15, 2013, the Company changed its name from Advocat Inc. to Diversicare Healthcare Services, Inc. as a result of a merger of the Company and a wholly-owned subsidiary. In connection with the name change, the Company changed its NASDAQ ticker symbol from “AVCA” to “DVCR” effective with the market open on

Monday, March 18, 2013. The following table sets forth the high and low bid prices of our common stock, as reported by NASDAQ.com, for each quarter in 2015 and 2014 :



Period				High		Low		Dividends
2014	—	1 ^st	Quarter	$	6.33	$	4.61	$	0.055
2014	—	2 ^nd	Quarter	$	8.25	$	5.75	$	0.055
2014	—	3 ^rd	Quarter	$	13.32	$	6.41	$	0.055
2014	—	4 ^th	Quarter	$	12.80	$	8.50	$	0.055
2015	—	1 ^st	Quarter	$	13.95	$	8.46	$	0.055
2015	—	2 ^nd	Quarter	$	17.15	$	11.89	$	0.055
2015	—	3 ^rd	Quarter	$	13.00	$	8.14	$	0.055
2015	—	4 ^th	Quarter	$	10.59	$	6.45	$	0.055

Our common stock has been traded since May 10, 1994. On February 16, 2016 , the closing price for our common stock was $ 7.30 , as reported by NASDAQ.com.

Holders . On February 16, 2016 , there were approximately 269 holders of record. Most of our shareholders have their holdings in the street name of their broker/dealer.

Dividends . For each of the two most recent fiscal years, we have paid a quarterly dividend of $0.055 per common share. While the Board of Directors intends to continue to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, the Company's financial condition, funds from operations, the level of its capital expenditures and its future business prospects. The Company is restricted by its debt agreements in its ability to pay dividends.

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 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,
	2015			2014			2013			2012			2011
Statement of Operations Data				(in thousands, except per share amounts)
REVENUES:
Patient revenues, net	$	387,595		$	344,192		$	260,221		$	231,047		$	233,844
EXPENSES:
Operating	311,035			275,605			213,064			186,958			185,638
Lease	28,690			26,151			20,396			18,018			17,031
Professional liability	8,122			7,216			5,666			4,304			3,237
General and administrative	24,793			22,133			20,940			19,515			21,024
Depreciation and amortization	7,524			7,078			6,363			5,758			5,454
Asset Impairment	—			—			—			—			344
Restructuring	—			—			1,446			—			—
	380,164			338,183			267,875			234,553			232,728
OPERATING INCOME (LOSS)	7,431			6,009			(7,654		)	(3,506		)	1,116
OTHER INCOME (EXPENSE):
Equity in net losses of unconsolidated affiliate	339			(5		)	(183		)	(280		)	—
Interest expense, net	(4,102		)	(3,697		)	(3,032		)	(2,232		)	(2,180		)
Debt retirement costs	—			—			(320		)	—			(112		)
	(3,763		)	(3,702		)	(3,535		)	(2,512		)	(2,292		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	3,668			2,307			(11,189		)	(6,018		)	(1,176		)
BENEFIT (PROVISION) FOR INCOME TAXES	(916		)	(857		)	4,196			2,147			316
INCOME (LOSS) FROM CONTINUING OPERATIONS	2,752			1,450			(6,993		)	(3,871		)	(860		)
DISCONTINUED OPERATIONS, net of taxes	(1,128		)	3,258			(1,469		)	951			2,227
NET INCOME (LOSS)	$	1,624		$	4,708		$	(8,462	)	$	(2,920	)	$	1,367
INCOME (LOSS) PER COMMON SHARE:
Basic
Continuing operations	$	0.45		$	0.21		$	(1.26	)	$	(0.74	)	$	(0.21	)
Discontinued operations	(0.18		)	0.54			(0.25		)	0.16			0.39
Net income (loss) per common share	$	0.27		$	0.75		$	(1.51	)	$	(0.58	)	$	0.18
Diluted
Continuing operations	$	0.44		$	0.20		$	(1.26	)	(0.74		)	(0.20		)
Discontinued operations	(0.18		)	0.52			(0.25		)	0.16			0.38
Net income (loss) per common share	$	0.26		$	0.72		$	(1.51	)	$	(0.58	)	$	0.18
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.22		$	0.22		$	0.22		$	0.22		$	0.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,100			6,011			5,899			5,821			5,774
Diluted	6,315			6,197			5,899			5,821			5,906



	December 31,
	2015		2014		2013		2012		2011
Balance Sheet Data	(in thousands)
Working capital	$	13,052	$	8,797	$	8,044	$	15,663	$	15,435
Total assets	$	138,051	$	129,089	$	137,744	$	114,963	$	116,744
Long-term debt and capitalized lease obligations, including current portion	$	60,867	$	48,265	$	53,577	$	29,462	$	29,899
Preferred Stock - Series C	$	—	$	—	$	4,918	$	4,918	$	4,918
Total Shareholders' Equity of Diversicare Healthcare Services, Inc.	$	13,267	$	11,754	$	8,129	$	17,178	$	21,315
Total Shareholders' Equity	$	13,267	$	11,754	$	9,566	$	18,751	$	22,969

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 nine 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, 2015 , our continuing operations consist of 55 nursing centers with 6,060 licensed nursing beds and 496 assisted-living and other residential beds. We own 15 and lease 40 of our nursing centers included in continuing operations. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Missouri, Ohio, Tennessee, and Texas.

Strategic Operating Initiatives

During the third quarter of 2010, we identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives included: improving skilled mix in our nursing centers, improving our average Medicare rate, implementing Electronic Medical Records (“EMR”) to improve Medicaid capture, accelerating center renovations and completing strategic acquisitions. We have experienced success in these initiatives and expect to continue to build on these improvements.

Improving skilled mix and average Medicare rate:

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. A comparison of our most recent quarter versus the third quarter of 2010, the quarter before we embarked on our strategic operating initiatives, reflects our success with these strategic operating initiatives:



	Three Months Ended
	December 31, 2015			September 30, 2010
As a percent of total census:
Medicare census	12.0		%	12.3		%
Managed Care census	3.7		%	1.3		%
Total skilled mix census	15.7		%	13.6		%
As a percent of total revenues:
Medicare revenues	27.9		%	29.3		%
Managed Care revenues	7.7		%	2.8		%
Total skilled mix revenues	35.6		%	32.1		%
Medicare average rate per day:	$	457.24		$	394.23

Implementing Electronic Medical Records to improve Medicaid acuity capture:

As another part of our strategic operating initiatives, we implemented EMR to improve Medicaid acuity capture, primarily in our states where the Medicaid payments are acuity based. We completed the implementation of EMR in all our nursing centers in December 2011, on time and under budget, and since implementation, have increased our average Medicaid rate despite rate cuts in certain acuity based states by accurate and timely capture of care delivery. A comparison of our most recent quarter versus the third quarter of 2010 reflects our success with increasing our average Medicaid rate per day:



	Three Months Ended
	December 31, 2015		September 30, 2010
Medicaid average rate per day:	$	166.72	$	147.93

Completing strategic acquisitions:

Our strategic operating initiatives include a renewed focus on completing strategic acquisitions. We continue to pursue and investigate opportunities to acquire, lease or develop new centers, focusing primarily on opportunities within our existing geographic areas of operation. We expect to announce additional development projects in the near future.

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 was in line with the short-term and long-term strategy of the business. As a result, we disposed of an owned building in Arkansas in 2012, and reached an agreement to terminate our lease for eleven other facilities in Arkansas in 2013. Additionally, in 2014, the Company disposed of all operations within the state of West Virginia, including the sale of Rose Terrace. More information on these divestitures is included below.

Divestitures

Effective July 1, 2014, the Company completed the transaction with Rose Terrace Acq., LLC to sell Rose Terrace, a 90-bed skilled nursing facility in Culloden, West Virginia for a sales price of $16,500,000 . The Company also entered into the Fifteenth Amendment to Consolidated Amended and Restated Master Lease with Omega Health Investors, Inc. ("Omega") to terminate the lease only with respect to two other skilled nursing facilities in West Virginia, and concurrently entered into an operations transfer agreement with American Health Care Management, LLC, an affiliate of the purchaser with respect to two other skilled nursing facilities located in Danville and Ivydale, West Virginia. The amendment effectively reduced the annual rent payments due under the Master Lease by $1,900,000. Upon completion of the transaction, Diversicare no longer operates any skilled nursing centers in the state of West Virginia. In conjunction with the closing of the sale, the Company paid the balance of the $8,000,000 mortgage loan outstanding on the Rose Terrace facility. The Company will continue to defend, and make cash payments related to professional liability claims asserted against these nursing centers for events occurring prior to July 1, 2014.

Effective September 1, 2013, the Company entered into an agreement with Omega to terminate its lease with respect to eleven nursing centers and 1,181 licensed beds located in the state of Arkansas, and concurrently entered into operation transfer agreements to transfer the operations of each of those eleven centers to an operator selected by Omega. Upon the completion of the transaction, the Company no longer operates any skilled nursing centers in the State of Arkansas. As a result of this transaction, the Company has reclassified the operations of these centers as discontinued operations for all periods presented in the accompanying consolidated financial statements. These centers contributed revenues of $40.2 million , during the twelve months ended December 31, 2013 . Further, these centers contributed net losses of $0.8 million , $1.1 million and $2.9 million during the twelve months ended December 31, 2015 , 2014 and 2013 , respectively. The net income or loss for the nursing centers included in discontinued operations does not reflect any allocation of corporate general and administrative expense or any allocation of corporate interest expense. The Company considered these additional costs along with the centers' future prospects based upon operating history when determining the contribution of the skilled nursing centers to its operations. In addition to the expenses associated with the discontinued operations, the Company also incurred $1.4 million in restructuring expenses in 2013 that represent corporate expenses and exit costs associated with the Arkansas lease termination, but not classified as discontinued operations. The Company will continue to defend, and make cash payments related to, professional liability claims asserted against these nursing centers for events occurring prior to September 1, 2013.

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, 2015 , 2014 and 2013 , and sets forth this data as a percentage of revenues for the same year:



	Year Ended December 31,
	(Dollars in thousands)
	2015					2014					2013
Revenues:
Patient revenues, net	$	387,595		100.0	%	$	344,192		100.0	%	$	260,221		100.0	%
Expenses:
Operating	311,035			80.2	%	275,605			80.1	%	213,064			81.9	%
Lease	28,690			7.4	%	26,151			7.6	%	20,396			7.8	%
Professional liability	8,122			2.1	%	7,216			2.1	%	5,666			2.2	%
General & administrative	24,793			6.4	%	22,133			6.4	%	20,940			8.0	%
Depreciation and amortization	7,524			1.9	%	7,078			2.1	%	6,363			2.4	%
Restructuring	—			—	%	—			—	%	1,446			0.6	%
	380,164			98.0	%	338,183			98.3	%	267,875			102.9	%
Operating income (loss)	7,431			2.0	%	6,009			1.7	%	(7,654		)	(2.9	)%
Other income (expense):
Equity in net losses of unconsolidated affiliate	339			0.1	%	(5		)	—	%	(183		)	(0.1	)%
Interest expense, net	(4,102		)	(1.1	)%	(3,697		)	(1.1	)%	(3,032		)	(1.2	)%
Debt retirement costs	—			—	%	—			—	%	(320		)	(0.1	)%
	(3,763		)	(1.0	)%	(3,702		)	(1.1	)%	(3,535		)	(1.4	)%
Income (loss) from continuing operations before income taxes	3,668			1.0	%	2,307			0.6	%	(11,189		)	(4.3	)%
Benefit (provision) for income taxes	(916		)	(0.2	)%	(857		)	(0.2	)%	4,196			1.6	%
Income (loss) from continuing operations	$	2,752		0.8	%	$	1,450		0.4	%	$	(6,993	)	(2.7	)%

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



	December 31,
	2015	2014	2013
Licensed Nursing Center Beds:
Owned	1,370	1,220	1,224
Leased	4,690	4,605	3,854
Total	6,060	5,825	5,078
Facilities:
Owned	15	13	13
Leased	40	39	31
Total	55	52	44

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. Our net revenues are derived substantially from Medicare, Medicaid and other government programs (approximately 77.6% , 78.0% and 80.3% for 2015 , 2014 , and 2013 , respectively). 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 collectibility 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 1.9% , 1.7% , and 1.6% for 2015 , 2014 , and 2013 , respectively. 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, the Company’s formerly operated Arkansas and West Virginia facilities, 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 $500,000 or $1,000,000 per medical incident with a sublimit per center of $1,000,000 and total annual aggregate policy limits of $5,000,000 . All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide coverage limits of $1,000,000 per claim and have sublimits of $3,000,000 per center, with varying aggregate policy limits and deductibles.

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 $21.6 million as of December 31, 2015 , including $3.7 million for settlements that are expected to be paid in 2016 , 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 $3.3 million , $4.8 million and $4.5 million for the years ended December 31, 2015 , 2014 and 2013 , 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.

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 $8.1 million , $7.2 million and $5.7 million for the years ended December 31, 2015 , 2014 and 2013 , respectively. These amounts are material in relation to our reported income (loss) from continuing operations for the related periods of $2.8 million , $1.5 million and $(7.0) million , respectively. The total liability recorded at December 31, 2015 was $21.6 million , compared to current assets of $60.4 million and total assets of $138.1 million .

Accrual for Other Self-Insured Claim s

With respect to workers' compensation insurance, substantially all of our employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. We are completely self-insured for workers' compensation exposures prior to May 1997. 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, 2008 through December 31, 2015 , we are covered by a prefunded deductible policy. Under this policy, we are self-insured for the first $500,000 per claim, subject to an aggregate maximum of $3,000,000 . 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 $175,000 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. 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. Our asset impairment analysis is consistent with the fair value measurements described in the accounting guidance for “Fair Value Measurements and Disclosures.”

No impairment of long lived assets was recognized during 2015 , 2014 , or 2013 . 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 fair value of assets acquired and the liabilities assumed. These valuations are subject to retroactive adjustment during the twelve-month period subsequent to the acquisition date. Such valuations require us to make significant estimates, judgments and assumptions, including projections of future events and operating performance.

Stock-Based Compensation

We recognize compensation cost for all share-based payments granted after January 1, 2006, on a straight-line basis over the vesting period. We calculated the recognized and unrecognized stock-based compensation for options and 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 an intrinsic valuation method based on 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, 2015 , 2014 , and 2013 , we recorded charges of approximately $1.2 million , $0.6 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

We determine deferred tax assets and liabilities based upon differences between financial reporting and tax bases of assets and liabilities and measure them using the enacted tax laws that will be in effect when the differences are expected to reverse. We maintain a valuation allowance of approximately $(0.8) million to reduce the deferred tax assets to amounts we believe can be realized on a more likely than not basis in accordance with generally accepted accounting principles. In future periods, we will continue to assess the need for and adequacy of the remaining valuation allowance. We follow the relevant guidance found in the FASB codification, ASC 740: Accounting for Uncertainty in Income Taxes . The guidance provides information and procedures for financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns.

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of December 31, 2015 , 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⁾	$	74,616	$	9,608	$	8,381	$	7,950	$	48,677
Settlement obligations ⁽²⁾	3,708		3,708		—		—		—
Elimination of Preferred Stock Conversion feature ⁽³⁾	1,889		687		1,202		—		—
Operating leases ⁽⁴⁾	572,899		32,245		65,555		68,138		406,961
Required capital expenditures under operating leases ⁽⁵⁾	3,133		218		436		436		2,043
Total	$	656,245	$	46,466	$	75,574	$	76,524	$	457,681


(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. Scheduled future payments reflect the February 2016 refinancing and adjusted maturity schedule.


(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)	Payments to Omega Health Investors ("Omega"), from whom we lease 23 nursing centers, for the elimination of the preferred stock conversion feature in connection with restructuring the preferred stock and master lease agreements. Monthly payments of approximately $57,000 will be made through the end of the initial lease period that ends in September 2018.


(4)	Represents lease payments under our operating lease agreements. Assumes all renewals periods.


(5)	Includes annual expenditure requirements under operating leases.

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 $1.8 million as of December 31, 2015 . The terms of such agreements are for one year and automatically renew for one year if not terminated by us or the employee. In addition, upon the occurrence of any triggering event, those certain members of management may elect to require that we purchase equity awards granted to them for a purchase price equal to the difference in the fair market value of our common stock at the date of termination versus the stated equity award exercise price. Based on the closing price of our common stock on December 31, 2015 , there is $236,000 in contingent liabilities for the repurchase of the equity grants. No amounts have been accrued for these contingent liabilities.

Revenue Sources

We classify our revenues from patients and residents into four major categories: Medicaid, Medicare, Managed Care, and private pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide 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 of the Medicare program. Managed Care revenues include payments for patients who are insured by a third-party entity or are Medicare beneficiaries who assign their Medicare benefits to a Managed Care replacement plan often referred to as Medicare replacement products. 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 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):



	Year Ended December 31,
	2015				2014				2013
Medicaid	$	188,323	48.6	%	$	166,497	48.4	%	$	137,388	52.8	%
Medicare	112,305		29.0	%	101,806		29.6	%	71,662		27.5	%
Managed Care	27,856		7.2	%	23,178		6.7	%	15,580		6.0	%
Private Pay and other	59,111		15.2	%	52,711		15.3	%	35,591		13.7	%
Total	$	387,595	100.0	%	$	344,192	100.0	%	$	260,221	100.0	%

The following table sets forth average daily skilled nursing census by payor source for our continuing operations for the periods presented:



	Year Ended December 31,
	2015			2014			2013
Medicaid	3,104	67.1	%	2,844	67.0	%	2,392	69.6	%
Medicare	577	12.5	%	540	12.7	%	395	11.5	%
Managed Care	173	3.7	%	151	3.6	%	103	3.0	%
Private Pay and other	772	16.7	%	709	16.7	%	548	15.9	%
Total	4,626	100.0	%	4,244	100.0	%	3,438	100.0	%

Consistent with the nursing center industry in general, changes in the mix of a nursing center's patient population among Medicaid, Medicare, Managed Care and private pay can significantly affect the profitability of the center's operations.

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.



(in thousands)	Year Ended December 31,
	2015			2014			Change			%
PATIENT REVENUES, net	$	387,595		$	344,192		$	43,403		12.6	%
EXPENSES:
Operating	311,035			275,605			35,430			12.9	%
Lease	28,690			26,151			2,539			9.7	%
Professional liability	8,122			7,216			906			12.6	%
General and administrative	24,793			22,133			2,660			12.0	%
Depreciation and amortization	7,524			7,078			446			6.3	%
Total expenses	380,164			338,183			41,981			12.4	%
OPERATING INCOME	7,431			6,009			1,422			23.7	%
OTHER INCOME (EXPENSE):
Equity in net income (losses) of unconsolidated affiliate	339			(5		)	344			6,880.0	%
Interest expense, net	(4,102		)	(3,697		)	(405		)	(11.0	)%
	(3,763		)	(3,702		)	(61		)	(1.6	)%
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	3,668			2,307			1,361			59.0	%
PROVISION FOR INCOME TAXES	(916		)	(857		)	(59		)	(6.9	)%
INCOME FROM CONTINUING OPERATIONS	$	2,752		$	1,450		$	1,302		89.8	%



(in thousands)	Year Ended December 31,
	2014			2013			Change			%
PATIENT REVENUES, net	$	344,192		$	260,221		$	83,971		32.3	%
EXPENSES:
Operating	275,605			213,064			62,541			29.4	%
Lease	26,151			20,396			5,755			28.2	%
Professional liability	7,216			5,666			1,550			27.4	%
General and administrative	22,133			20,940			1,193			5.7	%
Depreciation and amortization	7,078			6,363			715			11.2	%
Restructuring	—			1,446			(1,446		)	(100.0	)%
Total expenses	338,183			267,875			70,308			26.2	%
OPERATING INCOME (LOSS)	6,009			(7,654		)	13,663			178.5	%
OTHER EXPENSE:
Equity in net losses of investee	(5		)	(183		)	178			97.3	%
Interest expense, net	(3,697		)	(3,032		)	(665		)	(21.9	)%
Debt retirement costs	—			(320		)	320			100	%
	(3,702		)	(3,535		)	(167		)	(4.7	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	2,307			(11,189		)	13,496			120.6	%
BENEFIT (PROVISION) FOR INCOME TAXES	(857		)	4,196			(5,053		)	(120.4	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	1,450		$	(6,993	)	$	8,443		120.7	%

Year Ended December 31, 2015 Compared With Year Ended December 31, 2014

Patient Revenues

Patient revenues were $387.6 million in 2015 and $344.2 million in 2014 , an increase of $43.4 million or 12.6% . This increase is primarily attributable to the acquisition of new operations during the period. The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):



	Year Ended December 31,
	2015		2014		Change
Same-store revenue	$	329,463	$	318,096	$	11,367
2014 acquisition revenue	47,034		26,096		20,938
2015 acquisition revenue	11,098		—		11,098
Total revenue	$	387,595	$	344,192	43,403

The overall increase in revenue of $43.4 million is primarily attributable to revenue contributions from acquisition activity in 2015 of $11.1 million , as well as an incremental increase in revenues from 2014 acquisitions of $20.9 million as a result of having a full year in operations during 2015 . The balance of the increase in revenues year-over-year is attributable to increases in same-store revenue of $11.4 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,
	2015			2014
Skilled nursing occupancy	77.1		%	77.5		%
As a percent of total census:
Medicare census	12.5		%	12.7		%
Managed Care census	3.7		%	3.6		%
As a percent of total revenues:
Medicaid revenues	48.6		%	48.4		%
Medicare revenues	29.0		%	29.6		%
Managed Care revenues	7.2		%	6.7		%
Average rate per day:
Medicare	$	455.24		$	444.63
Medicaid	$	166.16		$	160.43
Managed Care	$	389.73		$	383.44

The average Medicaid rate per patient day for same-store nursing centers in 2015 increased 3.6% compared to 2014 , resulting in an increase in revenue of $6.2 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 2015 increased 2.4% compared to 2014 , resulting in an increase in revenue of $1.6 million also related to our ability to attract and provide care for patients with increased acuity levels. Same-store Managed Care rate per patient day for 2015 also experienced favorable results compared to 2014 resulting in a $0.4 million increase in revenue as we continue to see growth in this portion of our patient population.

Our total average daily census increased by approximately 9.0% for the full portfolio compared to 2014 on a consolidated basis, but was primarily attributable to the aforementioned acquisition activity. On a same-store basis, our Medicare and Medicaid average daily census for 2015 decreased compared to 2014 , resulting in decreases in revenue of $1.4 million and $0.2 million , respectively. Offsetting these decreases, Managed Care census increased at our same-store nursing centers resulting in a revenue increase of $2.3 million compared to 2014 .

In addition to the revenue changes driven by rate and census, the same-store group experienced additional revenue variances from ancillary services and participation in an inter-governmental transfer (IGT) program. Ancillary services at same-store centers

increased $1.9 million in 2015 as compared to 2014 , while revenue related to the IGT program in Indiana resulted in $1.1 million in additional revenue in 2015 .

Operating Expense

Operating expense increased to $311.0 million in 2015 from $275.6 million in 2014 , driven primarily by the $9.3 million in operating costs at the nursing centers added in 2015 , and $18.5 million incremental increase from the centers acquired in 2014 due to a full year of operations. Operating expense increased to 80.2% of revenue in 2015 , compared to 80.1% of revenue in 2014 .



