10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________ 

CHECK ONE:

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

For the Quarterly Period Ended: June 30, 2014

OR

¨ 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)

(615) 771-7575

(Registrant’s telephone number, including area code)

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  ý    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  ý    No  ¨

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 a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting Company	ý

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

6,156,428

(Outstanding shares of the issuer’s common stock as of July 31, 2014)

Part I. FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30, 2014			December 31, 2013
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	4,071		$	3,781
Receivables, less allowance for doubtful accounts of $4,582 and $3,879, respectively	42,678			32,658
Other receivables	1,187			1,118
Prepaid expenses and other current assets	1,925			2,442
Income tax refundable	747			763
Current assets of discontinued operations	2,913			2,870
Deferred income taxes	6,666			6,579
Total current assets	60,187			50,211
PROPERTY AND EQUIPMENT, at cost	95,310			93,572
Less accumulated depreciation and amortization	(51,678		)	(48,516		)
Discontinued operations, net	8,502			8,987
Property and equipment, net	52,134			54,043
OTHER ASSETS:
Deferred income taxes	15,804			15,912
Deferred financing and other costs, net	1,860			1,914
Investment in unconsolidated affiliate	428			487
Other noncurrent assets	6,217			5,698
Acquired leasehold interest, net	8,036			8,228
Noncurrent assets of discontinued operations	969			1,251
Total other assets	33,314			33,490
	$	145,635		$	137,744

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

2

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(continued)

	June 30, 2014			December 31, 2013
	(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations	$	10,334		$	4,549
Trade accounts payable	9,356			7,177
Current liabilities of discontinued operations	8,823			1,359
Accrued expenses:
Payroll and employee benefits	13,203			12,255
Self-insurance reserves, current portion	12,777			11,711
Other current liabilities	4,829			5,116
Total current liabilities	59,322			42,167
NONCURRENT LIABILITIES:
Long-term debt and capitalized lease obligations, less current portion	43,120			43,552
Self-insurance reserves, noncurrent portion	16,146			16,375
Noncurrent liabilities of discontinued operations	—			5,952
Other noncurrent liabilities	14,484			15,214
Total noncurrent liabilities	73,750			81,093
COMMITMENTS AND CONTINGENCIES
SERIES C REDEEMABLE PREFERRED STOCK
$.10 par value, 5,000 shares authorized, issued and outstanding	4,918			4,918
SHAREHOLDERS’ EQUITY:
Series A preferred stock, authorized 200,000 shares, $.10 par value, none issued and outstanding	—			—
Common stock, authorized 20,000,000 shares, $.01 par value, 6,388,000 and 6,307,000 shares issued, and 6,156,000 and 6,075,000 shares outstanding, respectively	63			63
Treasury stock at cost, 232,000 shares of common stock	(2,500		)	(2,500		)
Paid-in capital	19,883			19,570
Accumulated deficit	(9,207		)	(8,435		)
Accumulated other comprehensive loss	(594		)	(569		)
Total shareholders’ equity of Diversicare Healthcare Services, Inc.	7,645			8,129
Noncontrolling interest	—			1,437
Total shareholders’ equity	7,645			9,566
	$	145,635		$	137,744

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

3

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)

	Three Months Ended June 30,
	2014			2013
PATIENT REVENUES, net	$	82,313		$	61,488
EXPENSES:
Operating	64,687			50,316
Lease and rent expense	6,251			4,804
Professional liability	1,556			1,758
General and administrative	5,381			5,779
Depreciation and amortization	1,705			1,496
Total expenses	79,580			64,153
OPERATING INCOME (LOSS)	2,733			(2,665		)
OTHER INCOME (EXPENSE):
Equity in net income (loss) of unconsolidated affiliate	(56		)	22
Interest expense, net	(949		)	(745		)
Debt retirement costs	—			(320		)
Total other expense	(1,005		)	(1,043		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1,728			(3,708		)
BENEFIT (PROVISION) FOR INCOME TAXES	(755		)	1,287
INCOME (LOSS) FROM CONTINUING OPERATIONS	973			(2,421		)
INCOME FROM DISCONTINUED OPERATIONS:
Operating income, net of tax of $419 and $142, respectively	128			242
Income from discontinued operations	128			242
NET INCOME (LOSS)	1,101			(2,179		)
Less: (income) loss attributable to noncontrolling interests	—			(16		)
NET INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	1,101			(2,195		)
PREFERRED STOCK DIVIDENDS	(86		)	(86		)
NET INCOME (LOSS) FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS	$	1,015		$	(2,281	)
NET INCOME (LOSS) PER COMMON SHARE FOR DIVERSICARE HEALTHCARE SERVICES, INC. SHAREHOLDERS:
Per common share – basic
Continuing operations	$	0.15		$	(0.43	)
Discontinued operations	0.02			0.04
	$	0.17		$	(0.39	)
Per common share – diluted
Continuing operations	$	0.14		$	(0.43	)
Discontinued operations	0.02			0.04
	$	0.16		$	(0.39	)
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.055		$	0.055
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,015,000			5,874,000
Diluted	6,181,000			5,874,000

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

4

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands and unaudited)

	Three Months Ended June 30,
	2014			2013
NET INCOME (LOSS)	$	1,101		$	(2,179	)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax	84			110
Less: reclassification adjustment for amounts recognized in net income	(129		)	(78		)
Total other comprehensive income (loss)	(45		)	32
COMPREHENSIVE INCOME (LOSS)	1,056			(2,147		)
Less: comprehensive (income) loss attributable to noncontrolling interest	—			(16		)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	$	1,056		$	(2,163	)

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

5

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)