	Year Ended December 31,
	2015		2014		Change
Same-store operating expenses	$	262,378	$	254,769	$	7,609
2014 acquisition operating expenses	39,342		20,836		18,506
2015 acquisition operating expenses	9,315		—		9,315
Total revenue	$	311,035	$	275,605	35,430

The largest component of operating expenses is wages, which increased to $180.8 million in 2015 from $160.4 million in 2014 , an increase of $20.4 million , or 12.7% . On a same-store basis, wages increased by $5.6 million to $154.1 million in 2015 from $148.5 million in 2014 , which is a direct result from our increase in same-store revenues during 2015 .

Other factors driving the increase in operating expenses at the same-store nursing centers include bad debt and Medicare crossover claims expense. The expense increased approximately $1.8 million in 2015 compared to 2014 driven significantly by the growth in Medicare and Medicaid patients undergoing the initial qualification process. Provider taxes increased $0.5 million in 2015 compared to 2014 primarily driven by rate increases in Tennessee.

Lease Expense

Lease expense increased to $28.7 million in 2015 from $26.2 million in 2014 , an increase of $2.5 million , or 9.7% . The increase in lease expense was primarily driven by $2.3 million in combined lease expense for the newly leased nursing centers acquired in 2014 as a result of a full year of operations. The remaining increase was the result of regular rent adjustments at existing facilities.

Professional Liability

Professional liability expense was $8.1 million in 2015 compared to $7.2 million in 2014 , an increase of $0.9 million . As centers have been acquired in 2014 and 2015 , 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 55 professional liability lawsuits as of December 31, 2015 , compared to 51 as of December 31, 2014 . Our cash expenditures for professional liability costs of continuing operations were $3.3 million and $4.8 million for 2015 and 2014 , 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 $24.8 million in 2015 compared to $22.1 million in 2014 , an increase of $2.7 million . The overall increase in general and administrative expenses were attributable to a $1.2 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. Stock-based incentive expenses experienced a corresponding increase of $0.6 million. As previously noted, the Company began participating in an inter-governmental transfer program in Indiana during 2015. Certain costs associated with our participation in this program are recorded within general and administrative expense and resulted in $0.3 million of additional costs during 2015.

Depreciation and Amortization

Depreciation and amortization expense was approximately $7.5 million in 2015 and $7.1 million in 2014 . The increase in 2015 is primarily due to $0.3 million of depreciation associated with the Glasgow facility purchased in February 2015.

Interest Expense, Net

Interest expense has increased to $4.1 million in 2015 compared to $3.7 million in 2014 , an increase of $0.4 million . The increase was primarily attributable to higher debt balances in 2015 on the Revolver as a result of on-going change in ownership processes for newly acquired nursing centers, as well as interest on the debt associated with the two buildings purchased in 2015 .

Income from Continuing Operations before Income Taxes; Income from Continuing Operations per Common Share

As a result of the above, continuing operations reported income before taxes of $3.7 million in 2015 , as compared to $2.3 million in 2014 . The provision for income taxes was $0.9 million in 2015 , an effective rate of 25.0% and $0.9 million in 2014 , an effective rate of 37.1% . The basic and diluted income per common share from continuing operations were $0.45 and $0.44 in 2015 , respectively, compared to a basic and diluted income per common share from continuing operations of $0.21 and $0.20 in 2014 , respectively.

Year Ended December 31, 2014 Compared With Year Ended December 31, 2013

Patient Revenues

Patient revenues were $344.2 million in 2014 and $260.2 million in 2013, an increase of $84.0 million or 32.3%. This increase is primarily attributable to the acquisition of new operations during the period. The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):



	Year Ended December 31,
	2014		2013		Change
Same-store revenue	$	244,063	$	232,069	$	11,994
2013 acquisition revenue	74,033		28,152		45,881
2014 acquisition revenue	26,096		—		26,096
Total revenue	$	344,192	$	260,221	83,971

The overall increase in revenue of $84.0 million is primarily attributable to revenue contributions from acquisition activity in 2014 of $26.1 million, as well as an incremental increase in revenues from 2013 acquisitions of $45.9 million as a result of having a full year in operation during 2014. The balance of the increase in revenues year-over-year is attributable to increases in same-store revenue of $12.0 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,
	2014			2013
Skilled nursing occupancy	77.5		%	75.5		%
As a percent of total census:
Medicare census	12.7		%	11.5		%
Managed Care census	3.6		%	3.0		%
As a percent of total revenues:
Medicaid revenues	48.4		%	52.8		%
Medicare revenues	29.6		%	27.5		%
Managed Care revenues	6.7		%	6.0		%
Average rate per day:
Medicare	$	444.63		$	432.06
Medicaid	$	160.43		$	157.07
Managed Care	$	383.44		$	379.11

The average Medicaid rate per patient day for same-store nursing centers in 2014 increased 1.7% compared to 2013, resulting in an increase in revenue of $2.2 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 2014

increased 2.3% compared to 2013, resulting in an increase in revenue of $1.4 million also related to our ability to attract and provide care for patients with increased acuity levels. Same-store Managed Care rate per patient day for 2014 also experienced favorable results compared to 2013 resulting in a $0.4 million increase in revenue.

Our total average daily census increased by approximately 23.4% compared to 2013 on a consolidated basis, but was primarily attributable to the aforementioned acquisition activity. On a same-store basis, our Medicare, Medicaid, and Managed Care average daily census for 2014 increased compared to 2013, resulting in an increases in revenue of $3.6 million, $0.8 million, and $2.1 million, respectively.

Operating Expense

Operating expense increased to $275.6 million in 2014 from $213.1 million in 2013, driven primarily by the $20.8 million in operating costs at the nursing centers added in 2014, and a $37.1 million incremental increase from the centers acquired in 2013 due to a full year of operation. Operating expense decreased to 80.1% of revenue in 2014, compared to 81.9% of revenue in 2013.



	Year Ended December 31,
	2014		2013		Change
Same-store operating expenses	$	193,316	$	188,697	$	4,619
2013 acquisition operating expenses	61,453		24,367		37,086
2014 acquisition operating expenses	20,836		—		20,836
Total revenue	$	275,605	$	213,064	62,541

The largest component of operating expenses is wages, which increased to $160.4 million in 2014 from $126.2 million in 2013, an increase of $34.2 million, or 27.1%. We continued to see improvements in our labor costs as a percentage of revenues as this decreased to 46.6% in 2014, an improvement from 48.5% in 2013. On a same-store basis, wages remained relatively flat increasing by $0.7 million to $112.8 million in 2014 from $112.1 million in 2013, reflecting general wage increases.

Other factors driving the increase in operating expenses at the same-store nursing centers include bad debt expense and increases in provider taxes. Bad debt expense increased approximately $1.6 million in 2014 compared to 2013 driven significantly by the growth in Medicaid patients undergoing the initial qualification process. Provider taxes increased $0.6 million in 2014 compared to 2013 primarily driven by rate increases in Tennessee and Kentucky.

Lease Expense

Lease expense increased to $26.2 million in 2014 from $20.4 million in 2013. The increase in lease expense was primarily driven by $2.7 million in combined lease expense for the newly leased nursing centers acquired in 2014. We also incurred an incremental increase in lease expense of $3.3 million over the prior year associated leases for nursing centers for which we assumed leases in 2013. The remaining increase was the result of regular rent adjustments at existing facilities.

Professional Liability

Professional liability expense was $7.2 million in 2014 compared to $5.7 million in 2013, an increase of $1.5 million. As centers have been acquired in 2013 and 2014, 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 51 professional liability lawsuits as of December 31, 2014, compared to 54 as of December 31, 2013. Our cash expenditures for professional liability costs of continuing operations were $4.8 million and $4.5 million for 2014 and 2013, 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 $22.1 million in 2014 compared to $20.9 million in 2013, an increase of $1.2 million. The overall increase in general and administrative expenses were attributable to a a $0.7 million increase in bonus and stock-based incentive expenses, and a $0.6 million increase in expense related to the expansion of the Ohio and Kansas regions.

Depreciation and Amortization

Depreciation and amortization expense was approximately $7.1 million in 2014 and $6.4 million in 2013. The increase in 2014 is primarily due to an incremental increase of $0.3 million in depreciation and amortization expenses related to the Kansas facilities acquired in 2013. The incremental increase is the result of four additional months of expense in 2014.

Restructuring

We incurred certain charges in connection with the termination of our existing lease for 11 Arkansas nursing centers, including one-time separation costs of $0.3 million in 2013. These expenses were classified as restructuring expenses on the consolidated statement of operations. As these expenses related to the transaction which occurred in 2013, the $1.4 million in restructuring expense represents a decrease from the same period in 2013.

Interest Expense, Net

Interest expense has increased to $3.7 million in 2014 compared to $3.0 million in 2013, an increase of $0.7 million. The increase was primarily attributable to higher debt balances in 2014 on the Revolver as a result of on-going change in ownership processes for newly acquired nursing centers.

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 $2.3 million in 2014, as compared to a loss before taxes of $11.2 million in 2013. The provision for income taxes was $(0.9) million in 2014, an effective rate of 37.1% and a benefit of $4.2 million in 2013, an effective rate of 37.5%. The basic and diluted income per common share from continuing operations were $0.21 and $0.20 in 2014, respectively, compared to a basic and diluted loss per common share from continuing operations of $1.26 in 2013.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity is the net cash flow provided by the operating activities of our facilities. We believe that these internally generated cash flows will be adequate 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, dividends, 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 $10.3 million and $6.0 million in 2015 and 2014 , respectively, compared to net cash used in operating activities of continuing operations of $6.3 million in 2013 . One primary driver of the increase in cash provided by operating activities from continuing operations is the overall increase in income produced from operating activities during the year which increased $ 1.3 million . Operating activities of discontinued operations used cash of $7.0 million and $3.0 million in 2015 and 2014 , respectively, as compared to cash provided $5.1 million in 2013 .

Our cash expenditures related to professional liability claims of continuing operations were $3.3 million , $4.8 million and $4.5 million for 2015 , 2014 and 2013 , respectively. We also continue to experience cash expenditures related to professional liability claims of discontinued operations, primarily associated with the disposition of Arkansas and West Virginia. Our cash expenditures related to professional liability claims of discontinued operations were $8.2 million , $5.5 million , and $4.2 million for 2015 , 2014 and 2013 , respectively. The Company will continue to defend, and make cash payments related to, professional liability claims asserted against discontinued operations. 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 used cash of $13.1 million in 2015 , as compared to cash provided of $11.6 million in 2014 , and $23.4 million cash used in 2013 . The cash used in 2015 is primarily attributable to the $7 million and 3.9 million of assets purchased in the Glasgow and Fulton transactions, respectively. The cash provided in 2014 was the result of the sale of Rose Terrace and disposition of West Virginia operations which provided $16.5 million, and was offset by cash used of $5.5 million for the purchase of property and equipment. The cash used in 2013 was the result of $14.7 million in cash used to purchase the five Kansas nursing facilities in May 2013. We have used between $4.6 million and $5.4 million for capital expenditures of

continuing operations in each of the three calendar years ended December 31, 2015 , with certain years experiencing higher expenditures as a result of renovation projects at our facilities.

Financing activities of continuing operations provided cash of $10.6 million in 2015 , used cash of $8.5 million in 2014 , and provided cash of $20.9 million in 2013 . Financing activities in 2015 reflect the proceeds received from refinancing our credit facility resulting in proceeds of $27.9 million , offset by the repayment of the existing mortgage loan and other debt payments during the year of $15.3 million . Cash used in 2014 primarily resulted from the $4.9 million in the redemption of preferred stock. Financing activities reflect $1.3 million in common stock and preferred stock dividends in 2015 , $1.5 million in 2014 , and $1.3 million in 2013 .

Dividends

On February 26, 2016 , the Board of Directors declared a quarterly dividend on common shares of $0.055 per share. While the Board of Directors intends to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, the Company’s financial condition, funds from operations, the level of its capital expenditures and its future business prospects and opportunities. The Company is restricted by its debt agreements in its ability to pay dividends.

Redeemable Preferred Stock

Effective August 14, 2014, the Company redeemed all of its outstanding shares of Series C Preferred Stock (“Preferred Stock”) from the holder, Omega. The redemption was affected as a result of Omega’s exercise of its pre-existing option to require the Company to redeem the Preferred Stock as provided in the Company’s Certificate of Designation. Following the redemption, the Company no longer has any Series C Preferred Stock outstanding.

Professional Liability

As of December 31, 2015 , we have recorded total liabilities for reported professional liability claims and estimates for incurred, but unreported claims of $21.6 million . Our calculation of this estimated liability is based on an assumption that the Company will not incur a severely adverse judgment 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, 2015 , we had $60.9 million of outstanding long-term debt and capital lease obligations. The $60.9 million total includes $0.6 million in capital lease obligations. The balance of the long-term debt is comprised of $42.4 million owed on our collateralized mortgage debt, $12.9 million currently outstanding on the revolving credit facility, and $5.0 million on the Glasgow term loan.

We have agreements with a syndicate of banks for a mortgage loan and our revolving credit facility. Under the terms of the agreements, the syndicate of banks provided mortgage debt (“Mortgage Loan”) with an original balance of $45.0 million with a five year maturity through March 2016 and a $27.5 million revolving credit facility (“Revolver”) through March 2016. The Mortgage Loan has a term of five years with principal and interest payable monthly based on a 25 year amortization. Interest is based on LIBOR plus 4.5% , but a portion is fixed at 6.87% based on the interest rate swap described below. The Mortgage Loan is secured by 13 owned nursing centers, related equipment and a lien on the accounts receivable of these facilities. The Mortgage Loan and the Revolver are cross-collateralized.

The Revolver is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding on the Revolver based on borrowing base restrictions. As of December 31, 2015 , we had $12.9 million outstanding on the Revolver. Annual fees for letters of credit issued on the Revolver are 3.0% of the amount outstanding. We have a letter of credit of $4.6

million to serve as a security deposit for our Omega lease. We also have a $1.0 million letter of credit outstanding related to the Company's wholly-owned captive insurance entity. Finally, we have nine other letters of credit, totaling $2.6 million , to serve as security deposits at certain facilities. Considering the balance of eligible accounts receivable at December 31, 2015 , the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $27.5 million , the balance available for borrowing on the Revolver was $4.5 million as of December 31, 2015 . 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 90 days. Our Revolver has an interest rate of LIBOR plus 4.5% .

Our lending agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. We are in compliance with all such covenants at December 31, 2015 .

Our calculated compliance with financial covenants is presented below:



	Requirement	Level at December 31, 2015
Minimum fixed charge coverage ratio	1.00:1.00	1.06:1.00
Minimum adjusted EBITDA	$10,000,000	$10,733,000
EBITDAR (mortgaged facilities)	$6,150,000	$10,400,000

As part of the debt agreements entered into in March 2011 and amended May 2013, we entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. As part of the refinancing of the Mortgage Loan in 2013, we amended the existing swap agreement in order to ensure the terms of the swap agreement remained consistent with the underlying Mortgage Loan. The amended interest rate swap agreement has the same effective date and maturity date as the Mortgage Loan, and includes a notional amount of 50% of the outstanding balance on the Mortgage Loan. The interest rate swap agreement requires us to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 6.87% 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.

On February 1, 2015, in conjunction with the acquisition of Diversicare of Glasgow, a 94-bed skilled nursing facility in Glasgow, Kentucky, the Company entered into the $5.0 million Glasgow term loan with The PrivateBank in order to finance the purchase of the assets. The Glasgow term loan is an interest-only loan and has an 18-month maturity dated August 1, 2016, and a variable interest rate based on LIBOR, with a minimum base rate of 4.75%.

Capitalized Lease Obligations

Upon acquisition of certain facilities, 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 $0.6 million , $0.3 million , and $0.7 million as of December 31, 2015 , 2014 , and 2013 , 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.

Accounts receivable attributable to patient services of continuing operations totaled $52.0 million at December 31, 2015 compared to $47.3 million at December 31, 2014 , representing approximately 45 days and 43 days revenue in accounts receivable, respectively. The increase in accounts receivable is due primarily to accounts associated with facilities still in the change in ownership process, which is addressed below. We have adjusted the days of revenue in the accounts receivable calculation to remove the impact of the receivables related to these change in ownerships.

Our accounts receivable at December 31, 2015 included approximately $4.3 million of accounts for newly leased facilities including: the two centers acquired in Kentucky and one in Kansas, for which we assumed operations in during 2015. During the change of ownership process, we are required to hold these accounts while waiting for final Medicare and Medicaid approvals. We expect these accounts to be collectible as soon as we are able to submit them for payment.

The allowance for bad debt was $8.2 million and $6.0 million at December 31, 2015 and 2014 , respectively, which is commensurate with our overall revenue and receivables growth. We continually evaluate the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. 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 2016 to be relatively the same or slightly lower than the increases in 2015 . 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 eleven letters of credit outstanding totaling approximately $8.1 million as of December 31, 2015 . Ten of these letters of credit serve as a security deposits for certain facility leases, while one was issued in conjunction with the initial funding of our wholly-owned captive insurance company. 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 operate the new nursing centers in Alabama, Kansas, Kentucky, Missouri, Ohio, and Indiana, our ability to increase census at our renovated centers, changes in governmental reimbursement, including the impact of the CMS final rule that has resulted in a reduction in Medicare reimbursement as of October 2012 and our ability to mitigate the impact of the revenue reduction, government regulation, the impact of the recently adopted federal health care reform or any future health care reform, any increases in the cost of borrowing under our credit agreements, our ability to extend or replace our current credit facility, our ability to comply with covenants contained in those credit agreements, 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 HIPPA and laws governing reimbursement from government payors, impacts associated with the implementation of our electronic medical records plan, the costs of investing in our business initiatives and development, our ability to control costs, changes to our valuation of deferred tax assets, changes in occupancy rates in our centers, changing economic and competitive conditions, changes in anticipated revenue and cost growth, 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, 2015 , we had outstanding borrowings of approximately $60.3 million , $39.1 million of which were subject to variable interest rates. In connection with our May 2013 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 $212,000 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

None.

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, 2015 . 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, 2015 . 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, 2015 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 2016 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 2016 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 2016 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 2016 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 2016 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, 2015 and 2014	F-2
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013	F-3
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 2013	F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2015, 2014 and 2013	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013	F-6
Notes to Consolidated Financial Statements as of December 31, 2015, 2014 and 2013	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.

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

March 3, 2016

/s/ Kelly J. Gill

Kelly J. Gill

President and Chief Executive Officer

(Principal Executive Officer)

March 3, 2016

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

March 3, 2016

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
March 3, 2016	March 3, 2016

/s/ Wallace E. Olson	/s/ William C. O'Neil, Jr.
Wallace E. Olson	William C. O'Neil, Jr.
Director	Director
March 3, 2016	March 3, 2016

/s/ Kelly J. Gill	/s/ Richard M. Brame
Kelly J. Gill	Richard M. Brame
President and Chief Executive Officer	Director
Director	March 3, 2016
March 3, 2016

/s/ Robert A. McCabe, Jr.
Robert A. McCabe, Jr.
Director
March 3, 2016

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

Consolidated Financial Statements

For the Years Ended December 31, 2015 , 2014 and 2013

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 Income (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-34

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Diversicare Healthcare Services, Inc.

Brentwood, Tennessee

We have audited the accompanying consolidated balance sheets of Diversicare Healthcare Services, Inc. and subsidiaries as of December 31, 2015 and 2014 and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2015 . In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diversicare Healthcare Services, Inc. and subsidiaries at December 31, 2015 and 2014 , and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2015 , in conformity with accounting principles generally accepted in the United States of America.

Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ BDO USA, LLP

Nashville, Tennessee

March 3, 2016

F-1

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2015 AND 2014



ASSETS	2015			2014			LIABILITIES AND SHAREHOLDERS' EQUITY	2015			2014

CURRENT ASSETS:							CURRENT LIABILITIES:
Cash and cash equivalents	$	4,585,000		$	3,818,000		Current portion of long-term debt and capitalized lease obligations	$	6,603,000		$	5,705,000
Receivables, less allowance for doubtful accounts of $8,180,000 and $6,044,000, respectively	43,819,000			41,272,000			Trade accounts payable	10,136,000			8,121,000
Other receivables	1,407,000			862,000			Current liabilities of discontinued operations	345,000			482,000
Prepaid expenses and other current assets	2,223,000			2,339,000			Accrued expenses:
Income tax refundable	347,000			559,000			Payroll and employee benefits	14,404,000			14,642,000
Current assets of discontinued operations	36,000			73,000			Self-insurance reserves, current portion	10,224,000			11,833,000
Deferred income taxes	7,999,000			7,016,000			Other current liabilities	5,652,000			6,359,000
Total current assets	60,416,000			55,939,000			Total current liabilities	47,364,000			47,142,000
							NONCURRENT LIABILITIES:
PROPERTY AND EQUIPMENT, at cost	114,383,000			98,869,000			Long-term debt and capitalized lease obligations, less current portion	54,264,000			42,559,000
Less accumulated depreciation and amortization	(62,110,000		)	(55,014,000		)	Self-insurance reserves, noncurrent portion	12,344,000			14,268,000
	52,273,000			43,855,000			Other noncurrent liabilities	10,812,000			13,366,000
							Total noncurrent liabilities	77,420,000			70,193,000
							COMMITMENTS AND CONTINGENCIES
OTHER ASSETS:							SHAREHOLDERS’ EQUITY:
Deferred income taxes	11,762,000			12,885,000			Common stock, authorized 20,000,000 shares, $.01 par value, 6,513,000 and 6,388,000 shares issued, and 6,281,000 and 6,156,000 shares outstanding, respectively	65,000			64,000
Deferred financing and other costs, net	1,349,000			1,692,000			Treasury stock at cost, 232,000 shares of common stock	(2,500,000		)	(2,500,000		)
Investment in unconsolidated affiliate	798,000			463,000			Paid-in capital	21,142,000			19,970,000
Other noncurrent assets	3,994,000			6,411,000			Retained earnings (accumulated deficit)	(5,053,000		)	(5,285,000		)
Acquired leasehold interest, net	7,459,000			7,844,000			Accumulated other comprehensive loss	(387,000		)	(495,000		)
Total other assets	25,362,000			29,295,000			Total shareholders’ equity	13,267,000			11,754,000
	$	138,051,000		$	129,089,000			$	138,051,000		$	129,089,000

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

F-2

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



	Years Ended December 31,
	2015			2014			2013
PATIENT REVENUES, net	$	387,595,000		$	344,192,000		$	260,221,000
EXPENSES:
Operating	311,035,000			275,605,000			213,064,000
Lease and rent expense	28,690,000			26,151,000			20,396,000
Professional liability	8,122,000			7,216,000			5,666,000
General and administrative	24,793,000			22,133,000			20,940,000
Depreciation and amortization	7,524,000			7,078,000			6,363,000
Restructuring	—			—			1,446,000
Total expenses	380,164,000			338,183,000			267,875,000
OPERATING INCOME (LOSS)	7,431,000			6,009,000			(7,654,000		)
OTHER INCOME (EXPENSE):
Equity in net income (losses) of unconsolidated affiliate	339,000			(5,000		)	(183,000		)
Interest expense, net	(4,102,000		)	(3,697,000		)	(3,032,000		)
Debt retirement costs	—			—			(320,000		)
	(3,763,000		)	(3,702,000		)	(3,535,000		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	3,668,000			2,307,000			(11,189,000		)
BENEFIT (PROVISION) FOR INCOME TAXES	(916,000		)	(857,000		)	4,196,000
INCOME (LOSS) FROM CONTINUING OPERATIONS	2,752,000			1,450,000			(6,993,000		)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operating loss, net of income tax provision (benefit) of $375,000, $(878,000) and $(863,000), respectively	(1,128,000		)	(1,486,000		)	(1,469,000		)
Gain on disposal, net of income tax provision of $0, $2,802,000 and $0, respectively	—			4,744,000			—
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	(1,128,000		)	3,258,000			(1,469,000		)
NET INCOME (LOSS)	1,624,000			4,708,000			(8,462,000		)
Less: net (income) loss attributable to noncontrolling interests	—			25,000			(72,000		)
NET INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	1,624,000			4,733,000			(8,534,000		)
PREFERRED STOCK DIVIDENDS	—			(220,000		)	(344,000		)
NET INCOME (LOSS) FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS	$	1,624,000		$	4,513,000		$	(8,878,000	)
NET INCOME (LOSS) PER COMMON SHARE FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS:
Per common share – basic
Continuing operations	$	0.45		$	0.21		$	(1.26	)
Discontinued operations	(0.18		)	0.54			(0.25		)
	$	0.27		$	0.75		$	(1.51	)
Per common share – diluted
Continuing operations	$	0.44		$	0.20		$	(1.26	)
Discontinued operations	(0.18		)	0.52			(0.25		)
	$	0.26		$	0.72		$	(1.51	)
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.22		$	0.22		$	0.22
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,100,000			6,011,000			5,899,000
Diluted	6,315,000			6,197,000			5,899,000

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

F-3

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



	Years Ended December 31,
	2015			2014			2013
NET INCOME (LOSS)	$	1,624,000		$	4,708,000		$	(8,462,000	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax	556,000			368,000			666,000
Less: reclassification adjustment for amounts recognized in net income	(448,000		)	(294,000		)	(315,000		)
Total other comprehensive income	108,000			74,000			351,000
COMPREHENSIVE INCOME (LOSS)	1,732,000			4,782,000			(8,111,000		)
Less: comprehensive (income) loss attributable to noncontrolling interest	—			25,000			(72,000		)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	$	1,732,000		$	4,807,000		$	(8,183,000	)

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



	Common Stock			Treasury Stock				Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Shareholders' Equity of Diversicare Healthcare Services, Inc.			Non- Controlling Interests			Total Shareholders' Equity
	Shares Issued	Amount		Shares	Amount			Paid-in Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss						Non- Controlling Interests			Total Shareholders' Equity

BALANCE, DECEMBER 31, 2012	6,161,000	$	62,000	232,000	$	(2,500,000	)	$	18,757,000		$	1,779,000		$	(920,000	)	$	17,178,000		$	1,573,000		$	18,751,000
Net income (loss)	—	—		—	—			—			(8,534,000		)	—			(8,534,000		)	72,000			(8,462,000		)
Preferred stock dividends	—	—		—	—			—			(344,000		)	—			(344,000		)	—			(344,000		)
Common stock dividends declared	—	—		—	—			35,000			(1,336,000		)	—			(1,301,000		)	—			(1,301,000		)
Issuance/redemption of equity grants, net	146,000	1,000		—	—			21,000			—			—			22,000			—			22,000
Interest rate cash flow hedge	—	—		—	—			—			—			351,000			351,000			—			351,000
Tax impact of equity grant exercises	—	—		—	—			(20,000		)	—			—			(20,000		)	—			(20,000		)
Consolidation of non-controlling interests of variable interest entity	—	—		—	—			—			—			—			—			(208,000		)	(208,000		)
Stock based compensation	—	—		—	—			777,000			—			—			777,000			—			777,000

BALANCE, DECEMBER 31, 2013	6,307,000	63,000		232,000	(2,500,000		)	19,570,000			(8,435,000		)	(569,000		)	8,129,000			1,437,000			9,566,000
Net income (loss)	—	—		—	—			—			4,733,000			—			4,733,000			(25,000		)	4,708,000
Preferred stock dividends	—	—		—	—			—			(220,000		)	—			(220,000		)	—			(220,000		)
Common stock dividends declared	—	—		—	—			41,000			(1,363,000		)	—			(1,322,000		)	—			(1,322,000		)
Issuance/redemption of equity grants, net	81,000	1,000		—	—			(49,000		)	—			—			(48,000		)	—			(48,000		)
Interest rate cash flow hedge	—	—		—	—			—			—			74,000			74,000			—			74,000
Tax impact of equity grant exercises	—	—		—	—			(10,000		)	—			—			(10,000		)	—			(10,000		)
Deconsolidation of noncontrolling interest	—	—		—	—			—			—			—			—			(1,412,000		)	(1,412,000		)
Stock based compensation	—	—		—	—			418,000			—			—			418,000			—			418,000

BALANCE, DECEMBER 31, 2014	6,388,000	64,000		232,000	(2,500,000		)	19,970,000			(5,285,000		)	(495,000		)	11,754,000			—			11,754,000
Net income (loss)	—	—		—	—			—			1,624,000			—			1,624,000			—			1,624,000
Common stock dividends declared	—	—		—	—			45,000			(1,392,000		)	—			(1,347,000		)	—			(1,347,000		)
Issuance/redemption of equity grants, net	125,000	1,000		—	—			78,000			—			—			79,000			—			79,000
Interest rate cash flow hedge	—	—		—	—			—			—			108,000			108,000			—			108,000
Tax impact of equity grant exercises	—	—		—	—			62,000			—			—			62,000			—			62,000
Stock based compensation	—	—		—	—			987,000			—			—			987,000			—			987,000

BALANCE, DECEMBER 31, 2015	6,513,000	$	65,000	232,000	$	(2,500,000	)	$	21,142,000		$	(5,053,000	)	$	(387,000	)	$	13,267,000		$	—		$	13,267,000

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



	Years Ended December 31,
	2015			2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	1,624,000		$	4,708,000		$	(8,462,000	)
Discontinued operations	(1,128,000		)	3,258,000			(1,469,000		)
Income (loss) from continuing operations	2,752,000			1,450,000			(6,993,000		)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization	7,524,000			7,078,000			6,363,000
Provision for doubtful accounts	7,507,000			5,710,000			4,068,000
Deferred income tax provision (benefit)	(1,222,000		)	837,000			(4,148,000		)
Provision for self-insured professional liability, net of cash payments	3,200,000			1,173,000			384,000
Stock based compensation	1,152,000			580,000			950,000
Debt retirement costs	—			—			320,000
Provision for leases net of cash payments	(1,749,000		)	(1,180,000		)	(631,000		)
Equity in net income of unconsolidated affiliate	(335,000		)	—			(67,000		)
Other	396,000			316,000			224,000
Changes in other assets and liabilities affecting operating activities:
Receivables, net	(9,883,000		)	(14,592,000		)	(13,873,000		)
Prepaid expenses and other assets	(60,000		)	(184,000		)	837,000
Trade accounts payable and accrued expenses	1,009,000			4,771,000			6,231,000
Net cash provided by (used in) continuing operations	10,291,000			5,959,000			(6,335,000		)
Net cash provided by (used in) discontinued operations	(7,014,000		)	(2,978,000		)	5,108,000
Net cash provided by (used in) operating activities	3,277,000			2,981,000			(1,227,000		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(4,646,000		)	(5,494,000		)	(5,351,000		)
Acquisition of property and equipment through business combination	(10,900,000		)	—			(14,742,000		)
Proceeds from sale of discontinued operations	—			17,124,000			—
Change in restricted cash	2,489,000			31,000			(3,303,000		)
Deposits and other deferred balances	(9,000		)	(64,000		)	—
Net cash provided by (used in) continuing operations	(13,066,000		)	11,597,000			(23,396,000		)
Net cash provided by (used in) discontinued operations	—			(61,000		)	1,785,000
Net cash provided by (used in) investing activities	(13,066,000		)	11,536,000			(21,611,000		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(15,342,000		)	(21,645,000		)	(30,183,000		)
Proceeds from issuance of debt and sale leaseback transaction	27,945,000			21,808,000			54,500,000
Financing costs	(160,000		)	(195,000		)	(1,341,000		)
Issuance and redemption of employee equity awards	79,000			(47,000		)	22,000
Redemption of preferred stock	—			(4,918,000		)	—
Payment of common stock dividends	(1,347,000		)	(1,322,000		)	(972,000		)
Payment of preferred stock dividends	—			(220,000		)	(344,000		)
Deconsolidation of noncontrolling interests, net of income taxes	—			(1,385,000		)	(208,000		)
Payment for preferred stock restructuring	(619,000		)	(600,000		)	(581,000		)
Net cash provided by (used in) continuing operations	10,556,000			(8,524,000		)	20,893,000
Net cash provided by (used in) discontinued operations	—			(5,956,000		)	(202,000		)
Net cash provided by (used in) financing activities	10,556,000			(14,480,000		)	20,691,000

(Continued)

F-6

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(continued)



	Years Ended December 31,
	2015		2014		2013
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	767,000	$	37,000	$	(2,147,000	)
CASH AND CASH EQUIVALENTS, beginning of period	3,818,000		3,781,000		5,928,000
CASH AND CASH EQUIVALENTS, end of period	$	4,585,000	$	3,818,000	$	3,781,000
SUPPLEMENTAL INFORMATION:
Cash payments of interest, net of amounts capitalized	$	3,629,000	$	3,324,000	$	2,637,000
Cash payments of income taxes	$	205,000	$	84,000	$	88,000

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, 2015 , 2014 , and 2013

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, 2015 , our continuing operations consist of 55 nursing centers with 6,060 licensed nursing beds. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 496 licensed assisted living beds. Our continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Missouri, Ohio, Tennessee, and Texas.

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 variable interest entities (“VIEs”) in which the Company has an interest are consolidated when the Company identifies that it is the primary beneficiary. The Company had one variable interest entity through 2014 and it related to a nursing center in West Virginia described in Note 7, "Variable Interest Entity".

The investment in unconsolidated affiliate reflected on the consolidated balance sheet relates to a pharmacy joint venture partnership in which the Company owns a 50% interest. The joint venture partnership is accounted for using the equity method. An equity method investment is the Company’s investment in an entity over which the Company lacks control, but otherwise has the ability to exercise significant influence over operating and financial policies. The Company’s share of the profits and losses from this investment are reported in equity in earnings of unconsolidated affiliate in the accompanying consolidated statement of operations. The Company monitors this investment for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the joint venture and will record reductions in carrying value when or if necessary. Under the equity method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of the net earnings or losses of the affiliate as they occur. The investment in unconsolidated affiliate balance relates to this partnership and was $798,000 at December 31, 2015 and $463,000 at December 31, 2014 .

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 facility and may be based on the acuity of the care and services provided. These rates may be based on facility'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. During the years ended December 31, 2015 , 2014 and 2013 , the Company recorded $(141,000) , $(298,000) and $(141,000) of net favorable (unfavorable) estimated settlements from federal and state programs for periods prior to the beginning of fiscal 2015 , 2014 and 2013 , respectively.

F-8

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.

The Company includes the provision for doubtful accounts in operating expenses in its Consolidated Statements of Operations. The provisions for doubtful accounts of continuing operations were $7,507,000 , $5,710,000 , and $4,068,000 for 2015 , 2014 and 2013 , respectively. The provision for doubtful accounts of continuing operations was 1.9% , 1.7% , and 1.6% of net revenue during 2015 , 2014 , and 2013 , respectively.

Lease Expense

As of December 31, 2015 , the Company operates 40 nursing centers under operating leases, including 36 owned by Omega and four 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 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", Note 3, "Discontinued Operations", and Note 11, "Commitments and Contingencies" for a discussion regarding the Company's Master Lease with Omega, the termination of leases for certain facilities, and the addition of certain leased facilities.

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 facility level are classified as operating expenses.

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.

In accordance with the Financial Accounting Standards Board ("FASB") guidance on “Property, Plant and Equipment,” specifically the discussion around the accounting for the impairment or disposal of long-lived assets, 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. The need to recognize impairment is based on estimated undiscounted future cash flows from a property compared to the carrying value of that property.

Cash and Cash Equivalents

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.

F-9

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 6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations" for further discussion.

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 FASB's guidance on goodwill and other intangible assets, and is amortized on a straight-line basis over the remaining life of the acquired lease, including renewal periods, the original period of which is approximately 28 years from the date of acquisition. The lease terms for the seven centers this intangible relates to provide for an initial term and renewal periods at the Company's option through May 31, 2035. As the renewal periods of the acquired leased facilities are solely based on the Company's option, it is expected that costs (if any) to renew the lease through its current amortization period would be nominal and the decision to continue to lease the acquired facilities lies solely within the Company's intent to continue to operate the seven facilities. Any renewal costs would be included in deferred lease costs and amortized over the renewal period. Amortization expense of approximately $384,000 related to this intangible asset was recorded during each of the years ended December 31, 2015 , 2014 and 2013 , respectively.

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



	December 31,
	2015			2014
Intangible assets	$	10,652,000		$	10,652,000
Accumulated amortization	(3,193,000		)	(2,808,000		)
Net intangible assets	$	7,459,000		$	7,844,000

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:



2016	$	384,000
2017	384,000
2018	384,000
2019	384,000
2020	384,000
Thereafter	5,539,000
	$	7,459,000

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 prior to May 1997 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

F-10

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 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

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 10, "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 and cash equivalents, 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.

F-11

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 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.

The Company has not elected to expand the use of fair value measurements for assets and liabilities. It is noted that the assessment of carrying value compared to fair value for impairment analysis follow these fair value principles and hierarchy.

As further discussed in Note 6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations", in conjunction with the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The 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, 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, 2015 and 2014 :



December 31, 2015	Fair Value Measurements - Assets (Liabilities)
	Total			Level 1		Level 2			Level 3
Interest rate swap	$	(625,000	)	$	—	$	(625,000	)	$	—

December 31, 2014	Fair Value Measurements - Assets (Liabilities)
	Total			Level 1		Level 2			Level 3
Interest rate swap	$	(798,000	)	$	—	$	(798,000	)	$	—

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

Net Income (Loss) per Common Share

The Company follows the FASB's guidance on Earnings Per Share for the financial reporting of net income (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 9, "Net Income (Loss) per Common Share" for additional disclosures about the Company's Net Income (Loss) per Common Share.

F-12

Stock Based Compensation

The Company follows the FASB's guidance on Stock Compensation to account for share-based payments granted to employees and recorded non-cash stock based compensation expense of $1,152,000 , $580,000 and $950,000 during the years ended December 31, 2015 , 2014 and 2013 , 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 8, "Shareholders' Equity, Stock Plans and Preferred Stock" for additional disclosures about the Company's stock based compensation plans.

Accumulated Other Comprehensive Loss

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 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 Guidance

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity changing the criteria for reporting discontinued operations. The ASU states that only those disposed components (or components held-for-sale) representing a strategic shift that have a significant effect on operations and financial results will be reported in discontinued operations. The ASU also required expanded disclosures about discontinued operations in the financial statement notes. The ASU is effective for disposals (or classifications as held-for-sale) that occur within annual periods beginning on or after December 15, 2014 and interim periods within those annual periods. Early application is permitted, but only for those disposals that have not been reported in financial statements previously issued or available for issuance. We have chosen to early adopt this ASU and have applied the new criteria in determining the accounting treatment for the nursing centers exited during 2014. The adoption of this guidance did not have a material impact on the Company's consolidated financial results.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (Topic 835), which amends and simplifies the presentation of debt issuance costs. The main provisions of the standard require that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, and amortization of the debt issuance costs must be reported as interest expense. ASU 2015-03 will be effective for the interim and annual periods beginning after December 15, 2015 with early adoption permitted. The new standard must be applied on a retroactive basis, and the Company will be required to comply with the applicable disclosures for a change in accounting principle. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” which changes how deferred taxes are classified on our balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. Upon adoption, the Company anticipates reclassifying deferred income taxes of approximately $ 7,999,000 from current to non-current assets.

In February 2016, the FASB issued ASU No. 2016-02, Leases . The new 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 new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

F-13

Reclassifications

As discussed in Note 3, "Discontinued Operations" the consolidated financial statements of the Company have been retroactively reclassified for all periods presented to reflect as discontinued operations certain divestitures and lease terminations.

2. BUSINESS DEVELOPMENT

Center Acquisitions

As a result of this business combination transaction, the Company allocated the purchase price of $7,000,000 based on the fair value of the acquired net assets. The allocation of the purchase price was determined with the assistance of HealthTrust LLC, a third-party real estate valuation firm. The allocation for the net assets acquired is as follows:



	February 1, 2015
Purchase Price	$	7,000,000

Land	672,000
Buildings	5,778,000
Furniture, Fixtures, and Equipment	550,000
	$	7,000,000

On November 1, 2015, the Company entered into an Asset Purchase Agreement with Haws Fulton Investors, LLC to acquire certain land, improvements, furniture, fixtures and equipment, personal property and intangible property, together comprising a 60 -bed skilled nursing center in Fulton, Kentucky, for an aggregate purchase price of $3,900,000 financed temporarily through a draw on the Company's revolving credit facility, in anticipation of the Company's refinancing of the Mortgage Loan in February 2016 as disclosed in Note 12, "Subsequent Event".

As a result of this business combination transaction, the Company allocated the purchase price of $3,900,000 based on the fair value of the acquired net assets. The allocation for the net assets acquired is as follows:



	November 1, 2015
Purchase Price	$	3,900,000

Land	300,000
Buildings	3,338,000
Furniture, Fixtures, and Equipment	262,000
	$	3,900,000

Lease Agreements

During the years ended December 31, 2015 and 2014 , the Company completed transactions to assume the operations of one and eight facilities, respectively, through the assumption of long-term operating leases. The transactions during these periods are as follows:


•	On February 1, 2015, the Company assumed operations of a 85 -bed skilled nursing facility in Hutchinson, Kansas. This facility has an initial lease term of 10 years, and includes an option to purchase exercisable after the first year of operations. The center was already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement.

F-14


•	On October 1, 2014, the Company assumed operations of a 62 -bed skilled nursing facility in Greenville, Kentucky. This facility has an initial lease terms of 14 years. The center was already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement for this skilled nursing center.

•

On August 1, 2014, the Company assumed operations of two centers in Ohio. The centers included in this transaction are a 142 -bed skilled nursing facility and a 42 -bed assisted living center. The lease provides for an initial lease term of 10 years. The centers were already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement for these skilled nursing centers.

•

On July 1, 2014, the Company completed a transaction to enter the state of Missouri through the assumption of operations of three facilities totaling 339 skilled nursing beds. The lease provides for an initial 15 -year lease term with a 5 -year renewal option. The centers were already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement for these skilled nursing centers.

•

On June 1, 2014, the Company assumed operations at Diversicare of Nicholasville, an existing 73 -bed facility in Nicholasville, Kentucky. The lease provides for an initial 15 -year lease term with a 5 -year renewal option. The center was already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement for this skilled nursing center.

•

On March 1, 2014, the Company assumed operations at Diversicare of Big Springs, an existing 135 -bed facility in Huntsville, Alabama. The nursing center is owned by an unrelated third-party and the lease provides for an initial 10 -year lease term with two additional 5 -year renewal options. The additional skilled nursing center increases the Company's footprint in Alabama to seven centers, and the third center in the Huntsville market. The center was already operating and treating patients on the transition date. There was no purchase price paid to enter into the lease agreement for this skilled nursing center.

3. DISCONTINUED OPERATIONS

West Virginia Disposition

Effective April 3, 2014, the Company entered into an asset purchase agreement with Rose Terrace Acq., LLC (“Purchaser”) to sell its skilled nursing facility in Culloden, West Virginia. The original asset purchase agreement was subject to a number of conditions including an amendment to the Consolidated Amended and Restated Master Lease ("Master Lease") with Omega to terminate the lease only with respect to two other skilled nursing facilities in West Virginia, state licensure and regulatory approval.

Effective July 1, 2014, the Company completed the transaction with Rose Terrace Acq., LLC to sell Rose Terrace, a 90 -bed skilled nursing facility in Culloden, West Virginia for a sales price of $16,500,000 . The Company also entered into the Fifteenth Amendment to the Master Lease with Omega to terminate the lease only with respect to two other skilled nursing facilities in West Virginia, and concurrently entered into an operations transfer agreement with American Health Care Management, LLC, an affiliate of the purchaser with respect to two other skilled nursing facilities located in Danville and Ivydale, West Virginia. The amendment effectively reduced the annual rent payments due under the Master Lease by $1,900,000 . Upon completion of the transaction, Diversicare no longer operates any skilled nursing centers in the state of West Virginia. In conjunction with the closing of the sale, the Company paid the balance of the $8,000,000 mortgage loan outstanding on the Rose Terrace facility.

The transaction resulted in a gain on the disposition of Rose Terrace which, along with the results of operations for these nursing facilities, is presented within Discontinued Operations on the Consolidated Statements of Operations. The pretax gain on the transaction was $7,522,000 . The tax expense associated with the gain was $2,793,000 for which the Company applied net operating loss carryforwards from our deferred tax assets to substantially offset and minimize the cash outlay for this transaction.

These centers contributed revenues of $0 , $10,961,000 , and $21,698,000 and net income (loss) of $(225,000) , $(26,000) , and $1,516,000 during the years ended December 31, 2015 , 2014 , and 2013 , respectively. The net income or loss for the nursing centers included in discontinued operations does not reflect any allocation of corporate general and administrative expense or any allocation of corporate interest expense. The Company considered these additional costs along with the centers' future prospects based upon operating history when determining the contribution of the skilled nursing centers to its operations.

Arkansas Lease Termination

F-15

As a result of this transaction, the Company has reclassified the operations of these centers as discontinued operations for all periods presented in the accompanying consolidated financial statements. These centers contributed revenues of $0 , $0 , and $40,151,000 during the years ended December 31, 2015 , 2014 , and 2013 , respectively. Further, these centers contributed net losses of $838,000 , $1,111,000 and $2,865,000 during the years ended December 31, 2015 , 2014 and 2013 , respectively. The net income or loss for the nursing centers included in discontinued operations does not reflect any allocation of corporate general and administrative expense or any allocation of corporate interest expense. The Company considered these additional costs along with the centers' future prospects based upon operating history when determining the contribution of the skilled nursing centers to its operations. In addition to the expenses associated with the discontinued operations, the Company also incurred $1,446,000 in restructuring expenses in 2013 that represent corporate expenses and exit costs associated with the Arkansas lease termination, but not classified as discontinued operations.

A summary of the discontinued operations for the periods presented is as follows:



	December 31,
	2015			2014			2013
Net revenues	$	—		$	10,961,000		$	61,849,000
Operating expenses	(1,503,000		)	(13,325,000		)	(64,312,000		)
Gain from disposal of assets	—			7,546,000			—
Income (loss) from discontinued operations	(1,503,000		)	5,182,000			(2,463,000		)
Benefit (provision) for income taxes	375,000			(1,924,000		)	994,000
Income (loss) from discontinued operations, net of tax	$	(1,128,000	)	$	3,258,000		$	(1,469,000	)

4. RECEIVABLES

Receivables, before the allowance for doubtful accounts, consist of the following components:



	December 31,
	2015		2014

Medicare	$	14,415,000	$	16,312,000
Medicaid and other non-federal government programs	20,133,000		14,710,000
Other patient and resident receivables	17,451,000		16,294,000
	$	51,999,000	$	47,316,000
Other receivables and advances	$	1,407,000	$	862,000

The other receivables and advances balance are composed of $938,000 and $588,000 related to renovation projects to be funded by Omega at December 31, 2015 and 2014 , respectively. See Note 11, "Commitments and Contingencies" for additional discussion of these receivables and leased facility construction projects.