	Six Months Ended June 30,
	2014			2013
PATIENT REVENUES, net	$	160,112		$	119,927
EXPENSES:
Operating	127,511			97,828
Lease and rent expense	12,218			9,581
Professional liability	3,617			3,265
General and administrative	10,495			10,763
Depreciation and amortization	3,440			2,938
Total expenses	157,281			124,375
OPERATING INCOME (LOSS)	2,831			(4,448		)
OTHER INCOME (EXPENSE):
Equity in net loss of unconsolidated affiliate	(59		)	(215		)
Interest expense, net	(1,841		)	(1,285		)
Debt retirement costs	—			(320		)
Total other income (expense)	(1,900		)	(1,820		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	931			(6,268		)
BENEFIT (PROVISION) FOR INCOME TAXES	(391		)	2,573
INCOME (LOSS) FROM CONTINUING OPERATIONS	540			(3,695		)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operating income (loss), net of tax of $348 and $(334), respectively	(484		)	569
Income (loss) from discontinued operations	(484		)	569
NET INCOME (LOSS)	56			(3,126		)
Less: (income) loss attributable to noncontrolling interests	25			(34		)
NET INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	81			(3,160		)
PREFERRED STOCK DIVIDENDS	(172		)	(172		)
NET INCOME (LOSS) FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS	$	(91	)	$	(3,332	)
NET INCOME (LOSS) PER COMMON SHARE FOR DIVERSICARE HEALTHCARE SERVICES, INC. SHAREHOLDERS:
Per common share – basic
Continuing operations	$	0.07		$	(0.67	)
Discontinued operations	(0.08		)	0.10
	$	(0.01	)	$	(0.57	)
Per common share – diluted
Continuing operations	$	0.07		$	(0.67	)
Discontinued operations	(0.08		)	0.10
	$	(0.01	)	$	(0.57	)
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.11		$	0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	5,995,000			5,861,000
Diluted	5,995,000			5,861,000

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

6

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands and unaudited)

	Six Months Ended June 30,
	2014			2013
NET INCOME (LOSS)	56			(3,126		)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax	224			110
Less: reclassification adjustment for amounts recognized in net income	(248		)	(78		)
Total other comprehensive income (loss)	(24		)	32
COMPREHENSIVE INCOME (LOSS)	32			(3,094		)
Less: comprehensive (income) loss attributable to noncontrolling interest	25			(34		)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	$	57		$	(3,128	)

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

7

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

	Six Months Ended June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	56			(3,126		)
Discontinued operations	(484		)	569
Income (loss) from continuing operations	540			(3,695		)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	3,440			2,938
Provision for doubtful accounts	2,780			1,830
Deferred income tax benefit	36			(4,214		)
Provision for self-insured professional liability, net of cash payments	827			771
Stock-based compensation	295			357
Equity in net losses of unconsolidated affiliate, net of investment	59			(36		)
Debt retirement costs	—			320
Other	(315		)	(124		)
Changes in assets and liabilities affecting operating activities:
Receivables, net	(13,166		)	(5,640		)
Prepaid expenses and other assets	(146		)	1,929
Trade accounts payable and accrued expenses	3,447			974
Net cash provided by (used in) continuing operations	(2,203		)	(4,590		)
Discontinued operations	(491		)	5,056
Net cash provided by operating activities	(2,694		)	466
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(1,826		)	(2,416		)
Acquisition of property and equipment through business combination	—			(14,742		)
Change in restricted cash	35			(4,641		)
Deposits and other deferred balances	(43		)	—
Net cash used in continuing operations	(1,834		)	(21,799		)
Discontinued operations	(5		)	(546		)
Net cash used in investing activities	(1,839		)	(22,345		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(4,412		)	(22,805		)
Proceeds from issuance of debt	9,765			45,000
Financing costs	(114		)	(1,341		)
Issuance and redemption of employee equity awards	78			33
Payment of common stock dividends	(662		)	(323		)
Payment of preferred stock dividends	(172		)	(172		)
Distributions to noncontrolling interest	(1,410		)	(104		)
Payment for preferred stock restructuring	(298		)	(288		)
Net cash provided by continuing operations	$	2,775		$	20,000
Discontinued operations	2,048			(100		)
Net cash provided by (used in) investing activities	4,823			19,900

8

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

(continued)

	Six Months Ended June 30,
	2014		2013
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	290	$	(1,979	)
CASH AND CASH EQUIVALENTS, beginning of period	3,781		5,928
CASH AND CASH EQUIVALENTS, end of period	$	4,071	$	3,949
SUPPLEMENTAL INFORMATION:
Cash payments of interest, net of amounts capitalized	$	1,652	$	1,076
Cash payments of income taxes	$	33	$	45

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

9

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND 2013

1. BUSINESS

Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare Healthcare Services” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Ohio, Tennessee, and Texas. The Company's operating results also include the results of certain discontinued operations that have been reclassified on the face of the financial statements to reflect the discontinued status of these operations.

As of June 30, 2014, the Company’s continuing operations consist of 46 nursing centers with 5,282 licensed nursing beds. The Company owns 13 and leases 33 of its nursing centers. The nursing center and licensed bed count includes the following recent business development activity:

• The 73-bed facility in Nicholasville, Kentucky, for which the Company entered into a lease agreement and assumed operations effective June 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the fourth quarter of 2014.

• The 135-bed facility in Huntsville, Alabama, for which the Company entered into a lease agreement and assumed operations effective March 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the third quarter of 2014.

• The 442 licensed nursing beds at the four recently leased skilled nursing centers, three in Ohio and one in Indiana, which we have operated since October 1, 2013. The Medicaid and Medicare certification processes were completed for these four leased facilities in the first quarter of 2014. In addition to the licensed nursing beds, these four centers also include 270 licensed assisted living beds which are not included in the licensed nursing bed count.