Our accounts receivable at December 31, 2015 , included approximately $4.3 million of accounts that had not yet been billed as a result of the change of ownership process. The unbilled receivables are primarily attributable for the newly purchased centers in Glasgow, Kentucky and Fulton, Kentucky, as well as the newly leased facility in Hutchinson, Kansas. These three facilities have approximately $3.2 million of unbilled receivables as of December 31, 2015 . During the change of ownership process, we are required to hold these accounts while waiting for final Medicare and Medicaid approvals. We expect these accounts to be collectible as soon as we are able to submit them for payment.

The Company provides credit for a substantial portion of its revenues and continually monitors the credit-worthiness and collectability from its patients, including proper documentation of third-party coverage. The Company is subject to accounting losses from uncollectible receivables in excess of its reserves.

Substantially all receivables are pledged as collateral on the Company's debt obligations.

F-16

5. PROPERTY AND EQUIPMENT

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



	December 31,
	2015			2014

Land	$	4,859,000		$	3,857,000
Buildings and leasehold improvements	76,025,000			64,446,000
Furniture, fixtures and equipment	33,499,000			30,566,000
	114,383,000			98,869,000
Less: accumulated depreciation	(62,110,000		)	(55,014,000		)
Net property and equipment	$	52,273,000		$	43,855,000

As discussed further in Note 6, "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.

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

Long-term debt consists of the following:



	December 31,
	2015			2014
Mortgage loan with a syndicate of banks; issued in March 2011, amended May 2013; payable monthly, interest at 4.5% above LIBOR, a portion of which is fixed at 6.87% based on the interest rate swap described below.	$	42,401,000		$	43,441,000
Revolving credit facility borrowings payable to a bank; entered into in March 2010; amended in March 2011 and further amended May 2013 and March 2014; secured by receivables of the Company; interest at 4.5% above LIBOR.	12,900,000			4,500,000
Mortgage loan with The PrivateBank, issued in February 2015, interest-only loan, and a variable interest rate based on LIBOR, with a minimum base rate of 4.75%.	5,000,000			—
	60,301,000			47,941,000
Less current portion	(6,276,000		)	(5,539,000		)
	$	54,025,000		$	42,402,000

As of December 31, 2015 , the Company's weighted average interest rate on long-term debt, including the impact of the interest rate swap, was approximately 5.17% .

The Company has agreements with a syndicate of banks for a mortgage term loan ("Original Mortgage Loan") and the Company’s revolving credit agreement ("Original Revolver"). On May 1, 2013, 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 February 28, 2011. The Credit Agreement increases the Company's borrowing capacity to $65,000,000 allocated between a $45,000,000 Mortgage Loan ("Amended Mortgage Loan") and a $20,000,000 Revolver ("Amended Revolver"). Loan acquisition costs associated with the Amended Mortgage Loan and the Amended Revolver were capitalized in the amount of $1,341,000 and are being amortized over the five -year term of the agreements.

F-17

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $45,000,000 with a five -year maturity through April 30, 2018, and a $20,000,000 Amended Revolver through April 30, 2018. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 -year amortization. Interest is based on LIBOR plus 4.5% . A portion of the Amended Mortgage Loan is effectively fixed at 6.87% pursuant to an interest rate swap with an amortizing notional amount that was $21,200,500 as of December 31, 2015 . As of December 31, 2015 , the interest rate related to the Amended Mortgage Loan was 4.8% . The Amended Mortgage Loan is secured by 13 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. The Company’s Amended Revolver has an interest rate of LIBOR plus 4.5% 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 March 31, 2014, the Company entered into the Second Amendment to the Amended and Restated Revolver ("Second Amendment"). The Second Amendment temporarily increased the Amended Revolver capacity from the $20,000,000 in the original Amended Revolver to $27,500,000 through September 30, 2014, as a result of the increase in receivables related to new facilities that continue to progress through the change in ownership process. Effective July 1, 2014, the Company entered into the Third Amendment to the Amended and Restated Revolver ("Third Amendment"). The Third Amendment makes the previously temporary increase to the Amended Revolver capacity from the $20,000,000 in the original Amended Revolver to $27,500,000 , a permanent change to the borrowing capacity as a result of the increase in receivables related to new facilities that continue to progress through the change in ownership process.

As of December 31, 2015 , the Company had $12,900,000 in borrowings outstanding under the Amended Revolver compared to $4,500,000 outstanding as of December 31, 2014 . The outstanding borrowings on the Amended Revolver primarily reflect the Company's approach to accumulated Medicaid and Medicare receivables at recently acquired facilities as these facilities 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 11 letters of credit with a total value of $8,106,000 outstanding as of December 31, 2015 . Considering the balance of eligible accounts receivable, the letter of credit, the amounts outstanding under the Amended Revolver and the maximum loan amount of $27,500,000 , the balance available for borrowing under the Amended Revolver is $4,509,086 at December 31, 2015 .

Effective March 27, 2014, the Company executed its purchase option to acquire all assets associated with the Rose Terrace nursing center in Culloden, West Virginia from Milton Holdings, LLC which was considered a variable interest entity ("VIE") by the Company and was consolidated prior to the date of this transaction. See Note 7, "Variable Interest Entity" for further information on the VIE considerations. In conjunction with the purchase of the assets, the Company entered into an interest-only $8,000,000 term loan ("Rose Terrace Note") with a maturity date of March 27, 2015. The short-term nature and interest-only structure of the Rose Terrace Note reflected the Company's intent to sell the property and transfer operations to an unrelated third-party operator as further disclosed in Note 3, "Discontinued Operations". This transaction closed on July 1, 2014, at which time the Rose Terrace Note was paid in full.

On February 1, 2015, in conjunction with the acquisition of Diversicare of Glasgow, a 94 -bed skilled nursing facility in Glasgow, Kentucky, the Company entered into a $5,000,000 Term Loan and Security Agreement (the "Glasgow term loan") with The PrivateBank in order to finance the purchase of the assets. The Glasgow term loan is an interest-only loan that has an 18 -month maturity dated August 1, 2016, and a variable interest rate based on LIBOR, with a minimum base rate of 4.75% .

The Company’s debt agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. The Company is in compliance with all such covenants at December 31, 2015 .

In connection with the Company's 2015 and 2014 financing agreements, the Company recorded the following deferred loan costs related the new financing agreements:



	2015		2014
Deferred financing costs capitalized	$	160,000	$	195,000

F-18

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



2016	$	6,276,000
2017	1,357,000
2018	1,392,000
2019	1,401,000
2020	$	1,411,000
Thereafter	$	48,464,000
Total	$	60,301,000

Interest Rate Swap Cash Flow Hedge

As part of the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The 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 May 2013, 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 $21,200,500 as of December 31, 2015 . 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 6.87% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amounts. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at December 31, 2015 , the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $625,000 at December 31, 2015 . The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company's consolidated balance sheet. The balance of accumulated other comprehensive loss at December 31, 2015 , is $388,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $237,000 . As the Company's interest rate swap is not traded on a market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The fair value of the Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB's guidance on Fair Value Measurements and Disclosures .

Capitalized Lease Obligations

During 2011, the Company entered into a series of lease agreements to finance the purchase of certain equipment primarily for the implementation of Electronic Medical Records (“EMR”) in its nursing centers. Additionally, upon acquisition of certain facilities, we assumed certain leases, primarily related to equipment, that constitute capital leases. As a result, we have recorded the underlying lease assets and capitalized lease obligations of $566,000 and $324,000 as of December 31, 2015 and 2014 , respectively. These lease agreements provide three to five year terms.

Scheduled payments of the capitalized lease obligations are as follows:



2016	$	349,000
2017	198,000
2018	49,000
Total	596,000
Amounts related to interest	(30,000		)
Principal payments on capitalized lease obligation	$	566,000

F-19

7. VARIABLE INTEREST ENTITY

On December 28, 2011, the Company completed construction of Rose Terrace Health and Rehabilitation Center (“Rose Terrace”), its third health care center in West Virginia. The 90 -bed skilled nursing center is located in Culloden, West Virginia, along the Huntington-Charleston corridor, and offers 24-hour skilled nursing care designed to meet the care needs of both short and long-term nursing patients. The Rose Terrace nursing center utilizes a Certificate of Need the Company obtained in June 2009, when the Company completed the acquisition of certain assets of a skilled nursing center in West Virginia.

The Company initially entered into a lease agreement with the real estate developer that constructed, furnished, and equipped Rose Terrace. The agreement included the right to purchase the center and all associated assets beginning at the end of the first year of the initial term of the lease and continuing through the fifth year for a purchase price ranging from 110% to 120% of the total project cost. On March 27, 2014, the Company exercised this purchase option and acquired the land, building, and all other assets of the Rose Terrace nursing center from the real estate developer for the contractually agreed upon price of $7,693,000 .

Prior to the exercise of the purchase option, the Company had determined it was the primary beneficiary of the variable interest entity ("VIE") that developed the Rose Terrace nursing center based on the ownership of the Certificate of Need, the fixed price purchase option described above, the Company’s ability to direct the activities that most significantly impact the economic performance of the VIE, and the right to receive potentially significant benefits from the VIE. Accordingly, as the primary beneficiary, the Company consolidated the balance sheet and results of operations of the VIE for periods prior to the exercise of the purchase option. However, after the exercise of the purchase option, the previous owners paid the outstanding debt related to the entity in full. Subsequently, as further disclosed in Note 3, "Discontinued Operations" the Company sold the Rose Terrace facility and all assets associated with the facility. As a result of these events, the real estate development entity is no longer considered a VIE.

The following table summarizes the accounts and amounts included in the Company’s Consolidated Balance Sheet that are associated with the real estate developer’s interests in the VIE. As a result of the aforementioned transaction, no balances exist as of December 31, 2015 .




	Year Ended December 31, 2015		Year Ended December 31, 2014
Beginning non-controlling interests	$	—	$	1,437,000
Comprehensive loss attributable to non-controlling interests	—		(25,000		)
Deconsolidation of/distributions to non-controlling interest owners	—		(1,412,000		)
Ending non-controlling interests	$	—	$	—

8. SHAREHOLDERS' EQUITY, STOCK PLANS AND PREFERRED STOCK

Shareholders' Rights Plan

On May 7, 2014, the Company entered into a fourth amendment (the “Fourth Amendment”) to the Amended and Restated Rights Agreement, dated as of December 7, 1998, as amended March 19, 2005, August 15, 2008, and August 14, 2009 between the Company (formerly Advocat Inc.) and ComputerShare Trust Company, N.A., as successor to SunTrust Bank, as Rights Agent. In the Fourth Amendment, the Company changed the Expiration Date of the preferred share purchase rights (the “Rights”) under the Rights Agreement from August 2, 2018 to May 15, 2014. As a result of the Fourth Amendment, the Rights Agreement terminated by its terms and is of no further force and effect and the Rights expired at the close of business on May 15, 2014.

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 December 2005, the Compensation Committee of the Board of Directors adopted the 2005 Long-Term Incentive Plan (“2005 Plan”). The 2005 Plan allows the Company to issue stock options and other share and cash based awards. Under the 2005 Plan, 700,000 shares of the Company's common stock have been reserved for issuance upon exercise of equity awards granted thereunder. All grants under this plan expire 10 years from the date the grants were authorized by the Board of Directors.

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

F-20

and 150,000 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. No grants can be made under the Stock Purchase Plan after April 25, 2018.

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. Under the 2010 Plan, 380,000 shares of the Company's common stock have been reserved for issuance upon exercise of equity awards granted.

Equity Grants and Valuations

During 2015 and 2014 , the Compensation Committee of the Board of Directors approved grants totaling approximately 74,000 and 68,000 , 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.

The Company recorded non-cash stock-based compensation expense from continuing operations for equity grants and RSU's issued under the Plans of $1,152,000 , $580,000 , and $950,000 during the years ended December 31, 2015 , 2014 , and 2013 , 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, 2015 , there was $601,000 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 an intrinsic valuation method based on 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,
	2015	2014	2013
Expected volatility (range)	44%-49%	N/A ⁽¹⁾	N/A ⁽¹⁾
Risk free interest rate (range)	1.52%-1.87%	N/A ⁽¹⁾	N/A ⁽¹⁾
Expected dividends	2.15%	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, 2014 and 2013. 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, consistent with the Securities and Exchange Commission's interpretive guidance often referred to as the “Simplified Method.” The Company continues to use the Simplified Method since the Company's exercise history is not representative of the expected term of the equity granted in 2011. The Company's recent exercise history is primarily from options granted in 2005 that were vested at grant date and were significantly in-the-money due to an increase in stock price during the period between grant date and formal approval by shareholders, and from older options granted several years ago that had fully vested.

F-21

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,
	2015		2014 ⁽¹⁾		2013 ⁽¹⁾
Weighted average grant date fair value	3.78		$	—	$	—
Total intrinsic value of exercises	$	249,000	$	126,000	$	53,000

___________


(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, 2014 and 2013. All equity grants during these periods 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, 2015 :



	Weighted
	Average			Intrinsic			Intrinsic
Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$10.21 to $11.59	$	10.88	62,000	$	—	52,000	$	—
$2.37 to $6.21	$	5.54	170,000	444,000		170,000	444,000
			232,000			222,000

As of December 31, 2015 , the outstanding equity grants have a weighted average remaining life of 4.93 years and those outstanding equity grants that are exercisable have a weighted average remaining life of 4.60 years . During the year ended December 31, 2015 , approximately 52,000 stock option and SOSAR grants were exercised under these plans. A portion of the equity grants exercised were net settled. The net proceeds from equity grants exercised in 2015 was $79,000 .

Summarized activity of the equity compensation plans is presented below:



			Weighted
	SOSARs/		Average
	Options		Exercise Price
Outstanding, December 31, 2014	271,000		$	6.67
Granted	15,000		10.21
Exercised	(52,000	)	6.35
Expired or cancelled	(2,000	)	6.64
Outstanding, December 31, 2015	232,000		$	6.97

Exercisable, December 31, 2015	222,000		$	6.83



			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2014	130,000		$	5.45
Granted	74,000		12.31
Dividend Equivalents	3,000		10.81
Vested	(63,000	)	5.50
Cancelled	(3,000	)	8.93
Outstanding December 31, 2015	141,000		$	9.07

F-22

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, 2014	46,000		$	5.36
Granted	36,000		12.31
Dividend Equivalents	1,000		10.75
Vested	(21,000	)	5.09
Cancelled	—		—
Outstanding December 31, 2015	62,000		$	9.58

Series A Preferred Stock

The Company is authorized to issue up to 200,000 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.

Series B and Series C Redeemable Preferred Stock

As part of the consideration paid to Omega for restructuring the terms of the Omega Master Lease in November 2000, the Company issued to Omega 393,658 shares of the Company's Series B Redeemable Convertible Preferred Stock (“Series B Preferred Stock”) with a stated value of $3,300,000 and an annual dividend rate of 7% of the stated value. In October 2006, the Company and Omega entered into a Restructuring Stock Issuance and Subscription Agreement (“Restructuring Agreement”) to restructure the Series B Preferred Stock, eliminating the option of Omega to convert the Series B Preferred Stock into shares of Diversicare (formerly Advocat) common stock.

At the time of the Restructuring Agreement, the Series B Preferred Stock had a recorded value (including accrued dividends) of approximately $4,918,000 and was convertible into approximately 792,000 shares of common stock. The Company issued 5,000 shares of a new Series C Redeemable Preferred Stock (“Series C Preferred Stock”) to Omega in exchange for the 393,658 shares of Series B Preferred Stock held by Omega. The Series C Preferred Stock had a stated value of approximately $4,918,000 and an annual dividend rate of 7% of its stated value payable quarterly in cash. The Series C Preferred Stock was not convertible, but was redeemable at its stated value at Omega's option since September 30, 2010, and since September 30, 2007, was redeemable at its stated value at the Company's option.

In connection with the termination of the conversion feature, the Company agreed to pay Omega an additional $687,000 per year under the Lease Amendment. The additional annual payments of $687,000 were discounted over the twelve year term of the renewal to arrive at a net present value of $6,701,000 , the preferred stock premium. The Company recorded the fair value of the elimination of the conversion feature as a reduction in Paid In Capital with an offsetting increase to record a premium on the Series C Preferred Stock. As a result, the Series C Preferred Stock was initially recorded at a total value of $11,619,000 , equal to the stated value of the Series B Preferred Stock, $4,918,000 , plus the value of the conversion feature, $6,701,000 which was fully amortized in 2010. The stated value of the preferred stock was classified as temporary equity and the additional obligation was classified as a noncurrent in the accompanying consolidated balance sheet. As the related cash payments were made, the preferred stock premium was reduced and interest expense was recorded.

Effective August 14, 2014, the Company redeemed all of its outstanding shares of Series C Preferred Stock for approximately $4,918,000 from the holder. The redemption was affected as a result of Omega’s exercise of its pre-existing option to require the Company to redeem the Preferred Stock as provided in the Company’s Certificate of Designation. As a result of the redemption, the Company no longer has any Series C Preferred Stock outstanding. The following table reflects activity in the Series C Preferred Stock:



Series C Preferred Stock
	2015		2014			2013
Balance at the beginning of the period	$	—	$	4,918,000		$	4,918,000
Redemption of preferred stock	—		(4,918,000		)	—
Balance at the end of the period	$	—	$	—		$	4,918,000

F-23


9.	NET INCOME (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,
	2015			2014			2013
Numerator: Income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	2,752,000		$	1,450,000		$	(6,993,000	)
Less: net (income) loss attributable to noncontrolling interests	—			25,000			(72,000		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc.	2,752,000			1,475,000			(7,065,000		)
Preferred stock dividends	—			(220,000		)	(344,000		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	2,752,000			1,255,000			(7,409,000		)
Income (loss) from discontinued operations, net of income taxes	(1,128,000		)	3,258,000			(1,469,000		)
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	1,624,000		$	4,513,000		$	(8,878,000	)

Denominator: Basic Weighted Average Common Shares Outstanding:	6,100,000			6,011,000			5,899,000

Basic net income per common share
Income (loss) from continuing operations	$	0.45		$	0.21		$	(1.26	)
Income (loss) from discontinued operations
Operating loss, net of taxes	(0.18		)	(0.25		)	(0.25		)
Gain on disposal, net of taxes	—			0.79			—
Discontinued operations, net of taxes	(0.18		)	0.54			(0.25		)
Basic net income (loss) per common share	$	0.27		$	0.75		$	(1.51	)



	2015			2014			2013
Numerator: Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	2,752,000			1,255,000			(7,409,000		)
Income (loss) from discontinued operations, net of income taxes	(1,128,000		)	3,258,000			(1,469,000		)
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	1,624,000		$	4,513,000		$	(8,878,000	)

Basic weighted average common shares outstanding	6,100,000			6,011,000			5,899,000
Incremental shares from assumed exercise of options, SOSARS and Restricted Stock Units	215,000			186,000			—
Denominator: Diluted Weighted Average Common Shares Outstanding:	6,315,000			6,197,000			5,899,000

Diluted net income per common share
Income (loss) from continuing operations	$	0.44		$	0.20		$	(1.26	)
Income (loss) from discontinued operations
Operating loss, net of taxes	(0.18		)	(0.25		)	(0.25		)
Gain on disposal, net of taxes	—			0.77			—
Discontinued operations, net of taxes	(0.18		)	0.52			(0.25		)
Diluted net income (loss) per common share	$	0.26		$	0.72		$	(1.51	)

F-24

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:



	2015	2014	2013
SOSARs/Options Excluded	62,000	57,000	310,000

The weighted average common shares for basic and diluted earnings for common shares was the same due to the losses in 2013.

10. INCOME TAXES

Overview

For the years ended December 31, 2015 and 2014 , the Company recorded a provision for income taxes from continuing operations of $916,000 and $857,000 , respectively, compared to a benefit of $4,196,000 in 2013 . The provision (benefit) for income taxes of continuing operations is composed of the following components:



	Year Ended December 31,
	2015			2014		2013
Current provision (benefit) :
Federal	$	1,191,000		$	10,000	$	(77,000	)
State	947,000			10,000		29,000
	2,138,000			20,000		(48,000		)
Deferred provision (benefit):
Federal	(783,000		)	798,000		(4,402,000		)
State	(439,000		)	39,000		254,000
	(1,222,000		)	837,000		(4,148,000		)
Provision (benefit) for income taxes of continuing operations
	$	916,000		$	857,000	$	(4,196,000	)

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



	Year Ended December 31,
	2015			2014			2013
Provision (benefit) for federal income taxes at statutory rates	$	1,247,000		$	784,000		$	(3,804,000	)
Provision (benefit) for state income taxes, net of federal benefit	688,000			76,000			(187,000		)
Valuation allowance changes affecting the provision for income taxes	(534,000		)	(66,000		)	371,000
Employment tax credits	(1,249,000		)	(169,000		)	(930,000		)
Nondeductible expenses	862,000			123,000			276,000
Stock based compensation expense	(105,000		)	3,000			8,000
Other	7,000			106,000			70,000
Provision (benefit) for income taxes of continuing operations	$	916,000		$	857,000		$	(4,196,000	)

F-25

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,
	2015			2014
Current deferred tax assets:
Credit carryforwards	$	—		$	365,000
Allowance for doubtful accounts	3,049,000			2,277,000
Accrued liabilities	5,895,000			5,386,000
	8,944,000			8,028,000
Less valuation allowance	(319,000		)	(408,000		)
	8,625,000			7,620,000
Current deferred tax liabilities:
Prepaid expenses	(626,000		)	(604,000		)
	$	7,999,000		$	7,016,000



	December 31,
	2015			2014
Noncurrent deferred tax assets:
Net operating loss and other carryforwards	$	1,040,000		$	1,174,000
Credit carryforwards	2,612,000			2,030,000
Deferred lease costs	167,000			230,000
Depreciation	1,184,000			355,000
Tax goodwill and intangibles	(1,172,000		)	(978,000		)
Stock-based compensation	534,000			643,000
Accrued rent	3,055,000			3,786,000
Kentucky and Kansas acquisition costs	113,000			118,000
Impairment of long-lived assets	267,000			271,000
Interest rate swap	237,000			303,000
Noncurrent self-insurance liabilities	4,185,000			5,639,000
	12,222,000			13,571,000
Less valuation allowance	(460,000		)	(686,000		)
	$	11,762,000		$	12,885,000

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, 2015 , the Company has a cumulative pre-tax loss from continuing operations of $5,214,000 , which was partially offset by $3,668,000 of income attributable to the year ended December 31, 2015 . 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

F-26

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 improvement in financial performance for the year ended December 31, 2015 , the degree to which nonrecurring expenses caused the last three year cumulative pre-tax loss, 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 facilities in Arkansas in 2013 and West Virginia in 2014. The operations in the states of Arkansas and West Virginia demonstrated a trend of growing losses in recent years primarily as a result of disproportionate amount of professional liability expense relative to the revenue contributed. Additionally, the net operating loss created in 2013 was fully utilized during 2014 as a result of the income produced from operations and the taxable gain on the sale of Rose Terrace.

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, 2015 , the Company had $7,385,000 of net operating losses, which expire at various dates beginning in 2019 and continue through 2033. 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 $2,519,000 . 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 $315,000 in 2015 , 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, 2015 . In 2014 and 2013 , the Company recorded a deferred tax provision to adjust approximately $215,000 and $448,000 , 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 has recorded a total valuation allowance of approximately $779,000 at December 31, 2015 to reduce the deferred tax assets by the amount management believes is more likely than not to not be realized through the turnaround of existing temporary differences, future earnings, or a combination thereof.

Under the Work Opportunity Tax Credit ("WOTC") program, the Company recorded $737,000 , $550,000 and $1,124,000 in Work Opportunity Tax Credits during 2015 , 2014 and 2013 , respectively. On December 19, 2014, the Tax Increase Prevention Act of 2012 (the "Act") was signed into law. The Act retroactively reinstated the federal Work Opportunity Tax Credit for qualifying costs paid during 2014. Pursuant to ASC 740-10-25-47, the effect of changes in the tax laws including retroactive changes are recognized in the period the law was enacted, and as a result of the retroactive treatment, the credit was recognized in the financial statements during the fourth quarter of 2014 . The remaining WOTC credit carryforwards expire at various dates beginning in 2030 and continue through 2034.

Unrecognized Tax Benefits and Liabilities

The Company follows the FASB's guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns evaluating the need to recognize or unrecognize uncertain tax positions. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:



	2015		2014		2013
Balance at the beginning of the period	$	—	$	—	$	86,000
Changes in tax positions for prior years	—		—		(86,000		)
Balance at the end of the period	$	—	$	—	$	—

F-27

The Company records the liabilities associated with our unrecognized tax benefits in “other current liabilities” on the consolidated balance sheet. The net change in the amount of unrecognized tax benefits during the year ended December 31, 2013 was related primarily to the adjustment of the estimated liability and resolution of outstanding uncertain tax positions. Further, the Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of operations.

The Company received a notice of an audit by the Internal Revenue Service related to the 2012 tax year, which was closed in 2015 . As of December 31, 2015 , the Company’s tax years for 2013 forward are subject to examination by tax authorities.

11. 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, including renewal option periods (exclusive of taxes, insurance, and maintenance costs) under these leases beginning January 1, 2016 , are as follows:



2016	$	32,244,000
2017	32,554,000
2018	33,001,000
2019	33,782,000
2020	34,357,000
Thereafter	406,961,000
	$	572,899,000

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 $28,690,000 , $26,151,000 and $20,396,000 for 2015 , 2014 and 2013 , respectively. The accrued liability related to straight line rent was $7,830,000 and $9,579,000 at December 31, 2015 and 2014 , respectively, and is included in “Other noncurrent liabilities” on the accompanying consolidated balance sheets.

Omega Master Lease

The Company leases 36 nursing centers from Omega under a Master Lease. On October 20, 2006, the Company and Omega entered into a Third Amendment to Consolidated Amended and Restated Master Lease (“Lease Amendment”) to extend the term of its facilities leased from Omega. The Lease amendment extended the term to September 30, 2018 and provided a renewal option of an additional twelve years . Consistent with prior terms, the lease provides for annual increases in lease payments equal to the lesser of two times the increase in the consumer price index or 3 percent. 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 12 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 Company entered into an agreement with Omega to terminate its lease with respect to eleven nursing centers located in Arkansas and concurrently entered into operation transfer agreements to transfer the operations of each of those eleven centers to an operator selected by Omega. In connection with the closing of this transaction, the Company and Omega entered into the Thirteenth Amendment to the Master Lease. This amendment effectively modifies the terms of the Master Lease to terminate the terms surrounding the eleven nursing centers in Arkansas, and only as to those eleven centers, and effectively reduced the annual rent payable under the Master Lease by $5,000,000 .

In addition to the amendment to terminate the portion of the lease with respect to the Arkansas centers, the Company further amended the Master Lease by entering into the Fifteenth Amendment to Consolidated Amended and Restated Master Lease as a result of the disposition and transfer of operations of the Company's West Virginia nursing centers. This amendment effectively modified the terms of the Master Lease to terminate the lease with regard to the two West Virginia nursing centers, and effectively reduced the annual rent payable under the Master Lease by $1,900,000 .

The Master Lease requires the Company to fund annual capital expenditures related to the leased facilities at an amount currently equal to $434 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 $3,133,000 . These capital expenditures are being depreciated on a straight-line basis over the shorter of the asset life or the appropriate lease term.

F-28

Upon expiration of the Master Lease or in the event of a default under the Master Lease, the Company is required to transfer all of the leasehold improvements, equipment, furniture and fixtures of the leased facilities 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 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 facilities leased pursuant to the Master Lease have been pledged as security under the Master Lease. In addition, the Company has a letter of credit of $4,551,000 as a security deposit for the Company's leases with Omega, as described in Note 6, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations".

Renovation Funding

In January 2013, we entered into an amendment to the Master lease with Omega under which Omega agreed to provide an additional $5,000,000 to fund renovations to two nursing centers located in Texas that are leased from Omega. The annual base rent related to these facilities will be increased to reflect the amount of capital improvements to the respective facilities 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 facilities by making use of fifteen licensed beds it acquired in 2005. This expansion project was funded by Omega with the renovation funding previously described. This project increased capacity and footprint compared to the Company's previous lessor-funded facility projects which included renovations of existing facilities, but did not increase capacity. Accordingly, the costs incurred to expand the facility are recorded as a leasehold improvement asset with the amounts reimbursed by Omega for this project included as a long-term liability and amortized to rent expense over the remaining term of the lease. The capitalized leasehold improvements and lessor reimbursed costs are being amortized over the initial lease term ending in September 2018. The leasehold improvement asset and accumulated amortization are as follows:



	December 31
	2015			2014
Leasehold improvement	$	921,000		$	921,000
Accumulated Amortization	(631,000		)	(526,000		)
Net Intangible	$	290,000		$	395,000

Other Operating Leases

In addition to the Master Lease, the Company currently leases seventeen other nursing centers which primarily operate under individual leases. The lease terms for these centers range from nine years to twenty years including renewal options. While the individual lease terms vary from center to center, the majority of the leases include annual lease increases which are capped and, in most cases, are subject to adjustment for increases in the Consumer Price Index. All operating leases are accounted for using a straight-line rent methodology.

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, Tennessee, and West Virginia 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 $500,000 per medical incident with a sublimit per center of $1,000,000 and total annual aggregate policy limits of $5,000,000 . 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.

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 $21,618,000 as of December 31, 2015 . 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, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis and are presented without regard to any potential insurance recoveries. Amounts are added to the accrual for estimates of anticipated liability for

F-29

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 $3,328,000 , $4,757,000 , and $4,485,000 for the years ended December 31, 2015 , 2014 and 2013 , respectively.

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 Company has recorded estimated insurance recovery receivables included within "Other Current Assets" on the Consolidated Balance Sheet of $0 and $246,000 at December 31, 2015 and 2014 , 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 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 the Company’s employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. The Company is completely self-insured for workers’ compensation exposures prior to May 1997. 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, 2008 through December 31, 2013, the Company is covered by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500,000 per claim, subject to an aggregate maximum of $3,000,000 . 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 $264,000 at December 31, 2015 . The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,041,000 as of December 31, 2015 . 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, 2015 , the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $175,000 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 $686,000 at December 31, 2015 . The differences between actual settlements and reserves are included in expense in the period finalized.

F-30

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 $1,768,000 as of December 31, 2015 . 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. In addition, upon the occurrence of any triggering event, these certain members of management may elect to require the Company to purchase equity awards granted to them for a purchase price equal to the difference in the fair market value of the Company's common stock at the date of termination versus the stated equity award exercise price. Based on the closing price of our common stock on December 31, 2015 , there is $236,000 of contingent liabilities for the repurchase of the equity grants.

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 facility. 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.

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 facilities that were the subject of the original CID. Between July 2013 and early February 2016, the Company received three civil investigative demands, a form of subpoena, relating to a civil investigation of our practices and policies for rehabilitation, and other services, and our preadmission evaluation forms (PAEs) required by TennCare. We previously responded to the first two requests and are now responding to the third request. The DOJ’s investigation now covers all of the Company’s facilities, but thus far only documents from six of our facilities have been requested. The Company intends to continue cooperating with the DOJ and the OIG in the investigation. The Company cannot predict the outcome of this investigation or any possible related proceedings, and the outcome could have a materially adverse effect on the Company, including the imposition of damages, fines, penalties and/or a corporate integrity agreement, but 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 “Facility”). The complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Facility 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.

F-31

12. SUBSEQUENT EVENT

On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of financial institutions and banks, including The PrivateBank and Trust Company, the administering agent, which modifies the terms of the Amended and Restated Term Loan and Security Agreement ("Original Mortgage Loan") and Amended and Restated Revolving Loan and Security Agreement ("Original Revolver"), dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to $100.0 million allocated between a $72.5 million Mortgage Loan ("Amended Mortgage Loan") and a $27.5 million Revolver ("Amended Revolver").

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72.5 million , and a $27.5 million Amended Revolver through February 26, 2021. The Amended Mortgage Loan consists of $60.0 million term and $12.5 million acquisition loan facilities. Additionally, the Company can elect to increase the Amended Mortgage Loan and/or the Amended Revolver on or prior to the three year anniversary of the closing date, and such increase in the aggregate cannot exceed $30.0 million . The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 -year amortization. Interest is based on LIBOR plus 4.0% . A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an amortizing notional amount of $30.0 million. The Amended Mortgage Loan is secured by 17 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. 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. The Amended Mortgage Loan and the Amended Revolver are cross defaulted and cross collateralized.

The Credit Agreement amends certain provisions to our financial covenants including the following: (a) The Company's EBITDAR cannot be less than $10.0 million , (b) the Fixed Charge Coverage Ratio cannot be less than 1.05 to 1.00, (c) EBITDA cannot be less than $10.0 million , and (d) the Current Ratio cannot be less than 1.00 to 1.00, all as defined in the Credit Agreement.

In conjunction with the execution of the Credit Agreement, the Company exercised its real estate purchase options for Diversicare of Hutchinson in Hutchinson, Kansas and Clinton Place in Clinton, Kentucky for $4.25 million and $3.3 million , respectively. Diversicare has operated these facilities since February 2015 and April 2012, respectively.

F-32

13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Selected quarterly financial information for each of the quarters in the years ended December 31, 2015 and 2014 is as follows:



	Quarter
2015	First			Second			Third			Fourth

Patient revenues, net	$	95,225,000		$	96,288,000		$	98,105,000		$	97,977,000
Professional liability expense ⁽¹⁾	2,155,000			1,926,000			2,069,000			1,972,000
Income from continuing operations	5,000			807,000			669,000			1,271,000
Loss from discontinued operations	(263,000		)	(299,000		)	(238,000		)	(328,000		)
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	(258,000	)	$	508,000		$	431,000		$	943,000

Basic net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income from continuing operations	$	—		$	0.13		$	0.11		$	0.21
Loss from discontinued operations	(0.04		)	(0.05		)	(0.04		)	(0.05		)
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.04	)	$	0.08		$	0.07		$	0.16



Diluted net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income from continuing operations	$	—		$	0.13		$	0.11		$	0.20
Loss from discontinued operations	(0.04		)	(0.05		)	(0.04		)	(0.05		)
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.04	)	$	0.08		$	0.07		$	0.15


(1)	The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed further in Note 11, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of 2015 is set forth in the table above.



	Quarter
2014	First			Second		Third		Fourth

Patient revenues, net	$	77,799,000		$	82,313,000	$	90,331,000	$	93,749,000
Professional liability expense ⁽¹⁾	2,061,000			1,556,000		1,743,000		1,856,000
Income (loss) from continuing operations	(433,000		)	973,000		219,000		691,000
Income (loss) from discontinued operations	(612,000		)	128,000		3,928,000		(186,000		)
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	(1,106,000	)	$	1,015,000	$	4,099,000	$	505,000

Basic net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	(0.08	)	$	0.15	$	0.03	$	0.11
Income (loss) from discontinued operations	(0.10		)	0.02		0.65		(0.03		)
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.18	)	$	0.17	$	0.68	$	0.08

F-33



Diluted net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	(0.08	)	$	0.14	$	0.03	$	0.11
Income (loss) from discontinued operations	(0.10		)	0.02		0.63		(0.03		)
Net income (loss) per common share for Diversicare Healthcare Services, Inc. common shareholders	$	(0.18	)	$	0.16	$	0.66	$	0.08


(1)	The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed further in Note 11, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of 2014 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)



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	Other	(Write-offs) net of Recoveries	Balance at End of Period
Year ended December 31, 2015: Allowance for doubtful accounts	$6,044		$7,507	$—	$—	$(5,371)	$8,180
Year ended December 31, 2014: Allowance for doubtful accounts	$3,879		$5,710	$—	$—	$(3,545)	$6,044
Year ended December 31, 2013: Allowance for doubtful accounts	$3,047		$4,066	$—	$—	$(3,234)	$3,879

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, 2015:
Professional Liability Reserve	$25,163	$5,213	$1,010	$—	$(9,768)	$21,618
Workers Compensation Reserve	$250	$364	$—	$—	$(387)	$227
Health Insurance Reserve	$687	$6,294	$—	$—	$(6,295)	$686
Year ended December 31, 2014:
Professional Liability Reserve	$27,067	$5,930	$2,440	$—	$(10,274)	$25,163
Workers Compensation Reserve	$176	$372	$—	$18	$(316)	$250
Health Insurance Reserve	$843	$6,748	$237	$—	$(7,141)	$687
Year ended December 31, 2013:
Professional Liability Reserve	$22,740	$4,870	$8,136	$—	$(8,679)	$27,067
Workers Compensation Reserve	$287	$473	$—	$(87)	$(497)	$176
Health Insurance Reserve	$679	$8,321	$879	$—	$(9,036)	$843


(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)	As discussed in Note 3, "Discontinued Operations" of the Consolidated Financial Statements, 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).

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).

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).

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).

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).

*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).

10.3			Advocat Inc. Guaranty in favor of Omega Healthcare Investors, Inc. dated May 10, 1994 (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).

10.4			Settlement and Restructuring Agreement dated as of October 1, 2000 among Registrant, Diversicare Leasing Corp., Sterling Health Care Management, Inc., Diversicare Management Services Co., Advocat Finance, Inc., Omega Healthcare Investors, Inc. and Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.83 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).

10.5			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).

10.6			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).

10.7			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).

10.8			Security Agreement dated as of November 8, 2000 between Sterling Health Care Management, Inc. and Sterling Acquisition Corp. (incorporated by reference to Exhibit 10.87 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000).



10.9			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).

10.10			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).

10.11			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).

10.12			Restructuring Stock Issuance and Subscription Agreement dated as of October 20, 2006 between Advocat Inc. and Omega Healthcare Investors, Inc. (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed October 24, 2006).

10.13			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).

10.14			Subordinated Promissory Note in the amount of $2,533,614.53 issued to Omega HealthCare Investors Inc. dated as of October 1, 2006 (incorporated by reference to Exhibit 10.3 to the Company's current report on Form 8-K filed October 24, 2006).

10.15			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).

10.16			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).

10.17			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).

10.18			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).

*10.19			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).

*10.20			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).

*10.21			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).

*10.22			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).

10.23			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).

10.24			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).



10.25			Lease Agreement dated as of July 14, 2010 by and between Diversicare Rose Terrace, LLC, a subsidiary of the registrant, and A.B.E., LLC (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2010).

10.26			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).

10.27			Swap Agreement between the Company and The PrivateBank and Trust Company dated as of March 1, 2011 (incorporated by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2011).

*10.28			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).

*10.29			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).

*10.30			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).

*10.31			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).

10.32			Asset Purchase Agreement effective March 6, 2013 between the Company and Cumberland & Ohio Co. of Texas, as receiver of the assets of SeniorTrust of Florida, Inc. (incorporated by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.33			Operations Transfer Agreement effective March 6, 2013 by and between certain subsidiaries of the Company and the Cumberland & Ohio Co. of Texas, as receiver of the assets of SeniorTrust of Florida, Inc. (incorporated by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.34			Amended and Restated Revolving Loan and Security Agreement dated April 30, 2013 among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2013).

10.35			Amended and Restated Term Loan and Security Agreement dated April 30, 2013 among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.36			Amended and Restated Guaranty (Revolver) dated as of April 30, 2013, by the Company to and for the benefit of The PrivateBank in its capacity as administrative agent (incorporated by reference to Exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.37			Amended and Restated Guaranty (Term Loan) dated as of April 30, 2013, by the Company to and for the benefit of The PrivateBank in its capacity as administrative agent (incorporated by reference to Exhibit 10.8 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2013).

10.38			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).

**10.39			First Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement dated as of November 1, 2013 among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to Exhibit 10.1 to the Company's annual report on Form 10-K for the year ended Decemeber 31, 2014).




10.40		Asset Purchase Agreement dated April 3, 2014, by and between Diversicare Rose Terrace, LLC, and Rose Terrace Acq., LLC (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2014).

10.41		Second Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement dated as of March 31, 2014, among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2014).

10.42		Term Loan and Security Agreement effective as of March 27, 2014, by and between Diversicare Rose Terrace, LLC and The PrivateBank And Trust Company (incorporated by reference to exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2014).

10.43		Third Amendment and Consent to Amended And Restated Revolving Loan and Security Agreement dated as of July 1, 2014 by and among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2014).

10.44		Third Amendment to Amended and Restated Term Loan And Security Agreement dated as of July 1, 2014, by and among the Company and a syndicate of financial institutions and banks, including The PrivateBank as the Administering Agent (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2014).

10.45		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).

10.46		Asset Purchase Agreement dated February 1, 2015 by and between Diversicare Healthcare Services, Inc. and Barren County Health Care Center, Inc. (incorporated by reference to exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2015).

10.47		Term Loan and Security Agreement dated as of February 2, 2015 by and between Diversicare Glasgow Property, LLC and The PrivateBank And Trust Company (incorporated by reference to exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2015).

10.48		Asset Purchase Agreement dated November 1, 2015 by and between Diversicare Healthcare Services, Inc. and Haws Fulton Investors, LLC.

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

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (“ Agreement ”), is made effective as of September 30, 2015 , by and among FULTON INVESTORS, LLC, a Tennessee limited liability company (“ Seller ”), DIVERSICARE OF FULTON, LLC, a Delaware limited liability company (“ Buyer ”), and, solely for the purposes of Sections 5.18 and 11.2, Aubrey B. Preston (the “ Guarantor ”).

A. Seller owns and operates a certain skilled nursing facility located at 1004 Holiday Lane, Fulton, Kentucky 42041, known as “Haws Memorial Nursing & Rehabilitation Center” (the “ Facility ”).

B. Seller desires to sell and transfer the assets of the Facility and Buyer (or an affiliate of Buyer) desires to purchase the same from Seller subject to the terms and conditions of this Agreement.

C. Guarantor is the sole member of Seller, and as such will benefit from the transactions described herein.

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 . Seller agrees at Closing (as defined in Section 6.1 below), to sell, transfer, assign, convey and deliver to Buyer, and Buyer agrees to purchase, acquire and accept from Seller all right, title and interest in and to certain assets of Seller related to the Facility (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 estate owned by Seller and used in connection with the Facility as described on Exhibit 1.1(1) attached hereto and in and to all structures, improvements, fixed assets and fixtures including fixed machinery and fixed equipment situated thereon or forming a part thereof (collectively, the “ Real Estate ”), together with all appurtenances, easements and rights-of-way related thereto;

(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 Facility 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 Facility (including hard, electronic and microfiche copies) and all manuals, books and records used in operating the Facility 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 Facility;

(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 Seller’s possession;

(7) All goodwill and, to the extent assignable by Seller, all warranties (express or implied) and rights and claims related to the Assets or the operation of the Facility, including the “Haws Memorial Nursing & Rehabilitation Center” name;

(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 hereto;

(9) The Assumed Contracts, as defined in Section 3.9;

(10) all unpaid insurance benefits, including rights and proceeds, arising from or relating to the Facility and Assets prior to Closing;

(11) all other properties and assets of every kind, character and description, tangible or intangible, owned by Seller and used in connection with the Facility, whether or not similar to the items specifically set forth above;

(12) Seller’s Medicare provider number; and

(13) All interests in the admissions agreements with residents of the Facilities (“ Admission Agreements ”).

1.2. Excluded Assets . Seller is not selling and Buyer is not purchasing or assuming obligations with respect to the following (collectively, the “ Excluded Assets ”):

(1) Seller’s corporate and fiscal records and other records that Seller is required by law to retain in its 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 Seller other than the Facility’s petty cash;

(4) Seller’s provider agreements with Medicaid or any other state governmental payor program and any corresponding provider numbers;

(5) All Contracts not included in the Assumed Contracts; and

(6) Any other items listed on Exhibit 1.2 attached hereto.

1.3. Assumed Contracts and Liabilities .

(1) At Closing, Buyer will assume and agree to pay or perform, as the case may be, those obligations of Seller (i) arising after Closing under the Assumed Contracts and (ii) arising from all accrued vacation, sick leave and paid time off (vested and unvested) for Employees (as defined in Section 3.13) who are hired by Buyer or Buyer’s agent at Closing, to the extent that Buyer receives an agreed credit for such liabilities against the Purchase Price (as defined in Section 2.1 below) (herein, the “ Employee Obligations ”) (items (i) and (ii) are collectively, the “ Assumed Liabilities ”).

(2) Except for the Assumed Liabilities, Buyer shall not assume, and shall not be liable for, any debt, liability or obligation of Seller of any type or description whatsoever, whether related or unrelated to the Assets, the Facility or the transactions contemplated within this Agreement and Seller shall remain liable and responsible for the payment or performance, as the case may be, of all such debts, liabilities and obligations.

1.4. Excluded Liabilities . Without limiting the foregoing, Seller shall remain responsible for all debts, liabilities and obligations not expressly assumed by Buyer (collectively, the “ Excluded Liabilities ”), including but not limited to the following:

(1) All obligations pursuant to or related to any loan or debt obligations;

(2) Liabilities, indebtedness, commitments or obligations and responsibilities of any kind whatsoever (other than the Assumed Liabilities) of Seller arising from operations of the Facility relating to the time through Closing;

(3) All liabilities and commitments relating to the time periods through Closing for income tax and other taxes; all employee (and former employee) wages, salaries and benefits (unless specifically referred to in Section 1.3(1));

(4) any liability of Seller arising out of the injury to or death of any person, or damage to or destruction of any property, whether based on negligence, breach of warranty, strict liability, enterprise liability or any other legal or equitable theory arising from or related to services provided by Seller, to the extent any of such liabilities arose on or prior to the Closing; and

(5) amounts owed by Seller to any third party payors, including Medicare and Medicaid, for the periods through Closing as a result of any settlement or other adjustment process used by such third party payors, including cost reports filed or to be filed.

ARTICLE 2. PURCHASE PRICE; ALLOCATIONS;
ACCOUNTS RECEIVABLE AND RESIDENT FUNDS

2.1. Purchase Price . The purchase price payable by Buyer to Seller for the Assets shall be Three Million Nine Hundred Thousand and No/100 Dollars ($3,900,000.00) (the “ Purchase Price ”).

(7) The Purchase Price, plus or minus credits and prorations as set forth in this Agreement, shall be payable at Closing by wire transfer to an account designated by Seller of immediately available, same day funds.

(8) Within three (3) business days after the date of this Agreement, Buyer shall deliver to the Deposit Escrow Agent (pursuant to its standard form escrow agreement reasonably acceptable to Buyer and Seller ) a good faith cash deposit in the amount of One Hundred Thousand and No/100 Dollars ($10 0,000.00) (the “ Deposit ”). Any accrued interest shall be transferred with 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(2), Section 8.7 or Section 12.15 hereof or as a result of a default by Seller in its obligations under this Agreement, Buyer and Seller shall deliver instructions to the Deposit Escrow Agent within three (3) business days of such termination to return the Deposit plus any accrued interest to Buyer . In the event that this Agreement is terminated for any other reason whatsoever, Buyer and Seller 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 .