• The 107-bed facility in Louisville, Kentucky, for which the Company entered into a lease agreement in August 2013. The Medicare certification processes for this facility was completed in the first quarter of 2014. The Medicaid certification process was completed in the second quarter of 2014.

• The Kansas centers acquired in May 2013, which comprise five skilled nursing centers and 418 licensed beds. The Medicaid certification process was completed for these facilities during the second quarter of 2013, and the Medicare certification process was completed for these facilities during the third quarter of 2013.

2. CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements include the operations and accounts of Diversicare Healthcare Services 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 related to a nursing center in West Virginia that was dissolved in the first quarter of 2014 as a result of the asset purchase of the Rose Terrace nursing center as further described in Note 8, and is no longer consolidated into the interim consolidated financial statements of the Company. The investment in an unconsolidated affiliate (a 50 percent-owned joint venture partnership) is accounted for using the equity method and is described in Note 9.

The interim consolidated financial statements for the three and six month periods ended June 30, 2014 and 2013, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at June 30, 2014, and the results of operations for the three month and six month periods ended June 30, 2014 and 2013, and cash flows for the six month periods ended June 30, 2014 and 2013. The Company’s balance sheet information at December 31, 2013, was derived from its audited consolidated financial statements as of December 31, 2013.

The results of operations for the periods ended June 30, 2014 and 2013 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the

10

audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

3. RECENT ACCOUNTING GUIDANCE

In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update require an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

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, 2017. 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.

4. LONG-TERM DEBT AND INTEREST RATE SWAP

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.

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 a notional amount of $21,973,000. As of June 30, 2014, the interest rate related to the Amended Mortgage Loan was 4.65%. The Amended Mortgage Loan is secured by thirteen 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. The Second Amendment also provided for a permanent increase in the Amended Revolver capacity to $22,500,000 beginning October 1, 2014 through the original maturity date of April 30, 2018, to reflect the expansion of the Company's business through new facility acquisitions.

As of June 30, 2014, the Company had $9,000,000 borrowings outstanding under the revolving credit facility compared to $3,000,000 outstanding as of December 31, 2013. The outstanding borrowings on the revolver primarily reflect the Company's approach to accumulated Medicaid and Medicare receivables at recently acquired facilities as these facilities proceed through

11

the change in ownership process with CMS. Annual fees for letters of credit issued under this Revolver are 3.00% of the amount outstanding. The Company has eight letters of credit with a total value of $7,712,000 outstanding as of June 30, 2014. Considering the balance of eligible accounts receivable, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $27,500,000, the balance available for borrowing under the revolving credit center is $10,524,000 at June 30, 2014.

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 consolidated prior to the date of this transaction. See Note 8 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 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 12. This transaction closed on July 1, 2014. As such, the Rose Terrace Note is classified as a Current Liability of Discontinued Operations on the Interim Consolidated Balance Sheet.

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 June 30, 2014.

Interest Rate Swap Transaction

As part of the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company designated its interest rate swap as a cash flow hedge and the earnings component of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction with the amendment to the credit facility, the Company retained the previously agreed upon interest rate swap terms, and redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount of $21,973,000 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 Company assesses the effectiveness of its interest rate swap on a quarterly basis, and at June 30, 2014, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $959,000 at June 30, 2014. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The balance of accumulated other comprehensive loss at June 30, 2014 is $594,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $364,000. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a valuation 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 interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB guidance set forth in ASC 820, Fair Value Measurement.

5. 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, 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, Tennessee, and West Virginia as well as the Company’s formerly operated Arkansas facilities. Several of the Company’s nursing centers in Alabama, Kentucky, Ohio, and Texasare also covered under this policy. The SHC policy provides coverage limits of either $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. The remaining nursing centers are covered by one of three claims made professional liability insurance policies purchased from entities unaffiliated with the Company. These policies provide coverage limits of $1,000,000 per claim and have sublimits of $3,000,000 per center, with varying aggregate policy limits. 

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 likely exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and estimated future claims of $27,695,000 as of June 30, 2014. 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 claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

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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 the current portion of this reserve. Merlinos & Associates, Inc. (“Merlinos”) assisted management in the preparation of an estimate of the appropriate accrual for the current claims period and for incurred, but not reported, general and professional liability claims based on data furnished as of May 31, 2014.  The Company used this estimate from Merlinos in the preparation of its estimate of liability for incurred, but unreported professional liability claims as of as of June 30, 2014.

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.

As of June 30, 2014, the Company is engaged in 53 professional liability lawsuits. Nine 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 Company’s cash expenditures for self-insured professional liability costs from continuing operations were $2,225,000 and $2,134,000 for the six months ended June 30, 2014 and 2013, respectively.

The Company follows current accounting guidance set forth in FASB ASU 2010-24, “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 assets and equal liabilities of $70,000 at June 30, 2014 and $440,000 at December 31, 2013, 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 June 30, 2014, 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 $328,000 at June 30, 2014. The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,130,000 as of June 30, 2014. 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 June 30, 2014, 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 $900,000 at June 30, 2014. The differences between actual settlements and reserves are included in expense in the period finalized.

6. STOCK-BASED COMPENSATION

Overview of Plans

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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 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. 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 2014 and 2013, the Compensation Committee of the Board of Directors approved grants totaling approximately 68,000 and 69,000 shares of restricted common stock to certain employees and members of the Board of Directors, respectively. The fair value of restricted shares are determined as the quoted market price of the underlying common shares at the date of the grant. The restricted shares typically vest 33% 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. In addition to the shares of restricted common stock granted in 2013, the Compensation Committee of the Board of Directors also approved grants of approximately 55,000 unrestricted shares of common stock to certain employees. These shares were granted without restrictions and considered fully vested upon the date of the grant.

Summarized activity of the equity compensation plans is presented below:

			Weighted
			Average
	Shares		Exercise Price
Outstanding, December 31, 2013	333,000		$	6.64
Granted	—		—
Exercised	(1,000	)	2.37
Expired or cancelled	(27,000	)	7.49
Outstanding, June 30, 2014	305,000		$	6.58
Exercisable, June 30, 2014	262,000		$	6.71

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			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2013	118,000		$	5.41
Granted	68,000		5.51
Dividend Equivalents	2,000		6.86
Vested	(40,000	)	5.47
Cancelled	(1,000	)	5.42
Outstanding June 30, 2014	147,000		$	5.45

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, 2013	41,000		$	5.35
Granted	25,000		5.51
Dividend Equivalents	1,000		6.86
Vested	(21,000	)	5.70
Cancelled	—		—
Outstanding June 30, 2014	46,000		$	5.30

Prior to 2013, the Compensation Committee of the Board of Directors also approved grants of Stock Only Stock Appreciation Rights (“SOSARs”) and Stock Options at the market price of the Company's common stock on the grant date. The SOSARs and Options vest 33% on the first, second and third anniversaries of the grant date, and expire 10 years from the grant date. The SOSARs and Options were valued and recorded in the same manner, and will be settled with issuance of new stock for the difference between the market price on the date of exercise and the exercise price. The Company estimated the total recognized and unrecognized compensation using the Black-Scholes-Merton equity grant valuation model.

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.

While no SOSARs or Options were granted during 2014 and 2013, previously granted SOSARs and Options remain outstanding as of June 30, 2014. The following table summarizes information regarding stock options and SOSAR grants outstanding as of June 30, 2014:

	Weighted
	Average		Intrinsic		Intrinsic
Range of	Exercise	Grants	Value-Grants	Grants	Value-Grants
Exercise Prices	Prices	Outstanding	Outstanding	Exercisable	Exercisable
$10.40 to $11.59	11.13	63,000	—	63,000	—
$2.37 to $6.21	5.32	243,000	529,000	199,000	450,000
		306,000		262,000

Stock-based compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded

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total stock-based compensation expense of $295,000 and $357,000 in the six month periods ended June 30, 2014 and 2013, respectively.

7. EARNINGS (LOSS) PER COMMON SHARE

Information with respect to basic and diluted net earnings (loss) per common share is presented below in thousands, except per share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Numerator: Income (loss) amounts attributable to Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	973		$	(2,421	)	$	540		$	(3,695	)
Less: income (loss) attributable to noncontrolling interests	—			(16		)	25			(34		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc.	973			(2,437		)	565			(3,729		)
Preferred stock dividends	(86		)	(86		)	(172		)	(172		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	887			(2,523		)	393			(3,901		)
Income (loss) from discontinued operations, net of income taxes	128			242			(484		)	569
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	1,015		$	(2,281	)	$	(91	)	$	(3,332	)

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014			2013
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	0.15	$	(0.43	)	$	0.07		$	(0.67	)
Income (loss) from discontinued operations
Operating income (loss), net of taxes	0.02		0.04			(0.08		)	0.10
Discontinued operations, net of taxes	0.02		0.04			(0.08		)	0.10
Net income (loss) per common share – basic	$	0.17	$	(0.39	)	$	(0.01	)	$	(0.57	)
Per common share – diluted
Income (loss) from continuing operations	$	0.14	$	(0.43	)	$	0.07		$	(0.67	)
Income (loss) from discontinued operations
Operating income (loss), net of taxes	0.02		0.04			(0.08		)	0.10
Discontinued operations, net of taxes	0.02		0.04			(0.08		)	0.10
Net income (loss) per common share - diluted	$	0.16	$	(0.39	)	$	(0.01	)	$	(0.57	)
Denominator: Weighted Average Common Shares Outstanding:
Basic	6,015		5,874			5,995			5,861
Diluted	6,181		5,874			5,995			5,861

The effects of 326,000 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share for the three-month and six-month periods ended June 30, 2013, because these securities would have been anti-dilutive

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due to the net loss. The weighted average common shares for basic and diluted earnings for common shares were the same due to the year-to-date loss in these periods.

8. VARIABLE INTEREST ENTITY

Accounting guidance requires that a variable interest entity (“VIE”) must be consolidated by the primary beneficiary in accordance with the provisions set forth in FASB ASC 810, Consolidation, as mentioned in Note 2 above. The primary beneficiary is the party that has both the power to direct activities of a VIE that most significantly impact the entity's economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. We perform an ongoing qualitative analysis to determine if we are the primary beneficiary of a VIE. The Company had one variable interest entity related to a nursing center in West Virginia that was dissolved in the first quarter of 2014 as a result of the asset purchase of the Rose Terrace nursing center, and is no longer consolidated into the interim consolidated financial statements of the Company.

Rose Terrace Health and Rehabilitation Center

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 VIE 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 11, the Company sold the Rose Terrace facility and all assets associated with the facility. As a result of these events, the entity is no longer considered a VIE as of June 30, 2014.

9. EQUITY METHOD INVESTMENT

The investment in unconsolidated affiliate reflected on the interim consolidated balance sheet relates to a pharmacy joint venture partnership in which the Company owns 50%. The joint venture was initially funded by the Company and its partner and began operations during 2012. This investment in unconsolidated affiliate is accounted for using the equity method as the Company exerts significant influence, but does not control or otherwise consolidate the entity. The investment in unconsolidated affiliate balance at June 30, 2014, was $428,000 as compared to $487,000 at December 31, 2013. Additionally, the Company's share of the net profits and losses of the unconsolidated affiliate are reported in equity in net earnings or losses of unconsolidated affiliate in our statement of operations. The Company's equity in the net losses of unconsolidated affiliate for the six month period ended June 30, 2014, was $59,000 as compared to $215,000 for the six month period ended June 30, 2013.