(9) For purposes of determining the credit given to Buyer at Closing for assuming the Employee Obligations, the amount of Employee Obligations assumed by Buyer shall be equal to one hundred percent (100%) of the accrued vacation time (vested, but not unvested) plus fifty percent (50%) of the accrued sick leave (vested, but not unvested), both as shown on the payroll records delivered from Seller to Buyer 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 Buyer.

2.2. Apportionable Income and Expenses . All income and expense attributable to the operation of the Facility (measured on an accrual basis) through 11:59 p.m. on the day preceding the Closing Date (as defined in Section 6.1 below) shall be for the account of Seller. Thereafter, such income and expense shall be for the account of Buyer. All apportionable items of operating income and expense applicable to any periods commencing before Closing and continuing after Closing shall be prorated between Seller and, to the extent they are included within the Assumed Liabilities, Buyer. 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, Buyer and Seller 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. Seller shall have reasonable access to, and the right to inspect and audit, Buyer’s 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 Seller or Buyer 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 set forth in Exhibit 2.3 attached hereto (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) Seller is not selling, and shall retain all right, title and interest in and to all unpaid accounts receivable with respect to the Facility 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 (“ Seller’s A/R ”). Buyer (i) shall not interfere with any of Seller’s rights with respect to the Seller’s A/R, including but not limited to, the right to collect the same and to enforce any and all of Seller’s rights with respect to Seller’s A/R; provided Seller shall not initiate any litigation for collections against parties who continue to be residents of the Facility after Closing without Buyer’s consent, which consent shall not be unreasonably withheld or delayed, and (ii) agrees that if it receives any proceeds with respect to the Seller’s A/R, Buyer will hold such proceeds in trust for Seller and shall promptly turn over those proceeds to Seller without demand, in the form received.

(2) Within ten (10) business days following the Closing Date, Seller shall provide Buyer with a schedule setting forth by patient its outstanding accounts receivable with respect to the Facility as of the Closing Date.

(3) In furtherance and not in limitation of the requirements set forth in Section 2.4, payments received by Buyer 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 (if received by Buyer) shall be forwarded to Seller by Buyer, 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 Buyer if received by Buyer, and paid to Buyer promptly but in no event later than five (5) business days, if received by Seller; 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 Seller 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 current balances with any excess applied to reduce pre-Closing balances and, based on such assumption, the portion thereof which relates to the post-Closing period shall be retained by or promptly (within five (5) business days) remitted to Buyer and the balance shall be retained by or promptly (within five (5) business days) remitted to Seller.

(4) Any payments received within sixty (60) 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 to reduce the patients’ pre-Closing Date balances owed to Seller, 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, or any remittance was made to the wrong party, 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) The obligations of the parties to forward the accounts receivable payments pursuant to this Section 2.4 are absolute and unconditional and irrespective of any circumstances whatsoever which might constitute a legal or equitable discharge, offset, counterclaim or defense of the parties, the right to assert any of which is hereby waived.

2.5. Transfer of Resident Trust Funds .

(1) Upon execution of this Agreement, Seller shall prepare and deliver to Buyer a current true, correct, and complete accounting and inventory (properly reconciled) of any resident trust funds and residents’ property held by Seller in trust for residents at the Facility (collectively the “ Resident Trust Funds ”). Not less than ten (10) days prior to Closing, Seller shall prepare and deliver to Buyer an updated true, correct and complete accounting and inventory (properly reconciled) of the Resident Trust Funds.

(2) As of the Closing Date, Seller hereby agrees to transfer to Buyer the Resident Trust Funds and Buyer hereby agrees that it will 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, 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 Buyer at the Closing and to the extent the former exceeds the latter, Seller shall remit such excess to Buyer or to the extent the latter exceeds the former, Buyer shall remit such excess to Seller.

(4) Seller shall have no responsibility to the applicable resident/responsible party and regulatory authorities with respect to any Resident Trust Funds delivered to Buyer.

ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SELLER

As a material inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated herein, Seller hereby represents and warrants to Buyer and its permitted assignees, 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 . Seller is a limited liability company organized, validly existing and in good standing in the State of Tennessee and is in good standing and qualified to do business as a foreign limited liability company in the Commonwealth of Kentucky. Seller has full power and authority to own and operate the Facility and its Assets as presently owned and operated and to carry on its business as it is now being conducted. 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 Seller hereby. The execution, delivery and consummation of this Agreement, and all other agreements and documents executed in connection herewith by Seller, have been duly authorized by all necessary action on the part of Seller. Except as set forth on Exhibit 3.1 , no other action, consent or approval on the part of Seller or any other person or entity is necessary to authorize Seller’s 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 Seller, upon execution and delivery thereof, constitute the valid and binding obligations of Seller, enforceable in accordance with their respective terms.

3.2. Absence of Default . The execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith by Seller 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 governing documents of Seller; (2) any contract, lease, purchase order, agreement, instrument, indenture, mortgage, pledge, assignment, permit, license, approval or other commitment to which Seller is a party or by which Seller and/or the Assets are bound; or (3) any judgment, decree, order, writ, injunction, law, statute, rule, or regulation, of any court, governmental authority or arbitration tribunal to which Seller and/or the Assets are subject.

3.3. Financial Statements . Attached hereto as Exhibit 3.3 are true and correct copies of the audited balance sheets for the Facility as of December 31, 2013 and 2014, and audited income statements for the years then ending, and the interim unaudited balance sheet and income statement of the Facility for the six (6) month period ended June 30, 2015 (collectively, the “ Financial Statements ”). The Financial Statements are based on the books and records of Seller and present fairly and accurately the financial position, the results of operation, and all costs and expenses of the Facility for the periods specified. The Financial Statements are true, complete and correct and contain no untrue or misleading statements and do not omit anything which would cause them to be misleading or inaccurate in any respect. The Financial Statements have been prepared in compliance with generally accepted accounting principles, consistently applied.

3.4. Operations Since June 30, 2015 . Except as set forth on Exhibit 3.4 attached hereto, to the knowledge of Seller, since June 30, 2015, there has been no:

(5) Material change in the condition, financial or otherwise, of Seller or the Facility that has, or could reasonably be expected to have, a material adverse effect on the Assets, the Facility or future prospects of the Facility, or the results of the operations of Seller;

(6) Uninsured loss, damage or destruction in excess of $10,000.00 to any Assets;

(7) Material amendment to or change in the terms of any of the Assumed Contracts or termination, waiver or cancellation of any rights or claims of Seller thereunder; or

(8) Institution or settlement of any litigation, action or proceeding before any court or governmental body relating to Seller, the Facility or the Assets.

3.5. Employment Discrimination . Except as disclosed on Exhibit 3.5 attached hereto, no person or party (including, without limitation, any governmental agency) has asserted, or to Seller’s knowledge, threatened to assert, any claim for any action or proceeding against Seller (or any officer, director, employee, agent or member of 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, and Seller has no knowledge of any acts or omissions which could give rise to any such claims.

3.6. Licenses and Permits . The Facility has all licenses, permits, registrations, certificates of need and other certificates and accreditations (collectively, the “ Licenses and Permits ”) necessary for Seller to occupy and operate the Facility as a skilled nursing and rehabilitation facility, all of which are listed on Exhibit 3.6 attached hereto. True and correct copies of the Licenses and Permits have previously been delivered to Buyer. There is no default under any of the Licenses and Permits, nor does Seller know of any grounds for revocation, suspension or limitation of any of the Licenses or Permits. No written or verbal notices have been received by Seller with respect to any pending or, to Seller’s knowledge, threatened or pending revocation, termination, suspension or limitation of any of the Licenses and Permits. The licensed-bed capacity and the current effective capacity of the Facility are also set forth on said Exhibit 3.6 . No waivers of any laws, rules, regulations or requirements (including, but not limited to, minimum square footage requirements per bed) are required for the Facility to operate at the foregoing licensed bed capacity.

3.7. Compliance with Zoning, Land Use and Other Laws . Except as set forth on Exhibit 3.7 attached hereto, to Seller’s knowledge none of the Real Estate is in violation of any zoning, public health, building code or other similar law applicable thereto or to the ownership, occupancy and/or operation thereof, or there exist applicable variances, conditional use permits, waivers or exemptions relating to the Real Estate with respect to any non-conforming use or other zoning or building codes matters. To Seller’s 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) attached hereto, Seller is the sole legal and beneficial owner of the personal property included in the Assets, free and clear of all security interests, liens, leases, covenants, assessments, easements, options, rights of refusal, restrictions, reservations, defects in the title, encroachments and other encumbrances. To Seller’s knowledge no item of Inventory or Equipment and Furnishings is in need of repair or replacement other than as part of routine maintenance in the ordinary course of business.

(2) The descriptions of the Real Estate contained in Exhibit 1.1(1) hereto include all real property owned by Seller in connection with the Facility. Seller is the sole and exclusive holder of all right, title and interest in the Real Estate, and at Closing will have, good, marketable and insurable fee simple title to, and be in possession of, the Real Estate. 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, 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 a skilled nursing facility and are acceptable to Buyer, and (iv) matters shown by the Existing Title Work (as defined in Section 8.7(1)) deemed to be Permitted Exceptions under Section 8.7(3)hereof and those additional matters described on Exhibit 3.8(2) attached hereto (the “ Permitted Exceptions ”). Seller has the full right and authority to transfer and convey the Real Estate to Buyer (or an affiliate of Buyer) as contemplated by the terms of this Agreement, and to vest in Buyer good, marketable and insurable fee simple 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 Facility or any Asset to which either Seller is a party or by which Seller, the Assets or the Facility is bound or affected, including, without limitation, service contracts, management agreements and equipment leases (collectively, the “ Contracts ”). At least five (5) business days prior to the Closing Date, Buyer shall notify Seller of which Contracts it intends to assume, and such Contracts shall hereinafter be the “ Assumed Contracts ”; provided, however that any Contracts not included in the Assumed Contracts shall be retained by Seller.

(2) No event or condition has happened or presently exists that (i) constitutes a default or breach by Seller or, to Seller’s knowledge, against any other party thereto, or (ii) after notice or lapse of time or both, would constitute a default or breach by Seller or, to Seller’s knowledge, against any other party thereto, under any of the Assumed Contracts. To Seller’s 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 . Except as set forth on Exhibit 3.10 attached hereto, to Seller’s knowledge all operations, use or occupancy of the Real Estate by Seller and any agent, contractor or employee of any agent or contractor of Seller (collectively, “ Agents ”), or any tenant or subtenant of Seller of any part of the Real Estate, have been in compliance in all respects with any and all federal, state or local laws, statutes, regulations, orders, codes, judicial decisions, decrees, licenses, permits and other applicable requirements of governmental authorities with respect to Hazardous Substances, pollution or protection of human health and safety (collectively, “ Environmental Law ”) including, but not limited to, the release, emission, discharge, storage and removal of Hazardous Substances. The Real Estate is free of any lien imposed pursuant to Environmental Law.

(3) No Investigation or Inquiry . Except as set forth on Exhibit 3.10 attached hereto, Seller: (i) has neither received nor 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, to Seller’s knowledge, 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 Seller which could serve as a basis therefor. Seller has not assumed any liability of any third party for clean up under, or noncompliance with, Environmental Law.

(4) No Disposal, Discharge or Release . Seller has 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 compliance with applicable Environmental Laws.

(5) OSHA . Seller is in compliance with OSHA requirements respecting friable asbestos, if any, located on the Real Estate, and in this regard Seller has properly implemented an operations and maintenance training program where required for certain of its employees in the proper handling and removal of asbestos.

Seller shall promptly notify Buyer in writing of any order or notice of violation or noncompliance with any Environmental Law, any threatened or pending action by any regulatory agency or governmental authority, or any claims made by any third party relating to Hazardous Substances on, emanations on or from, releases on or from, the Real Estate; and shall promptly furnish Buyer 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 Seller’s 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 attached hereto, Seller has received no notice of any 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 on 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 Seller, any of the Assets or the Facility and Seller knows of no basis therefor. A list of each lawsuit, administrative proceeding, governmental investigation, arbitration or other action commenced against Seller or involving the Real Estate or Assets commenced or pending during the past five (5) years is set forth on Exhibit 3.12 attached hereto.

3.13. Seller’s Employees . Exhibit 3.13 attached hereto sets forth: (1) a complete list of all of Seller’s employees at the Facility, including all employees on leave of absence, including but not limited to leaves arising from injury or workers compensation claims, Family and Medical Leave Act (collectively, the “ Employees ”), and rates of pay; (2) categorization of each person as a full-time or part-time employee of Seller; (3) the employment dates and job titles of each such person; and (4) true and complete copies 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 , Seller has no employment agreements with the Employees and all such Employees are employed on an “at will” basis. Seller will terminate all of the Employees at Closing. Seller shall retain responsibility for and timely pay all salaries and wages, related payroll taxes and all retention bonuses, retirement and other fringe benefits that have accrued to the Employees through Closing; provided that Buyer shall assume accrued vacation and paid time off obligations (vested and unvested) pursuant to Section 1.3(1) above. No officer, director, agent or managing employee (as that term is defined in 42 U.S.C. § 1320a-5(b)) of Seller has been (i) excluded from participating in the Programs (as defined in Section 3.27 below), (ii) subject to sanction pursuant to 42 U.S.C. § 1320a-7a or 1320a-8, (iii) convicted of, a criminal offense under the Anti-Kickback Statute (42 U.S.C. § 1320a-7b) or (iv) charged with or, to Seller’s knowledge, investigated, for any violation of laws related to fraud, theft, embezzlement, breach of fiduciary responsibility, financial misconduct, obstruction of any investigation, or controlled substances.

3.14. Labor Relations . Seller is not a party to any labor contract, collective bargaining agreement, Letter of Understanding, or any other arrangement, with any labor union or organization which obligates 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 Seller and any present or former employee(s) of Seller.

3.15. Insurance . A complete list of all insurance policies held by Seller with respect to the Facility is set forth on Exhibit 3.15 attached hereto. True and complete copies of such policies have previously been provided to Buyer. Exhibit 3.15 also sets forth a summary of Seller’s current insurance coverage (listing type, carrier and limits), and includes a list of any pending insurance claims relating to Seller. Seller is not in default or breach with respect to any provision of any such insurance policies nor has Seller failed to give any notice or to present any claim thereunder in due and timely fashion. In the event Seller’s professional and general liability insurance is written on a claims made basis, Seller shall purchase continuing coverage, otherwise known as an Extended Reporting Endorsement or “tail” coverage, for the mutual benefit of both Buyer and Seller, with minimum limits of no less than $1 million per occurrence and $3 million in the annual aggregate. Such required liability coverage will remain in force for a minimum of two (2) years from the date of Closing. In the event any of such aggregate liability insurance limits are eroded during the two (2) year period when such insurance is required to be maintained, Seller agrees to reinstate such limits at the beginning of each year during the two (2) year period. Seller further agrees to add Buyer as an Additional Insured to any of its required liability coverage.

3.16. Broker’s or Finder’s Fee . Seller has not employed and is 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.

3.17. Motor Vehicles . Any motor vehicles used at the Facility, whether owned or leased, are listed on Exhibit 3.17 attached hereto.

3.18. Employee Benefit Plans .

(1) Welfare Benefit Plans . Exhibit 3.18(1) attached hereto contains a true, accurate and complete list of each “ employee welfare benefit plan ” (as defined in Section 3(1) of the Employee Retirement Income Security Act of 1974 as amended (“ ERISA ”)) maintained by Seller or to which Seller contributes or is required to contribute (such employee welfare benefit plans being hereinafter collectively referred to as the “ Welfare Benefit Plans ”). Complete and accurate copies of all Welfare Benefit Plans have previously been provided to Buyer.

(2) Pension Benefit Plans . Exhibit 3.18(2) attached hereto contains a true and complete list of each “ employee pension benefit plan ” (as defined in Section 3(2) of ERISA) maintained by Seller, to which Seller contributes or is required to contribute, or which covered any employee of Seller during the period of their employment with any predecessor of Seller, including any multi-employer pension plan as defined under Section 414(f) of the Code (such employee pension benefit plans being hereinafter collectively referred to as the “ Pension Benefit Plans ”). Complete and accurate copies of all Pension Benefit Plans have previously been provided to Buyer.

(3) Liabilities . There are no unfunded liabilities under any Welfare Benefit Plans or Pension Benefit Plans. Buyer shall not be liable or responsible for any debt, obligation, responsibility or liability of Seller under any such plans. Seller shall be liable under its Welfare Benefit Plans and Pension Benefit Plans for all claims due and unpaid at Closing and for all claims incurred before Closing, whether or not paid or presented before Closing.

(4) COBRA Coverage . Seller has provided or caused to be provided notice of the availability of continuation coverage within the meaning of Section 4980B of the Code (“ COBRA coverage ”) for all of either present and former employees and their dependents entitled to such notice because of a qualifying event occurring before Closing, and for providing COBRA coverage as required by law for all such employees, or their dependents, who elect or have elected such coverage.

3.19. Compliance with Laws . Seller has received no written or, to Seller’s knowledge, verbal notices of non-compliance with any laws, rules and regulations applicable to the Assets or Facility. Seller is in material compliance with all federal, state and local laws, rules and regulations which relate to the operations of the Facility.

3.20. WARN Act . Within the period ninety (90) days prior to Closing, Seller has 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.

3.21. Tax Returns; Taxes . Seller has filed all federal, state and local tax returns and reports required by such authorities to be filed, and paid all taxes, assessments, governmental charges, penalties, interest and fines due to 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 the knowledge of Seller, threatened against Seller by any federal, state or local authority. All tax returns have been (and with respect to the final returns will be) 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. Seller has not committed any violation of any federal, state or local tax laws. Proper amounts have been collected or withheld by Seller 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).

3.22. Deposits . The Deposits currently held by Seller are listed on Exhibit 3.22 attached hereto. All funds held with respect to such Deposits are in balance and will be in balance at Closing. Exhibit 3.22 will be updated to Closing by Seller for purposes of crediting any additional Deposits to Buyer’s account.

3.23. Accreditation; Survey Reports . Seller has not received any written notice of material deficiency from The Joint Commission or any other crediting organization with respect to the Facility’s current accreditation period that require any material action or response by Seller that have not been corrected or otherwise remedied. Seller has made available to Buyer a true and complete copy of (i) Facility’s most recent Joint Commission or other accreditation survey report and deficiency list, if any and (ii) 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. Intellectual Property . Exhibit 3.24 lists all trade secrets, names, assumed names, registered or unregistered trade names, patents, inventions or discoveries that may be patentable, registered or unregistered trademarks, registered or unregistered service marks, registered or unregistered copyrights, registered or unregistered brands, applications for any of the foregoing, and proprietary rights in internet web sites and internet domain names, as owned, used or licensed by Seller in connection with the Facility (collectively, the “ Intellectual Property Assets ”). The Intellectual Property Assets owned by Seller do not infringe, misappropriate, violate or conflict with any patent, copyright, trademark, trade secret or any other intellectual property or proprietary right of any other person.

3.25. Workers’ Compensation . Seller is in compliance with coverage for workers’ compensation and unemployment compensation of the Commonwealth of Kentucky and all other jurisdictions in which Seller engages in business or has employees. There are no outstanding or pending, and to the knowledge of Seller no threatened claims against Seller for workers’ compensation or unemployment compensation, and no workers’ compensation claims which can be reopened. Seller shall remain responsible for all workers’ compensation claims which arise out of any workplace injury occurring on or before the Closing Date.

3.26. Compliance with Medicare and Other Third Party Payor Programs . With respect to the federal Medicare programs and other third party payor programs:

(1) The Facility is fully qualified as a provider of, and is in compliance, in all material respects, with all conditions for participation in Medicare.

(2) In connection with the Facility, Seller participates in the Medicaid Program (the “ Program ”) under valid Medicaid contracts and reimbursement agreements (collectively, the “ Program Agreements ”). Seller is in compliance with rules and policies respecting the Program, including all certification, billing, reimbursement and documentation requirements, and there is no threatened or pending revocation, suspension, termination, probation, restriction, limitation or non-renewal affecting any of Seller’s Program Agreements or third-party payor contracts.

(3) Seller has timely filed all cost reports required to be filed in connection with Medicare, Medicaid or any other third party payor program, and has delivered to Buyer true, correct and complete copies of all such cost reports filed for each of the last three (3) completed fiscal years of Seller, together with all claims and adjustments asserted by the applicable governmental authority and any settlement thereof.

(4) Except for reviews conducted by the applicable regulatory authorities in the ordinary course of business, Seller has 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, Medicaid or any other third party payor program.

(5) Neither Seller nor, to Seller’s knowledge any employee of Seller, has been convicted of or pleaded guilty or no contest to any criminal offense related to the operation of the Facility, and, to the knowledge of Seller, no person has committed any offense that could serve as the basis for suspension, restriction or exclusion of the Facility from Medicare, Medicaid or any other third party payor program.

(6) Seller has not received written notice of any proceeding, and Seller has 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 Seller’s participation in Medicare, Medicaid or any other third party payor program.

(7) Buyer shall not be subject to any fines or penalties that may be imposed by regulatory authorities with respect to Seller’s operation of the Facility prior to the Closing Date and Buyer’s license to operate the Facility shall not be subject to revocation or suspension as a result of any action or omission of Seller in connection with Seller’s operation of the Facility prior to Closing Date.

3.27. Condition of Property . To the best knowledge of Seller, there are no interior or exterior, structural or other material defects in any portion of the Real Estate. The Real Estate is and shall be on the Closing Date in good working order, condition and repair, reasonable wear and tear excepted.

3.28. Absence of Certain Business Practices; Fraud and Abuse Matters . To Seller’s knowledge, no former or present partner, officer, employee or agent of Seller or persons who provide professional services under agreements with Seller, acting alone or together, has, directly or indirectly, overtly or covertly, (i) knowingly and willfully received any prohibited remuneration, rebates, payments, commissions, promotional allowances or any other prohibited gifts or benefits, from any customer, supplier, physician, health care employee, governmental employee or other person with whom Seller has done business directly or indirectly; (ii) knowingly and willfully given or agreed to give any prohibited remuneration, rebates, payments, commissions, promotional allowances, or any other prohibited gifts or benefits to any customer, supplier, physician, health care employee, governmental employee or other person who is or may be in a position to help or hinder the business of Seller (or Seller in connection with any actual or proposed transaction) or (iii) engaged in any activities that are prohibited, or are cause for civil penalties or permissive exclusion from Medicare or Medicaid, under Title 42 of the United States Code (“ Title 42 ”) or Title 31 of the United States Code, or the regulations promulgated thereunder, that, in the case of any of clause (i), (ii) or (iii), (A) would subject Seller to any claims, liabilities or penalties in any civil, criminal or governmental investigation, litigation or proceeding brought by any regulatory authority, (B) if continued in the future, would have a material adverse effect or (C) are prohibited by any private accrediting organization from which the Facility seeks or has accreditation or by generally recognized professional standards of care or conduct, including without limitation the following activities:

(1) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment;

(2) knowingly and willfully making or causing to be made any false statement or representation of a material fact for use in determining rights to any benefit or payment;

(3) presenting or causing to be presented a claim for reimbursement under Medicare, Medicaid or other federal or state health care program that is (i) for an item or service that the person presenting or causing to be presented knows or should know was not provided as claimed, (ii) for an item or service that the person presenting knows or should know that the claim is false or fraudulent or (iii) for an item or service that the person presenting knows or should know is not medically necessary;

(4) knowingly and willfully making or causing to be made or inducing or seeking to induce the making of any false statement or representation (or omitting to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading) or a material fact with respect to (i) the conditions or operations of the Facility in order that such Facility may qualify for Medicare, Medicaid or other federal or state health care program certification or (ii) information required to be provided under Section 1320a-7 of Title 42 or any regulations promulgated thereunder; or

(5) currently is, or within the preceding five (5) years, been subject to any corporate integrity agreement with the Office of Inspector General, or any other type of oversight program that could cause the facility to incur obligations or liabilities or that could restrict, impair, limit, jeopardize, or suspend participation in the Medicare program.