10. BUSINESS DEVELOPMENT

Acquisitions

On March 6, 2013, the Company entered into an asset purchase agreement ("the Agreement") with Cumberland & Ohio Co. of Texas, as receiver of the assets of SeniorTrust of Florida, Inc. to acquire certain land, improvements, furniture, fixtures and equipment, and personal property of five facilities, all located in Kansas, for an aggregate purchase price of $15,500,000. The purchase of the Kansas facilities was completed on May 1, 2013. The Company also incurred $338,000 in acquisition-related expenses associated with this transaction. The five facilities acquired under the Agreement include the following:

• 77-bed skilled nursing facility known as Chanute HealthCare Center

• 119-bed skilled nursing facility known as Haysville HealthCare Center

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• 80-bed skilled nursing facility known as Larned HealthCare Center

• 62-bed skilled nursing facility known as Sedgwick HealthCare Center

• 80-bed skilled nursing facility known as Council Grove HealthCare Center

As a result of the consummation of the Agreement, the Company allocated the purchase price of $15,500,000 between the assets associated with the transaction based on the fair value of the acquired net assets. In addition to the assets acquired in the transaction, the Company also assumed liabilities of $758,000 which resulted in total cash outlay of $14,742,000. 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:

	As of May 1, 2013
Purchase Price	$	15,500,000
Land	$	2,130,000
Buildings	12,127,000
Furniture, fixtures, and equipment	1,200,000
Inventory	43,000
Less: Liabilities assumed	$	758,000
Total cash paid	$	14,742,000

Lease Agreements

On June 1, 2014, the Company assumed operations at Diversicare of Nicholasville, an existing 73-bed facility in Nicholasville, Kentucky. The nursing center is owned by a real estate investment trust ("REIT"), and 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.

On October 1, 2013, the Company assumed operations at four existing nursing centers, three in Ohio and one in Indiana. The nursing centers are owned by a REIT and the lease of these centers provides for an initial 15-year lease term with a 5-year renewal option. This transaction represents an increase in the Company's footprint in the Midwest, expanding into one new state, Indiana, and increasing our presence in Ohio to four nursing centers. All four of the centers were 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 August 1, 2013, the Company assumed operations at Seneca Place, an existing 107-bed facility in Louisville, Kentucky.  The nursing center is owned by a REIT, and 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.

11. 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 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. The Company concurrently entered into an operations transfer agreement with respect to the two other skilled nursing facilities located in

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Danville and Ivydale, West Virginia. Effective May 31, 2014, the Company determined that these three centers, based on the progress of the underlying contingencies and conditions associated with the asset purchase agreement, met the requirements for classification as discontinued operations. As a result, the three facilities are reflected as discontinued operations for all periods in the accompanying financial statements. The Company finalized the transaction on July 1, 2014, and is disclosed as a subsequent event in Note 12.

These centers contributed revenues of $10,989,000 and $10,222,000 and net income of $660,000 and $906,000 during the six months ended June 30, 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

Effective September 1, 2013, the Company entered into an agreement with Omega Healthcare Investors, Inc. ("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 Consolidated Amended and Restated Master Lease ("Master Lease") most recently amended on January 22, 2013. 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.

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 interim consolidated financial statements. These centers contributed revenues of $0 and $31,880,000 and net loss of $739,000 and $87,000 during the six months ended June 30, 2014 and 2013, respectively.  The net loss in 2014 primarily relates to professional liability expense incurred during the first quarter of 2014. 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.

The discontinued assets and liabilities of the disposed skilled nursing centers have been reclassified and are segregated in the interim consolidated balance sheets as assets and liabilities of discontinued operations. The current asset amounts, which are primarily composed of net accounts receivable of $2,913,000 and $2,870,000 at June 30, 2014 and December 31, 2013, respectively. The current liabilities are primarily composed of outstanding short-term debt on the Rose Terrace facility, trade payables, and various accrued expenses of $8,823,000 and $1,359,000 at June 30, 2014 and December 31, 2013, respectively. The Company expects to collect the balance of the accounts receivable and pay the remaining trade payables and accrued expenses in the ordinary course of business. The short-term debt related to the Rose Terrace facility was paid in full in conjunction with the sale of the facility on July 1, 2014. The Company did not transfer the accounts receivable or liabilities to the new owners or operators of the facilities. Further, in accordance with Company accounting policy, the reserve for professional liability and workers' compensation will remain in the consolidated liability accounts as future payment of these liabilities will be paid through the Company's future operating cash flows.

12. SUBSEQUENT EVENTS

Effective July 1, 2014, subsequent to the end of the second quarter, 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 $16.5 million. The Company also agreed to an amendment to the Master Lease with Omega Health Investors, Inc. 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. 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.

In a separate and unrelated transaction, the Company also completed a transaction to enter the state of Missouri through the assumption of operations of three facilities totaling 339 skilled nursing beds effective July 1, 2014. This portfolio is expected to contribute in excess of $17 million in annual revenues with initial lease terms of 15 years.

Also 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

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$20,000,000 in the original Amended Revolver to $27,500,000 as defined in the Second Amendment, 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.

Effective August 1, 2014, the Company completed a transaction to assume operations of two facilities in Ohio. The facilities included in this transaction are Avon Place, a 142-bed skilled nursing facility, and Ontario Commons, a 42-bed assisted living facility. The assumption of operations at Ontario Commons represents the Company's first and only all-assisted living facility in the current portfolio. These facilities are expected to contribute in excess of $9 million in annual revenues with initial lease terms of 10 years.