3.29. Undisclosed Liabilities . All material liabilities of Seller related to the Facility are identified on the Financial Statements, the Exhibits to this Agreement or otherwise identified on the attached Exhibit 3.29 except for (a) liabilities reflected or reserved against in the financial statement balance sheets of Seller, or (b) current liabilities incurred in the ordinary course of business of Seller, and Seller knows of no other material liabilities.

ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF BUYER

As an inducement to Seller to enter into this Agreement and to consummate the transactions contemplated herein, Buyer hereby represents and warrants to Seller, 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 . Buyer is a limited liability company duly organized under the laws of the State of Delaware, and qualified to do business under the laws of the Commonwealth of Kentucky. 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. 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 Buyer has been duly authorized by all necessary action on the part of Buyer. No other action on the part of Buyer 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 Buyer, upon due execution and delivery thereof, shall constitute the valid binding obligations of Buyer, enforceable in accordance with their respective terms.

4.2. Absence of Default . The execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith by Buyer 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 (except in the ordinary course pursuant to Buyer’s existing credit agreements) under: (1) any term or provision of the governing documents of Buyer; (2) any contract, lease, agreement, indenture, mortgage, pledge, assignment, permit, license, approval or other commitment to which Buyer is a party or by which Buyer is bound; (3) any judgment, decree, order, regulation or rule of any court or regulatory authority; or (4) 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 . Buyer has not employed and is 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. Buyer shall indemnify and hold Seller harmless from any breach of this representation.

ARTICLE 5. COVENANTS OF PARTIES

5.1. Inspection; Preservation of Facility and Assets . Buyer, its agents, employees, consultants and contractors (“ Buyer Parties ”), shall have the right to come onto the Real Estate and to have access to the Assets and the Facility from time to time for the purpose of conducting its due diligence investigation and review of the Assets and the Facility; provided, that any inspection, examination, test or study conducted by or on behalf of Buyer shall be solely at Buyer’s expense, shall be conducted at reasonable times and upon reasonable advance notice, and shall not interfere with the operation of the Facility by Seller. Seller shall have a right to have a representative present during any visits to or inspections of the Facility by Buyer Parties. From the date hereof through Closing, Seller shall use its best efforts and shall do or cause to be done all such acts and things as may be necessary to preserve, protect and maintain intact the operation of the Facility and Assets as a going concern consistent with prior practice and not other than in the ordinary course of business and to preserve, protect and maintain for Buyer the goodwill of the clinical staff, suppliers, employees, clientele, patients and others having business relations with the Facility. Seller shall use its best efforts to obtain all documents called for by this Agreement. Buyer and Seller shall use its best efforts to facilitate the consummation of the transactions contemplated under this Agreement. Until termination of this Agreement, Seller agrees that it will not sell or transfer, or negotiate the sale or transfer of, the Assets or the Facility. From the date hereof until Closing, Seller 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, Seller will not perform any material grading or excavation, construction or removal of any improvement, or make any other material change or improvement upon or about the Real Estate without the prior written consent of Buyer. From the date hereof through Closing, Seller and any party in possession of all or any part of the Assets 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, Seller shall not make any material change in the operations of the Facility or and in the utilization of the Assets and shall not enter into any other material contract or commitment or any other transaction with respect to the Facility or the Assets without the prior written consent of Buyer.

5.3. WARN Act . Buyer shall employ such number of Seller’s employees at the Facility, and shall retain for a period of ninety (90) days following the Closing Date such number of Seller’s employees at the Facility, as shall be necessary to avoid any potential liability by Seller for a violation of the Workers Adjustment Retraining and Notification Act (the “ WARN Act ”) (or any similar law of the Commonwealth of Kentucky) attendant to Seller’s failure to notify such employees of a “mass layoff” or “plant closing” as defined in the WARN Act (or any similar law of the Commonwealth of Kentucky). For purposes of determining compliance by Buyer with the foregoing provisions, employees terminated by Seller at the Facility during the period of ninety (90) days immediately prior to the Closing Date for other than cause, retirement or voluntary departure, shall be taken into consideration so long as Seller notifies Buyer of such terminations. Seller shall notify Buyer in writing regarding all employees terminated by Seller during said ninety (90) day period. In order to determine compliance with this Section 5.3, Buyer shall advise Seller in writing on or before five (5) days prior to the Closing Date of those employees of Seller that Buyer has elected not to employ. Nothing herein contained shall be deemed either to affect or to limit in any way the management prerogatives of Buyer with respect to employees, or to create or to grant to such employees any third party beneficiary rights or claims or causes of action of any kind or nature. The provisions of this Section 5.3 shall survive the Closing. Notwithstanding the foregoing Buyer shall be entitled to offer employment to therapists who work at the Facility and are employees of Seller or its affiliates, and Seller and/or its affiliates shall consent to such employment and shall release Buyer and its affiliates, and the affected employees, from any non-competition covenants or similar restrictions.

5.4. Access to Books and Records .

(1) From the date hereof through Closing, Seller shall give Buyer and Buyer’s counsel, accountants and other representatives full access to all of Seller’s offices, properties, books, contracts, commitments, records and affairs relating to the Assets or the Facility so that Buyer may inspect and audit them and shall furnish to Buyer a copy of all documents and information concerning the properties and affairs of Seller, the Facility or the Assets as Buyer may request. If any such books, records and materials are in the custody of third parties, Seller shall direct such third parties to promptly provide them to Buyer. Copies of documents furnished to Buyer by Seller will be returned by Buyer upon request if the transaction is not consummated. Seller shall provide Buyer promptly with interim financial statements of Seller and any other management reports, as and when they are available.

(2) Following Closing, Buyer shall permit Seller’s 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 Facility which relate to transactions or events occurring through Closing. Buyer’s reasonable out-of-pocket costs associated with the delivery of the requested documents shall be paid by Seller.

(3) Following Closing, Seller shall permit Buyer and its 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 Facility or Assets, which books and records are retained by Seller and which relate to transactions or events occurring prior to Closing. For a period of five (5) years after Closing or such longer period as may be mandated by law, Seller agrees that, prior to the destruction or disposition of any such books or records, Seller shall provide not less than forty-five (45) days, nor more than ninety (90) days, prior written notice to Buyer of such proposed destruction or disposal. If Buyer desires to obtain any such documents or records, it may do so by notifying Seller in writing at any time prior to the date scheduled for such destruction or disposal. In such event, Seller shall not destroy such documents or records and the parties shall then promptly arrange for the delivery of such documents or records to Buyer, its successors or assigns. Seller’s reasonable out-of-pocket costs associated with the delivery of the requested documents or records shall be paid by Buyer.

(4) For a period of eighteen (18) months following Closing, to the extent requested by Buyer in connection with (a) any audit of the financial statements of Seller relating to the Facility; (b) any separate presentation to be prepared by Buyer or any of its affiliates of the financial statements relating to the Facility (including, without limitation, any such separate presentation of the Facility as a “significant subsidiary” or a “Facility acquired” within the meaning of the accounting rules of the Securities Act and/or the Exchange Act (each as defined below), and/or the rules and regulations promulgated under either such act); or (c) any presentation to be prepared by Buyer or any of its affiliates of the pro forma effects of Buyer’s acquisition of the Facility, in each case, Seller shall, and shall cause its accountants to, (i) cooperate in the preparation of such financial statements or pro forma presentation, including, the execution and delivery of any management or other audit letters reasonably requested by Buyer’s auditors, and (ii) provide, or cause to be provided, any records or other information requested by Buyer or any of its affiliates in connection therewith, to the extent they are not included in the Assets, as well as access to, and the cooperation of, Seller’s accountants and work papers relating to financial statements of Seller, at the cost and expense of Buyer.

5.5. 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 Seller’s insurance company and assigned to Buyer; provided, however, that in the event of a material casualty that affects the Facility and renders it unusable for its intended purposes, Buyer may elect to either: (i) terminate this Agreement in its entirety, without any further penalty or obligation and no remaining obligations of either party to the other; or (ii) complete the Closing on the terms stated herein, subject to the right to either receive all insurance proceeds, or obtain a reduction in the Purchase Price with regard to such insurance proceeds received by Seller.

5.6. Condemnation . From the date hereof through Closing, in the event the Facility becomes subject to or is threatened with any condemnation or eminent domain proceedings that threatens to render the Facility unusable for its intended purposes then Buyer, in its sole discretion, may elect to terminate this Agreement in its entirety without obligation or penalty. In the event Buyer does not elect to terminate the Agreement, the transaction shall proceed towards Closing, provided that the Purchase Price shall be reduced by any condemnation award received by Seller or Buyer shall be assigned all such claims . In the event that the Facility becomes subject to or is threatened with any condemnation or eminent domain proceedings which do not threaten to render the Facility unusable for its intended purposes, then the parties shall proceed to Closing and Buyer shall be entitled to any condemnation award or damages paid with respect to such proceeding.

5.7. Preserve Accuracy of Representations and Warranties . Seller 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. Seller will promptly notify Buyer of any lawsuit, claim, administrative action or other proceeding asserted or commenced against Seller that may involve or relate in any way to Seller, the Assets or the operation of the Facility. Seller shall promptly notify Buyer of any facts or circumstances that come to Seller’s attention and that cause, or through the passage of time or the giving of notice or either, may cause any of Seller’s representations and warranties to be untrue or misleading at any time from the date hereof through Closing.

5.8. Maintain Books and Accounting Practices . From the date hereof through Closing, Seller shall maintain its 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.

5.9. Indebtedness; Liens . Other than in the ordinary course of Seller’s business consistent with past practice, from the date hereof through Closing, Seller shall not create, incur, assume, guarantee or otherwise become liable or obligated with respect to any indebtedness for borrowed money, nor make any loan or advance to, or any investment in, any person or entity, nor create any lien, security interest, mortgage, right or other encumbrance in any of the Assets, without Buyer’s prior written approval.

5.10. Compliance with Laws and Regulatory Consents . From the date hereof through Closing: (1) Seller shall comply with all applicable statutes, laws, ordinances and regulations; (2) Seller shall keep, hold and maintain all certificates, accreditations, participations, licenses, and other permits necessary for operation of the Facility; (3) Seller shall use reasonable efforts and shall cooperate with Buyer to obtain all consents, approvals, exemptions and authorizations of third parties, whether governmental or private, necessary to consummate the transactions contemplated by this Agreement; and (4) Seller shall make and cause to be made all filings and give and cause to be given all notices which may be necessary or desirable under all applicable laws and under applicable contracts, agreements and commitments in order to consummate the transactions contemplated by this Agreement.

5.11. Maintain Insurance Coverage . From the date hereof through Closing, Seller shall maintain the existing insurance on the Assets and the operations of the Facility.

5.12. Licensure and Certification . Buyer shall promptly file all initial applications and other documents required by the Commonwealth of Kentucky (the “ State ”) for the issuance of the licenses, certificates of need, certifications and approvals required by the State for the operation of the Facility by Buyer (the “ Licensure Approvals ”) and Buyer 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. Buyer shall not use or bill under any Medicaid provider numbers used by Seller, and Buyer 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 Facility (“ New Provider Number ”). Seller’s Medicaid provider account numbers for the Facility shall remain the sole and exclusive property of Seller.

5.13. Performance . Seller and Buyer shall take all appropriate steps to satisfy their respective obligations and the conditions to Closing.

5.14. WARN Act; Hiring of Employees . Prior to Closing, Seller 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 the WARN Act. At Closing, Buyer 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 either Seller under the WARN Act or any similar state law or regulation.

5.15. Consents . Seller shall use reasonable efforts to obtain all consents required in form and substance for the assignment of the Assumed Contracts and Buyer shall assist Seller 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, Seller shall cooperate in any reasonable arrangement designed to provide Buyer the benefit under any such Assumed Contracts, including without limitation enforcement, at no out-of-pocket cost to Seller, of any and all rights of Seller against the other party or parties thereto arising out of the breach or cancellation by such other party or otherwise.

5.16. Medicare/Medicaid Cost Reports .

(5) Seller acknowledges and agrees that it shall be responsible for all Medicare and Medicaid billing and cost reports filed with Medicare and Medicaid with respect to the Facility prior to the Closing Date and is responsible for terminating cost reports that include periods up to the Closing Date. Seller acknowledges and agrees that it shall remain liable for any claims for overpayments under any of Seller’s Medicare or Medicaid provider agreements for periods prior to the Closing Date. Seller shall timely file all required Medicare credit balance reports, responses to open cost report audits and settlements, and terminating cost reports. Buyer acknowledges and agrees that following the Closing Date, Seller shall continue to be entitled to receive any refund or other benefit which may result from the filing of said reports, including, without limitation, rights to settlements and retroactive adjustments and the Seller Bad Debt (as defined below), if any, arising under a cost report of Seller or its affiliates, for cost report periods ending on or prior to the Closing Date, whether open or closed. After the Closing Date, Buyer shall assist Seller in any way reasonably necessary or required of Buyer to complete such cost reports in a timely manner; provided that any costs or expenses related thereto shall be borne by Seller.

(6) After the Closing Date, Seller shall promptly and diligently provide Buyer with reasonable and appropriate documentation regarding the Medicare bad debts associated with the Facility incurred by Seller for dates of services prior to the Closing Date (the “ Seller Bad Debt ”) for purposes of facilitating Buyer’s preparation of related cost reports.

(7) Buyer shall timely prepare and file with the CMS and the appropriate state agency, its initial cost report for the fiscal year commencing with the fiscal year in which the Closing Date occurs, and will include in its initial cost report the Seller Bad Debt.

(8) Seller shall provide to Buyer for filing by the day following closure of the certificate of need file, a completed and signed CMS 855A (Sections 1A, 2F, 13, 15 or 16, assuming Seller has submitted an 855 application at some point such as revalidation and the Authorized/Delegated Person has not changed from the last submission). If the Authorized/Delegated Person has changed or if none is on file with the MAC, then Section 6 shall be completed for both the old and new Authorized/Delegated Person. As an alternative, Seller can provide all the information needed to complete the Seller’s CMS 855A and a completed and signed Section 15 or 16.

5.17. Prohibited Actions Pending Closing . Unless otherwise expressly provided for herein or approved by Buyer in writing, from the date of this Agreement until the Closing Date, Seller shall not:

(1) Accept any advance payment for more than thirty (30) days of any rent or residents’ occupancy fees under any lease included in the Assumed Contracts or occupancy agreement; or waive, reduce or forgive any rent or occupancy fees required to be paid under any occupancy agreement, or grant any lease or other concessions or free rent periods under any occupancy agreement;

(2) Make any capital improvements to the Real Estate in excess of $10,000 or incur any other obligations in excess of $10,000;

(3) Make any commitments or representations to any applicable governmental authority, any adjoining or surrounding property owners, any civic association, any utility or any other person or entity that would in any manner be binding upon Buyer;

(4) 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

(5) 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 Seller.

5.18. Restrictive Covenants . In consideration of the Purchase Price and the benefits Seller and the Guarantor will receive under this Agreement, and to protect Buyer’s legitimate business interests in the operation of the Facility, Seller and the Guarantor shall not, directly or indirectly, do any of the following:

(1) For a period beginning at Closing and ending on the third anniversary of Closing, engage in, or invest in (other than as a passive shareholder of less than five percent (5%) of the securities of a publicly traded entity), own, manage, operate, finance, control, be employed by, associated with or in any manner connected with, or render services or advice or other aid to, any person engaged in or planning to become engaged in, any Competing Business (defined below) within the Restricted Area (defined below); or

(2) For a period beginning at Closing and ending on the first anniversary of Closing, induce or attempt to induce any employee or independent contractor of Buyer or any of its affiliates to leave the employ or service of Buyer or any of its affiliates, in any way interfere with the relationship between Buyer or any of its affiliates and any such employee or independent contractor, or solicit, offer employment to, otherwise attempt to hire, employ, or otherwise engage as an employee, independent contractor, or otherwise, any such employee or independent contractor.

For purposes hereof, (i) “ Competing Business ” shall mean any business engaged in the ownership and/or operation of skilled nursing facilities, and (ii) “ Restricted Area ” shall mean any area within a ten (10) mile radius of the Facility.

5.19. Medicare Billing Assistance . Following the Closing Date, Buyer will cooperate and assist Seller in the preparation and execution of Medicare billings for services provided by Seller to residents of the Facility for months (or portions of months) ending prior to the Closing Date and any associated forms for new or discharged residents, which may need to be signed by the Facility’s administrator. After the Closing Date, Buyer shall allow the field auditor/accountant of Seller to have reasonable onsite access to the Facility and the records of the Facility for the billing month in question for the purpose of preparing, completing and submitting the Medicare billings and any associated forms to the appropriate Medicare offices for payment to the account of Seller.

5.20. Collection Assistance . Buyer shall cooperate with Seller in collecting accounts receivable which relate to periods prior to the Closing Date, but shall not be responsible for actively collecting such receivables for Seller. Until the earlier of: (i) Seller receives payment of all of Seller’s A/R; or (ii) the date which is twelve (12) months after the Closing Date, Buyer shall provide Seller with an accounting by the 20th day of each month setting forth all amounts received by Buyer during the preceding month with respect to Seller’s A/R which are set forth in the schedule provided by Seller pursuant to Section 2.4. Seller shall have the right to inspect all cash receipts of Buyer related to payment for services rendered to residents of the Facility prior to the Closing Date, during weekday business hours, in order to confirm Buyer’s compliance with the obligations imposed on it under this Section.

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 promptly following the satisfaction or waiver of the closing conditions set forth in Articles 7 and 8 (the “ Closing Date ”). The parties shall use commercially reasonable efforts to close the transactions contemplated hereby as of the first day of the first month after the Due Diligence Termination Date (i.e., on or before October 30, 2015, effective as of 12:01 a.m. local time on November 1, 2015). Closing shall take place at the offices of Harwell Howard Hyne Gabbert & Manner, P.C., Nashville, Tennessee, 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, Buyer shall pay to Seller or their designee (pursuant to wire instructions given to Buyer by Seller) funds in an amount equal to the Purchase Price. Notwithstanding the foregoing, the Closing Date shall be extended if and to the extent necessary to allow Buyer to obtain the requisite health care licenses to operate the Facility or by mutual agreement of Purchaser and Seller. For the avoidance of doubt, the Closing Date shall not be conditioned on Purchaser’s ability to secure financing for the transaction.

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 Seller : (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 Buyer or Seller; or (b) in the event Buyer breaches or violates any material provision of this Agreement or fails to perform any material covenant or agreement to be performed by Buyer under the terms of this Agreement and such breach, violation or failure is not cured prior to Closing or waived by Seller at or prior to Closing.

(2) By Buyer : (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 Buyer or Seller; (b) pursuant to Section 5.5, 5.6 or 5.12; (c) in the event Buyer is dissatisfied with due diligence review, in any respect, provided that such right of termination shall expire on the Due Diligence Termination Date (as defined in Section 8.9 below); (d) in the event Buyer notifies Seller prior to the Due Diligence Termination Date that the Lender (as defined in Section 8.8) has not consented to the transactions contemplated hereby, or (e) in the event Seller breaches or violates any material provision of this Agreement or fails 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 Buyer at or prior to Closing.

(3) By Buyer or Seller if Closing hereunder shall not have taken place within ninety (90) days after the date of this Agreement, 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. SELLER’S CONDITIONS TO CLOSE

The obligations of Seller 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 Buyer contained in this Agreement (including the Exhibits hereto) shall be deemed to have been made again at Closing and shall then be true in all material respects; and Buyer 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.

ARTICLE 8. BUYER’S CONDITIONS TO CLOSE

The obligations of Buyer under this Agreement are subject to the satisfaction, on or prior to Closing, of the following conditions (which may be waived in writing by Buyer in whole or in part):

8.1. Representations and Warranties True at Closing; Compliance with Agreement. The representations and warranties of Seller contained in this Agreement (including the Exhibits hereto), shall be deemed to have been made again at Closing and shall then be true in all material respects; and Seller 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 5.5 and 5.6 shall have been complied with.

8.3. Regulatory Approvals . Buyer shall have obtained or have reasonable assurance that it will obtain (at its 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 Facility; provided that Buyer has promptly made application for such certifications, consents, licenses, etc. Buyer acknowledges and agrees that it shall not be entitled to use Seller’s Medicaid provider account numbers for the Facility, which shall remain the sole and exclusive property of Seller.

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.

8.5. Material Adverse Change . There shall not have occurred a material adverse change with respect to the assets, financial condition or operations of the Facility, taken as a whole.

8.6. Status of License and Certification . Buyer shall be satisfied in its sole but reasonable discretion that the nursing home license, and Medicare/Medicaid certification, for the operation of the Facility is in substantial compliance and valid and in good standing, and not subject to any regulatory or remedial conditions or restrictions nor otherwise subject to or in risk of suspension or termination. In the event Closing cannot occur due to the inability of Buyer to receive the licenses or certifications as a result of lack of the Facility’s substantial compliance with Medicare or Medicaid requirements for skilled nursing facilities, then Seller agrees to use its best efforts to correct such issues and the Closing Date will be extended for such additional time as may be reasonably necessary for such corrective measures.

8.7. Title Work and Surveys; Defects and Cure; Title Policy; Environmental Inspections . The obligations of Buyer 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 Buyer to the extent permitted by applicable Law:

(1) Title Work . Seller has furnished to Buyer copies of all existing title insurance policies in Seller’s possession or control insuring title to the Real Estate listed on Exhibit 8.7 attached hereto (the “ Existing Title Work ”). Within three (3) business days following the date of this Agreement, Buyer may, at Buyer’s option and expense, order title insurance commitments (the “ New Title Work ”) for the issuance at Closing of an Owner’s Policy of Title Insurance in current ALTA form (the “ Owner’s Policy ”) to be issued through a title insurance company selected by Buyer (the “ Title Company ”) and insuring good and marketable fee simple title to the Real Estate in the Buyer in the amount of the Purchase Price being allocated to the Real Estate. The New Title Work shall set forth the state of title as of the 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 or lender’s title policy of title insurance, if issued. Buyer shall furnish Seller with copies of the New Title Work.

(2) Survey . Seller has furnished to Buyer copies of all existing land title surveys of the Real Estate in Seller’s possession or control listed on Exhibit 8.7 (the “ Existing Surveys ”). Within three (3) business days following the date of this Agreement, Buyer may, at Buyer’s option and expense, order a current, as-built survey for the Real Estate (the “ New Survey ”) meeting the 2011 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Survey of comparable properties, including such Table A optional items as Buyer elects. Buyer shall furnish Seller with copies of any updated surveys and New Surveys.

(3) Defects and Cure . The Existing Title Work, the New Title Work, the Existing Survey and the New Survey are collectively referred to as “ Title Evidence ”. Buyer shall notify Seller in writing within ten (10) business days after its receipt of the last of the Title Evidence (and in any event on or before the Due Diligence Termination Date) of any claims, encumbrances, exceptions or defects disclosed in the Title Evidence, other than Permitted Exceptions, to which Buyer objects (the “ Defects ”). Any matters disclosed in the Title Evidence as to which Buyer does not so object shall be deemed to be Permitted Exceptions. Seller, at its sole cost and expense, may elect to cure any such Defects on or before Closing (“ cure ” shall include, but is not limited to, an endorsement by the Title Company reasonably acceptable to Buyer or its lender, either eliminating the Defect, insuring over the Defect or insuring against the effect of the Defect) or Seller may elect to not cure the Defect and shall give written notice to Buyer within ten (10) business days of its receipt of Buyer’s notice of Defects of its decision. Within ten (10) business days of Buyer’s receipt of Seller’s election not to cure any Defects, Buyer may, at its election, (i) waive such uncured Defects and close, or (ii) terminate this Agreement. If Seller fails to timely give such notice, Seller shall be deemed to have elected not to cure the Defects, whereupon Buyer may waive such Defects and close or may terminate this Agreement as provided in the immediately preceding sentence.