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ITEM 2 – 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 eight states, primarily in the Southeast, Midwest and Southwest. Our centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. In addition to the services usually provided in long-term care centers, we also offer a variety of comprehensive rehabilitation services as well as nutritional support services. As of June 30, 2014, the Company’s continuing operations consist of 46 nursing centers with 5,282 licensed nursing beds. The Company owns 13 and leases 33 of its nursing centers. The nursing center and licensed bed count includes the following recent business development activity:

• The 73-bed facility in Nicholasville, Kentucky, for which the Company entered into a lease agreement and assumed operations effective June 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the fourth quarter of 2014.

• The 135-bed facility in Huntsville, Alabama, for which the Company entered into a lease agreement and assumed operations effective March 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the third quarter of 2014.

• The 442 licensed nursing beds at the four recently leased skilled nursing centers, three in Ohio and one in Indiana, which we have operated since October 1, 2013. The Medicaid and Medicare certification processes were completed for these four leased facilities in the first quarter of 2014. In addition to the licensed nursing beds, these four centers also include 270 licensed assisted living beds which are not included in the licensed nursing bed count.

• The 107-bed facility in Louisville, Kentucky, for which the Company entered into a lease agreement in August 2013. The Medicare certification processes for this facility was completed in the first quarter of 2014. The Medicaid certification process was completed in the second quarter of 2014.

• The Kansas centers acquired in May 2013, which comprise five skilled nursing centers and 418 licensed beds. The Medicaid certification process was completed for these facilities during the second quarter of 2013, and the Medicare certification process was completed for these facilities during the third quarter of 2013.

Our continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Ohio, Tennessee, and Texas.

Discontinued Operations

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 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. The Company concurrently entered into an operations transfer agreement with respect to the two other skilled nursing facilities located in Danville and Ivydale, West Virginia. Effective May 31, 2014, the Company determined that these three centers, based on the progress of the underlying conditions associated with the asset purchase agreement, met the requirements for classification as discontinued operations. As a result, the three facilities with 240 licensed beds are reflected as discontinued operations for all periods in the accompanying financial statements. The Company finalized the transaction on July 1, 2014, and is disclosed in the accompanying financial statements as a subsequent event to the second quarter ended June 30, 2014.

Effective September 1, 2013, the Company finalized an agreement with Omega Healthcare Investors, Inc. to terminate its lease with respect only to eleven nursing centers with 1,181 licensed beds located in Arkansas and to concurrently transfer operations to an operator selected by Omega. The completion of this transaction represents disposal of all of the Company's operations in the state of Arkansas.

The net income for the nursing centers included in discontinued operations does not reflect any allocation of regional or corporate general and administrative expense or any allocation of corporate interest expense. We considered these additional costs along with the future prospects of these nursing centers when determining the contribution of the skilled nursing centers to our operations.

The assets and liabilities of the disposed skilled nursing centers have been reclassified and are segregated in the interim consolidated balance sheets as assets and liabilities of discontinued operations. The current asset amounts are primarily composed of net accounts receivable and the current liabilities consist primarily of accounts payable. The Company expects to collect the balance of the accounts receivable and pay the remaining trade payables and taxes in the ordinary course of business. The Company did not transfer the accounts receivable or liabilities to the new operators of these centers. Further, in

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accordance with Company accounting policy, the reserve for professional liability and workers' compensation will remain in the consolidated liability accounts as future payment of these liabilities will be paid through the Company's future operating cash flows.

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”), and completing strategic acquisitions. We have experienced success in these initiatives and expect to continue to build on these improvements. We describe each of these below as well as provide metrics for our most recent quarter versus the third quarter of 2010, the quarter before we embarked on our strategic operating initiatives.

Improving skilled mix and average Medicare rate:

Our strategic operating initiatives of improving our skilled mix and our average Medicare rate by accurately capturing the delivery of care required investing in nursing and clinical care to treat more acute patients along with nursing center based sales representatives to attract these patients. These initiatives developed referral and Managed Care relationships that have attracted and are expected to continue to attract patients whose stay in the centers is 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
	June 30, 2014			September 30, 2010
As a percent of total census:
Medicare census	13.8		%	12.3		%
Managed Care census	3.4		%	1.3		%
Total skilled mix census	17.2		%	13.6		%
As a percent of total revenues:
Medicare revenues	31.3		%	29.3		%
Managed Care revenues	6.4		%	2.8		%
Total skilled mix revenues	37.7		%	32.1		%
Medicare average rate per day:	$	438.46		$	394.23

The initiatives have developed positive results in growing our skilled patient population, increasing the Managed Care census to 3.4% of total census in the second quarter of 2014, as compared to 1.3% in the third quarter of 2010, and total skilled mix census from 13.6% to 17.2% over the same period.

Implementing Electronic Medical Records:

As another part of our strategic operating initiative, we implemented EMR to improve documentation of the delivery of care. We completed the implementation of EMR in all our nursing centers in December 2011, on time and under budget. A comparison of our most recent quarter versus the third quarter of 2010 reflects the increase in our average Medicaid rate per day:

	Three Months Ended
	June 30, 2014		September 30, 2010
Medicaid average rate per day:	$	158.47	$	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 areas of operation. We expect to announce additional development projects in the near future. Since September 30, 2010, the

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Company has added four skilled nursing centers in Kentucky, three in Ohio, one in Indiana, one in Alabama, and five in Kansas.

As part of our strategic efforts, we have also performed a 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, we reached an agreement to dispose of the owned Rose Terrace facility in West Virginia and transfer operations of the other two facilities we operated in West Virginia. This transaction was effective July 1, 2014, subsequent to the end of the current period. As a result of these transactions, we no longer operate within the states of Arkansas or West Virginia.

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, professional liability, 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.

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 involving estimates of the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income or loss to vary significantly from period to period. Our critical accounting policies are more fully described in our 2013 Annual Report on Form 10-K.

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, typically called a Health Maintenance Organization, often referred to as an HMO plan, 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 and resident revenues related to our continuing operations by payor source for the periods presented (dollar amounts in thousands):

	Three Months Ended June 30,								Six Months Ended June 30,
	2014				2013				2014		2013
Medicaid	$	39,201	47.6	%	$	32,889	53.5	%	$77,510	48.4%	$63,376	52.8%
Medicare	25,691		31.3		17,109		27.8		48,039	30.0	34,060	28.4
Managed Care	5,287		6.4		3,444		5.6		10,717	6.7	7,411	6.2
Private Pay and other	12,134		14.7		8,046		13.1		23,846	14.9	15,080	12.6
Total	$	82,313	100.0	%	$	61,488	100.0	%	$160,112	100.0%	$119,927	100.0%

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

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	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Medicaid	2,727	66.7	%	2,297	69.8	%	2,718	67.3	%	2,231	69.7	%
Medicare	563	13.8		382	11.6		531	13.2		383	12.0
Managed Care	138	3.4		89	2.7		144	3.6		100	3.1
Private Pay and other	662	16.1		524	15.9		645	15.9		488	15.2
Total	4,090	100.0	%	3,292	100.0	%	4,038	100.0	%	3,202	100.0	%

Consistent with the nursing home industry in general, changes in the mix of a facility’s patient population among Medicaid, Medicare, Managed Care, and Private Pay and other can significantly affect the profitability of the facility’s operations.

Health Care Industry

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 resident 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 laws and regulations 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.

In March 2010, significant legislation concerning health care and health insurance was passed, including the “Patient Protection and Affordable Care Act,” (“Affordable Care 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 and residents in a variety of ways. This Legislation significantly changes the future responsibility of employers with respect to providing health care coverage to employees in the United States. Two of the main provisions of the Legislation become effective in 2014 whereby most individuals will be required to either have health insurance or pay a fine and employers with 50 or more employees will either have to provide minimum essential coverage or will be subject to additional taxes. On July 2, 2013, the United States Treasury Department announced that it will delay the employer reporting mandate, which was to be effective for 2014, until 2015 to allow additional time for process improvement and system integration. 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 expect for this Legislation to continue to impact our Medicaid and Medicare reimbursement as well, though the exact timing and level of that impact is currently unknown. The Legislation expands the role of home-based and community services, which may place downward pressure on our ability to maintain our population of Medicaid residents.

On June 28, 2012, the United States Supreme Court ruled that the enactment of the Affordable Care Act did not violate the Constitution of the United States. This ruling permits the implementation of most of the provisions of the Affordable Care Act to proceed. The provisions of the Affordable Care Act discussed above are only examples of federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. We anticipate that many of the provisions of the Legislation may be subject to further clarification and modification through the rule making process and could have a material adverse impact on our results of 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

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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 2013, CMS issued Medicare payment rates, effective October 1, 2013, that increased reimbursement to skilled nursing centers by approximately 0.6% compared to the fiscal year ending September 30, 2013. The increase is the net effect of a 2.5% inflation increase as measured by the SNF market basket, offset by a 0.7% negative productivity adjustment required by the Affordable Care Act, and a 1.2% budget neutrality adjustment. This adjustment is further offset by the ongoing sequestration from the BCA as mentioned above. The 2% sequestration isnot 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 $1,920 per patient annual ceiling on physical and speech therapy services, and a separate $1,920 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 by the Protecting Access to Medicare Act of 2014, which extended this exception process through March 31, 2015.

Related to the exceptions process discussed above, for services provided with dates of service between January 1, 2014, through March 31, 2015, 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 were conducted by Medicare Administrative Contractors during this period.

It is unknown if any further extension of the therapy cap exceptions or the new threshold process will be included in future legislation or CMS policy decisions. If the exception process is discontinued or if the manual review process for therapy in excess of $3,700 negatively impacts our Medicare Part B reimbursement, we would likely see a reduction in our therapy revenues which would negatively impact our operating results and cash flows.

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 was 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. Congress has stepped in with so-called “doc fix” legislation numerous times to stop payment cuts to physicians, most recently by the Protecting Access to Medicare Act of 2014, which stopped these payment cuts through March 31, 2015.

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The Protecting Access to Medicare Act of 2014 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 percent.

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.

We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in the third quarter of 2013 and the third quarter of 2012, along with increased Medicaid acuity in our acuity based states, was the primary contributor to our 1.3% increase in average rate per day for Medicaid patients in 2014 compared to 2013. Based on the rate changes received during the third quarter of 2013, we expect downward pressure on our rate per day for Medicaid patients as we move into 2014 due to modest rate decreases 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 six months ended June 30, 2014, we derived 31.3% and 47.6% 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 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.

Licensure and Other Health Care Laws

All of 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 certificate of need 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 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.

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of June 30, 2014, summarized by the period in which payment is due, as follows (dollar amounts in thousands):

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Contractual Obligations	Total		Less than 1  year		1 to 3 Years		3 to 5 Years		After 5 Years
Long-term debt obligations (1)	$	72,134	$	21,002	$	7,953	$	43,179	$	—
Settlement obligations (2)	5,470		5,470		—		—		—
Series C Preferred Stock (3)	4,918		4,918		—		—		—
Elimination of Preferred Stock Conversion feature (4)	2,920		687		1,374		859		—
Operating leases (5)	585,122		28,958		59,509		61,428		435,227
Required capital expenditures under operating leases (6)	6,738		244		488		488		5,518
Total	$	677,302	$	61,279	$	69,324	$	105,954	$	440,745

(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.

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

(3) Series C Preferred Stock equals the redemption value at the preferred shareholder’s earliest redemption date.

(4) Payments to Omega Health Investors ("Omega"), from which 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.