(4) Updates . Buyer shall have the right following the expiration of the Due Diligence Termination Date and through Closing, to obtain updates of the New Title Work and New Survey. If any Defect appears for the first time in any update of the New Title Work or the New Survey issued after the Due Diligence Termination Date and prior to Closing, Buyer shall have five (5) business days after Buyer acquires knowledge of such Defect to give notice to Seller of an objection in respect of such Defect and the provisions of this Section 8.7(3) shall apply in determining election and rights of the parties with respect thereto as if Buyer had delivered an objection notice with respect thereto prior to the expiration of the Due Diligence Termination Date.

(5) Removal and Cure . Anything herein to the contrary notwithstanding at or prior to Closing, Seller shall take all action and execute and file for recordation such instruments as are necessary in order to satisfy and cancel all mortgages, liens, attachments, judgments or other encumbrances on the Real Estate, whether in existence on the date hereof or arising after the date hereof and through the Closing Date, that can be cancelled or satisfied by the payment of money. The removal of all such matters by Seller, at or prior to Closing, shall be a condition to Buyer’s obligation to close hereunder.

(6) Title Policy . At the Closing, Buyer 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 Buyer good and marketable fee simple 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.” At Buyer’s request, 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 Buyer or Buyer’s lender shall reasonably require in connection with its review of the Title Evidence. Seller 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 8.7(6). If required by Buyer’s lender, Buyer shall have the benefits of and may obtain a simultaneous issue mortgage title policy insuring the lien of the mortgage of such lender. Buyer shall pay all premiums, costs and expenses of the Title Policy and the premiums, costs and expenses of any mortgage title insurance required of any lender of Buyer.

(7) Environmental Inspections . For a period of twenty (20) days following the execution of this Agreement (the “ Environmental Inspection Period ”), at Buyer’s option and expense, Buyer and Buyer’s agents, representatives and contractors (or those of Buyer’s lender) shall have the right to enter upon the Real Estate for the purpose of conducting such tests, assessments, evaluations and investigations as Buyer may determine in its 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 five (5) days after the expiration of the Environmental Inspection Period, Buyer shall give written notice to Seller if Buyer has identified any existing, potential or suspect environmental conditions, risks or liabilities on or in respect of the Real Estate (“ Environmental Conditions ”). Buyer shall provide Seller with a copy of Buyer’s Environmental Inspections reflecting such Environmental Conditions. If Buyer gives notice of any Environmental Conditions to Seller, then Seller (i) shall, at its sole cost and expense, cure or remedy such Environmental Conditions to Buyer’s 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 Buyer within two (2) days after Buyer’s notice of Environmental Conditions. Within two (2) days of Buyer’s receipt of Seller’s notice that Seller has elected not to cure or remedy any Environmental Conditions, Buyer may elect to (i) waive such Environmental Conditions and close or (ii) elect to terminate this Agreement. If Seller fails to timely give notice of its election as herein provided, Seller shall be deemed to have elected not to cure or remedy the Environmental Conditions, whereupon Buyer may elect to waive such Environmental Conditions and close or terminate this Agreement as provided in the immediately preceding sentence.

8.8. Lender Consent . The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be conditioned on Buyer obtaining the consent of its primary lender, The PrivateBank and Trust Company (the “ Lender ”).

8.9. Due Diligence . On or before the thirtieth (30 ^th ) day following the execution of this Agreement (the “ Due Diligence Termination Date ”), Buyer shall have completed its due diligence investigations and review of the Facility (including its review of any property condition reports, engineering reports and other third party reports as Buyer may elect to obtain, at Buyer’s expense) with results acceptable to Buyer, in Buyer’s sole discretion. So long as Buyer has ordered all third party reports (including New Title Work, New Survey, environmental assessments pursuant to Section 8.7(7), and any property condition reports or other engineering reports desired by Buyer) within three (3) business days following the execution of this Agreement, then in the event that Buyer has not received any such report in final form reasonably acceptable to Buyer within twenty-five (25) days following the execution of this Agreement, Buyer may extend the Due Diligence Termination Date by up to fifteen (15) days by providing written notice to Seller of such extension.

8.10. Admission Agreements . Buyer and Seller will enter into an Assignment and Assumption Agreement in form acceptable to Buyer, pursuant to which Seller will assign to Buyer, and Buyer will assume all of Seller’s right, title and interest in and to and obligations arising after the Closing Date under the Admission Agreements with the persons who are residing at the Facility on the Closing Date (“ Assigned Admission Agreements ”). Any claims arising under the Assigned Admission Agreements prior to the Closing Date shall be and remain the liability and obligation of Seller as provided in Sections 1.3(2) and 11.2.

ARTICLE 9. OBLIGATIONS OF SELLER AT CLOSING

At Closing, Seller shall deliver or cause to be delivered to Buyer the following in form and substance reasonably satisfactory to Buyer:

9.1. Performance of Covenants . Seller shall have performed the covenants and obligations required of Seller by this Agreement in all material respects.

9.2. Documents Relating to Title . Seller shall execute, acknowledge, deliver and cause to be executed, acknowledged and delivered to Buyer, or to its designee:

(3) A special warranty deed, duly executed and acknowledged by Seller, in recordable form conveying fee simple title to the Real Estate to Buyer (or an affiliate of Buyer) free and clear of all liens, claims and encumbrances made, created or suffered by Seller or those claiming by, through or under Seller, except for Permitted Exceptions.

(4) One or more Bill of Sale and Assignment Agreements, in form and substance satisfactory to Buyer (and/or an affiliate of Buyer) and Seller, warranting and conveying to Buyer good, valid and marketable title to all Assets, free and clear of all liens, mortgages, pledges, encumbrances, security interests, covenants, easements, rights of way, equities, options, rights of first refusal restrictions, special tax or governmental assessments, defects in title, encroachments and other burdens, except for those expressly acceptable to Buyer.

(5) Certificates of title to all vehicles that constitute Assets endorsed by Seller together with completed originals of any forms required by all applicable states to transfer the same.

(6) Assignment of Admission Agreements, in the form and substance satisfactory to Buyer and Seller.

9.3. Possession . Seller shall deliver to Buyer full possession and control of the Facility 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, subject only to the Permitted Exceptions.

9.4. Corporate Good Standing and Resolutions . Seller shall deliver to Buyer a certificate of good standing from the State of Tennessee and the Commonwealth of Kentucky, certified copy of the Articles of Organization and other governing documentation of Seller (all dated the most recent practical date prior to Closing), certified copies of the resolutions of the member(s) and any other governing body of 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 . Seller shall deliver to Buyer certificates of officers of Seller, dated as of Closing, certifying that: (1) each covenant and obligation of Seller has been complied with by Seller; and (2) each representation and warranty of Seller is true and correct at Closing as if made on and as of Closing.

9.6. Taxes and Other Payments . Seller shall deliver to Buyer:

(8) A certificate of non-foreign status signed by the appropriate party and sufficient in form and substance to relieve Buyer of all withholding obligations under Section 1445 of the Code. In the event that Seller cannot furnish such a certificate or Buyer is not entitled to rely upon such a certificate under the provisions of Section 1445 and the regulations thereunder, Seller shall take and/or permit Buyer or Buyer’s nominee to take any and all steps necessary to allow Buyer or Buyer’s nominee to satisfy the requirements of Section 1445.

(9) Executed releases of all mortgages, security interests, liens, pledges, restrictions or other encumbrances on or applicable to the Assets, other than the Permitted Exceptions.

9.7 Closing Statement . The parties shall execute a mutually agreeable form of Closing Statement as of the Closing Date of this transaction.

ARTICLE 10. OBLIGATIONS OF BUYER AT CLOSING

At Closing, Buyer shall deliver or cause to be delivered to Seller the following in a form and substance reasonably satisfactory to Seller:

10.1. Performance of Covenants . Buyer shall have performed the covenants and obligations required of Buyer by this Agreement in all material respects.

10.2. Purchase Price . Buyer shall pay to Seller the Purchase Price upon the terms specified in Section 2.1 hereof.

10.3. Certificate of Existence and Resolutions . Buyer shall deliver to Seller certificates of good standing from the Secretary of State of Delaware and Kentucky, dated the most recent practical date prior to Closing, together with a certified copy of the resolutions of Buyer approving this Agreement and the consummation of the transactions intended hereby.

10.4. Closing Certificate . Buyer shall deliver to Seller a certificate of officers of Buyer, dated as of Closing, certifying that: (1) each covenant and obligation of Buyer has been complied with by Buyer; and (2) each representation and warranty of Buyer is true and correct at Closing as if made on and as of Closing.

10.5. Assumption of Liabilities . Buyer shall covenant to perform and comply with all of the Assumed Liabilities, subject to the provisions of this Agreement, from and after Closing.

ARTICLE 11. SURVIVAL OF PROVISIONS AND INDEMNIFICATION

11.1. Survival . The covenants, obligations, representations and warranties of Buyer and Seller 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 not be merged into any documents delivered in connection with Closing, and shall survive the Closing for eighteen (18) months from the Closing Date, except for the representations and warranties set forth in Sections 3.1, 3.2, 3.10, 3.12, 3.15, 3.18, 3.19, 3.20, 3.21, 3.23, 3.26, 3.28, 4.1, and 4.2 shall survive until thirty (30) days after the expiration of the applicable statute of limitations with respect to the matters covered thereunder.

11.2. Indemnification by Seller and Guarantor . Subject to Section 11.4, Seller and Guarantor shall, jointly and severally, promptly indemnify, defend, and hold harmless Buyer, the directors, officers, shareholders, employees and agents of Buyer, 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 Seller or Shareholders 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 Seller delivered pursuant to this Agreement; (2) the Excluded Liabilities or any liability of Seller not expressly assumed by Buyer pursuant to Section 1.3 hereof; (3) the determination by Medicare, Medicaid, any fiscal intermediary, or any federal or state governmental authority, that any amounts paid to Seller by Medicare, Medicaid, any fiscal intermediary, or any federal or state governmental authority for any services provided by the Facility prior to the Closing Date resulted in an overpayment or other determination by Medicare, Medicaid, any fiscal intermediary, or any federal or state governmental authority that funds previously paid by Medicare, Medicaid, any fiscal intermediary, or any federal or state governmental authority to Seller must be repaid, which determination results in (i) an offset against amounts owed to Buyer, or (ii) any penalty, sanction or repayment obligations being assessed against Buyer and (4) any claim (whether or not disclosed herein) that is brought or asserted by any third party(s) against Buyer arising out of the ownership, licensing, operation, or conduct of the Facility or Assets or the conduct of any of Seller’s employees, agents or independent contractors, relating to all periods of time prior to and through Closing.

11.3. Indemnification by Buyer . Subject to Section 11.4, Buyer shall promptly indemnify, defend, and hold Seller 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 Buyer of any of its 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 Buyer delivered pursuant to this Agreement; (2) any claim which is brought or asserted by any third party(s) against Seller 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 Seller arising out of or relating to the ownership, licensing, operation or conduct of the Facility or Assets or the conduct of any of Buyer’s employees, agents or independent contractors, relating to all periods of time subsequent to Closing.

11.4. Procedure for Indemnification .

(10) Notice . Within thirty (30) days after receipt of written or actual notice of any action or claim (the “ Claim ”) as to which it asserts a right to indemnification, the party seeking indemnification hereunder (the “ Indemnitee ”) shall give written notice thereof (the “ Notice ”) to the person from whom indemnification is sought (the “ Indemnitor ”), provided that the failure of the Indemnitee to give the Indemnitor notice within the specified number of days shall not relieve the Indemnitor of any of its obligations hereunder, but may create a cause of action for breach for damages directly attributable to such delay.

(11) Third Party Claims .

(a) If any claim for indemnification by Indemnitee arises out of a Claim by a person other than Indemnitee, the Indemnitor shall be entitled to assume the defense thereof, by written notice to the Indemnitee within fifteen (15) days after receipt of the Notice. Indemnitor shall thereupon undertake to take all steps or proceedings to defeat or compromise any such Claim, including retaining counsel reasonably satisfactory to the Indemnitee. Except as otherwise provided herein, all costs, fees and expenses with respect to any such Claim shall be borne by Indemnitor. If the Indemnitor assumes the defense of a Claim, it shall not settle such Claim unless such settlement includes as an unconditional term thereof a release by the claimant of the Indemnitee, reasonably satisfactory to the Indemnitee and except that Indemnitor shall not, without the prior written consent of Indemnitee, directly or indirectly require Indemnitee to take or refrain from taking any action, or make any public statement, or consent to any settlement, which it reasonably considers to be against its interest. Indemnitee shall have the right to participate at its own expense, in such proceedings, but control of such proceedings shall remain exclusively with Indemnitor.

(b) If the Indemnitor shall fail to notify the Indemnitee of its desire to assume the defense of any such claim or action within the prescribed period of time, then the Indemnitee may assume such defense in such manner as it may deem appropriate, and the Indemnitor shall be bound by any determinations made or any settlements thereof effected by the Indemnitee. The Indemnitor shall be permitted, at its own expense, to join in such defense and to employ its own counsel but control of such proceedings shall remain exclusively with Indemnitee.

(c) Indemnitor and Indemnitee agree to make available to each other, their counsel and other representatives, all information and documents reasonably available to them reasonably requested by the other which relate to any such claim or action, and to render to each other such reasonable assistance as may be reasonably requested in order to insure the proper and adequate defense of such claim or action, but any costs or expenses related thereto shall be borne by Indemnitor; and provided that any failure (after written notice with specificity and an opportunity to cure) shall not relieve the Indemnitor of any of its obligations hereunder but may create a cause of action for breach for damages directly attributable to such failure.

(12) Straddle Resident Claims . Any claim by a resident relating to professional negligence or similar matters involving a resident of Facility served both prior to and subsequent to the Closing Date will be the responsibility of either Buyer or Seller in accordance with the following guidelines: (a) if it is a claim in which the incident giving rise to liability arose prior to the Closing Date, Seller shall be obligated for such claim and shall pay the defense expenses and damages assessed; (b) if it is a claim in which the incident giving rise to liability arose subsequent to the Closing Date, then Buyer shall be obligated for such claim and shall pay the defense expenses and damages assessed; and (c) in the event that it is not clear whether or not the incident giving rise to liability occurred prior to or subsequent to the Closing Date, then Seller and Buyer will jointly defend the case and each will fully cooperate with the other in such defense. In the event of any joint defense hereunder, the parties will (x) attempt in good faith to agree upon a single counsel to represent both parties in the defense of such claim, and (y) share equally in all costs incurred and damages assessed against the parties in connection with such claim. Once the case is resolved, if Seller and Buyer cannot agree to the allocation of both liability and expenses, then the issue shall be submitted to binding arbitration in accordance with the rules and procedures of the American Health Lawyers Association.

(13) Payment of Claims . Amounts payable by the Indemnitor to the Indemnitee shall be payable by the Indemnitor as incurred by the Indemnitee. In the event Indemnitor fails to pay, timely and fully, any such amounts, Indemnitee may pay such Claim. In such event, the Indemnitee may recover from the Indemnitor, in an addition to the amount so paid, reasonable attorneys’ fees in connection with the enforcement of any payment due hereunder.

(14) Limitations on Indemnification . No Indemnitor shall have any liability for any Claims hereunder until the total of all Claims against such Indemnitor exceeds Ten Thousand Dollars ($10,000.00) (the “ Threshold ”) after which Indemnitor shall be liable for Claims above said Threshold. No claim for indemnification may be asserted hereunder unless the party seeking indemnification gives the other party notice of such claim on or before the second anniversary of the Closing Date. The total aggregate amount of claims to which any Indemnitor shall be subject hereunder shall be capped at One Million Five Hundred Dollars ($1,500,000.00) (the “ Cap ”). Notwithstanding the forgoing, the Threshold and the Cap shall not apply to Claims arising under Section 11.2(2), (3) or (4), or Section 11.3(2) or (3).

(15) Insurance Benefit . No Indemnitor shall have any liability for Claims hereunder to the extent such Claim is covered by insurance held by the Indemnitee (or to the extent Indemnitee has been named as an additional insured) with respect to cash proceeds of such policy actually received by Indemnitee; provided, however, that (i) this provision shall not apply and the Indemnitee shall be entitled to indemnification with respect to the amount of any Claim that is in excess of the cash proceeds actually received by such Indemnitee (after deducting reasonable costs and expenses incurred in connection with the recovery of such insurance proceeds, including attorneys’ fees and premium increases) pursuant to such insurance, (ii) this limitation shall not apply to any self-insurance arrangement maintained by Indemnitee, and (iii) this provision shall not be deemed to require Indemnitee to file a claim with respect to any insurance coverage if Indemnity reasonably determines that such claim would result in a cancellation of any policy held by or benefiting Indemnitee or any of its affiliates.

(16) Damages . Neither party, nor any of its affiliates, shall have any liability hereunder for consequential, incidental, special or punitive damages.

(17) Exclusive Remedy . The sole and exclusive remedy for any damages incurred by either party as a result of any breach of the representations, warranties, covenants and agreements of the other party contained in this Agreement shall be the remedies contained in this Article 11.

ARTICLE 12. MISCELLANEOUS

12.1. Assignment . Except as otherwise provided below, neither Seller nor Buyer 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, Buyer may assign some or all of its rights, including its right to take title to some or all of the Assets at Closing, to one or more affiliates so long as Buyer remains 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, Seller shall pay all of its expenses in connection with the negotiation, execution, and implementation of the transactions contemplated by this Agreement and Buyer shall pay all of its expenses in connection with the negotiation, execution, and implementation of the transactions contemplated by this Agreement. Seller will pay any applicable real estate documentary or transfer taxes and recording costs for the recording of Buyer’s deed to the Real Estate. All costs associated with any real property surveys, environmental reports, title insurance or document recording fees incurred in connection with the transactions contemplated within this Agreement shall be borne solely by Buyer and paid by Closing. Real estate and personal property taxes and assessments (“ Taxes ”) imposed by any governmental authority with respect to the Real Estate and Seller’s personal property of the relevant tax year in which the Closing occurs and that are not yet due and payable shall be prorated as of the Closing Date based upon the most recent ascertainable assessed values and tax rates. Seller shall receive a credit for any Taxes already paid by Seller and applicable to any period after the Closing Date. Seller shall pay any unpaid Taxes for tax years prior to the relevant tax year in which Closing occurs. 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 Buyer:

c/o Diversicare Healthcare Services, Inc.

1621 Galleria Boulevard

Brentwood, Tennessee 37027

Attn: President

(615) 771-7409 (fax)

with a copy to:

Harwell Howard Hyne Gabbert & Manner, P.C.

333 Commerce Street, Suite 1500

Nashville, Tennessee 37201

Attn: Michael R. Hill

(615) 251-1059 (fax)

mrh@h3gm.com

To Seller:

Fulton Investors, LLC

1973 New Highway 96 West

Franklin, TN 37064

Attn: Aubrey B. Preston

(615) 567-6721 (fax)

with a copy to:

Bradley Arant Boult Cummings LLP

1600 Division St., Suite 700

Nashville, TN 37203

Attn: Michael D. Brent, Esq.

(615) 252-6361 (fax)

mbrent@babc.com

To Guarantor:

Aubrey B. Preston

1973 New Highway 96 West

Franklin, TN 37064

(615) 567-6721 (fax)

12.4. Confidentiality; Public Announcements . 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 for regulatory filings and except that Buyer shall be entitled to disclose the terms of this Agreement to its attorneys, accountants, financing sources, third party agents, investors, and other advisors, provided, such persons agree to keep the terms of this Agreement confidential. Except as otherwise required by law, all public announcements prior to and on the Closing Date relating to this Agreement or the transactions contemplated hereby, including announcements to employees, will be made only as may be agreed upon jointly by the parties.

12.5. Controlling Law . This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Tennessee without regard to its choice or conflicts of law provisions. Seller and Buyer hereby consent to the jurisdiction of courts located in Davidson County, Tennessee, for the resolution of any disputes arising under this Agreement for which a dispute resolution mechanism has not been specified herein.

12.6. Headings . Section headings in this Agreement are for convenience 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 the knowledge of Seller” or the like is used, Seller shall be deemed to have the knowledge of Seller’s executive officers, managers and directors.

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 Buyer and Seller.

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 Buyer or Seller as provided herein, Seller 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 Seller or any of the Assets.

12.15. Completion of Exhibits . Certain of the Exhibits have not been prepared in their final form at the time of execution of this Agreement. Seller shall use its best efforts to provide all such Exhibits within ten (10) days of the execution of this Agreement; provided, however that Buyer and Seller shall work together reasonably and in good faith to determine the allocation to be set forth in Exhibit 2.3 at least three (3) business days prior to the Closing. Submission of Exhibits shall be in writing delivered via hand delivery or email to the other party’s counsel. The submitted Exhibits shall be deemed accepted and thereby become an Exhibit to this Agreement unless: (i) such proposed Exhibit would, individually or in aggregate with the effect of items disclosed in other Exhibits which were first submitted after signing of this Agreement, constitute a material adverse effect on the receiving party in the receiving party’s sole discretion, and (ii) within five (5) business days after receipt of such proposed Exhibit. 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. Acceptance of Exhibits shall not mean that the underlying information (e.g., underlying claim, likelihood of successful defense and adequacy of insurance coverage) is acceptable.

12.16. Waiver of Jury Trial . EACH OF THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, INCLUDING TO ENFORCE OR DEFEND ANY RIGHTS HEREUNDER, AND AGREES THAT ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

The parties hereto have executed this Agreement as of the date first above written.

BUYER:

DIVERSICARE OF FULTON, LLC


BY:	DIVERSICARE HOLDING COMPANY, LLC, its sole member

By: /s/ Kelly J. Gill

Title: President and Chief Executive Officer

SELLER:

FULTON INVESTORS, LLC

By: /s/ Aubrey B. Preston

Title: Sole Member

GUARANTOR:

/s/ Aubrey B. Preston

Aubrey B. Preston

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 Clinton, LLC

Diversicare Clinton Property, LLC

Diversicare Council Grove Property, LLC

Diversicare Doctors, LLC

Diversicare Estates, LLC

Diversicare Fulton Property, LLC

Diversicare Glasgow Property, 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 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 Mansfield, LLC

Diversicare of Nicholasville, LLC

Diversicare of Providence, LLC

Diversicare of Riverside, LLC

Diversicare of Sedgwick, 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 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

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 (File Numbers 333-134905, 333-151565 and 333-167630) of Diversicare Healthcare Services, Inc. of our report dated March 3, 2016 , relating to the consolidated financial statements and financial statement schedule which appears in this Form 10-K.

/s/ BDO USA, LLP

Nashville, Tennessee

March 3, 2016

Exhibit 31.1

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

(i) CERTIFICATION

I, Kelly J. Gill, 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: March 3, 2016

/s/ Kelly J. Gill

Kelly J. Gill

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

(ii) CERTIFICATION

I, James R. McKnight, Jr., 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: March 3, 2016

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

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, 2015

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, 2015 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 March 3, 2016 .

/s/ Kelly J. Gill

Kelly J. Gill

President and Chief Executive Officer

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

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.