(5) Represents lease payments under our operating lease agreements. Assumes all renewal periods are enacted.

(6) 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 therein), or upon a change of control of the Company (as defined therein). The maximum contingent liability under these agreements is approximately $1,610,000 as of June 30, 2014. 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 June 30, 2014, the potential contingent liability for the repurchase of the equity grants is $179,000.

Results of Operations

The results of operations presented have been reclassified to present the effects of certain divestitures discussed in the overview to "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The following tables present the unaudited interim statements of operations and related data for the three and six month periods ended June 30, 2014 and 2013:

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(in thousands)	Three Months Ended June 30,
	2014			2013			Change			%
PATIENT REVENUES, net	$	82,313		$	61,488		$	20,825		33.9	%
EXPENSES:
Operating	64,687			50,316			14,371			28.6	%
Lease and rent expense	6,251			4,804			1,447			30.1	%
Professional liability	1,556			1,758			(202		)	(11.5	)%
General and administrative	5,381			5,779			(398		)	(6.9	)%
Depreciation and amortization	1,705			1,496			209			14.0	%
Total expenses	79,580			64,153			15,427			24.0	%
OPERATING INCOME (LOSS)	2,733			(2,665		)	5,398			202.6	%
OTHER INCOME (EXPENSE):
Equity in net income (loss) of unconsolidated affiliate	(56		)	22			(78		)	354.5	%
Interest expense, net	(949		)	(745		)	(204		)	27.4	%
Debt retirement costs	—			(320		)	320			—	%
	(1,005		)	(1,043		)	38			(3.6	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1,728			(3,708		)	5,436			(146.6	)%
BENEFIT (PROVISION) FOR INCOME TAXES	(755		)	1,287			(2,042		)	(158.7	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	973		$	(2,421	)	$	3,394		(140.2	)%

(in thousands)	Six Months Ended June 30,
	2014			2013			Change			%
PATIENT REVENUES, net	$	160,112		$	119,927		40,185			33.5	%
EXPENSES:
Operating	127,511			97,828			29,683			30.3	%
Lease and rent expense	12,218			9,581			2,637			27.5	%
Professional liability	3,617			3,265			352			10.8	%
General and administrative	10,495			10,763			(268		)	(2.5	)%
Depreciation and amortization	3,440			2,938			502			17.1	%
Total expenses	157,281			124,375			32,906			26.5	%
OPERATING INCOME (LOSS)	2,831			(4,448		)	7,279			163.6	%
OTHER INCOME (EXPENSE):
Equity in net income (loss) of unconsolidated affiliate	(59		)	(215		)	156			72.6	%
Interest expense, net	(1,841		)	(1,285		)	(556		)	43.3	%
Debt retirement costs	—			(320		)	320			100.0	%
	(1,900		)	(1,820		)	(80		)	4.4	%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	931			(6,268		)	7,199			114.9	%
BENEFIT (PROVISION) FOR INCOME TAXES	(391		)	2,573			(2,964		)	(115.2	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	540		$	(3,695	)	$	4,235		114.6	%

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Percentage of Net Revenues	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
PATIENT REVENUES, net	100.0	%	100.0	%	100.0	%	100.0	%
EXPENSES:
Operating	78.6		81.8		79.6	%	81.6	%
Lease and rent expense	7.6		7.8		7.6	%	8.0	%
Professional liability	1.9		2.9		2.3	%	2.7	%
General and administrative	6.5		9.4		6.6	%	9.0	%
Depreciation and amortization	2.1		2.4		2.1	%	2.4	%
Total expenses	96.7		104.3		98.2		103.7
OPERATING INCOME (LOSS)	3.3		(4.3	)	1.8		(3.7	)
OTHER INCOME (EXPENSE):
Equity in net losses of unconsolidated affiliate	(0.1	)	—		—	%	(0.2	)%
Interest expense, net	(1.2	)	(1.2	)	(1.1	)%	(1.1	)%
Debt retirement costs	—		(0.5	)	—	%	(0.3	)%
	(1.3	)	(1.7	)	(1.1	)	(1.6	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	2.0		(6.0	)	0.7		(5.3	)
BENEFIT (PROVISION) FOR INCOME TAXES	(0.9	)	2.1		(0.2	)%	2.1	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	1.1	%	(3.9	)%	0.5	%	(3.2	)%

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Three Months Ended June 30, 2014 Compared With Three Months Ended June 30, 2013

Patient Revenues

Patient revenues were $82.3 million for the three months ended June 30, 2014, as compared to $61.5 million in the three months ended June 30, 2013. This increase is primarily attributable to the acquisition of new facilities during the period. The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):

	Three Months Ended June 30,
	2014		2013		Change
Same-store revenue	$	60,443	$	57,593	$	2,850
2013 acquisition revenue	18,619		3,895		14,724
2014 acquisition revenue	3,251		—		3,251
Total revenue	$	82,313	$	61,488	$	20,825

The overall increase in revenue of $20.8 million is primarily attributable to revenue contributions from acquisition activity in 2013 of $14.7 million, as well as the $3.3 million contribution from the two newly leased nursing centers in 2014.

The same-store revenues increased by $2.9 million in 2014 compared to the same period in 2013 primarily attributable to improved census. The largest driver for the increase in same-store revenues is the increase in Medicare census which increased 11.9% resulting in a $1.7 million increase in revenues for the three months ended June 30, 2014, as compared to the same period in 2013. Managed Care average daily census increased 14.7% resulting in a revenue increase at our same-store nursing centers of $0.4 million. Additionally, Medicaid census increased 2.1% in 2014 compared to the same period in 2013, resulting in an increase of $0.6 million to revenues. These increases were offset by a decline in private pay census during the period which resulted in a decrease of $0.8 million for the three months ended June 30, 2014 compared to the same period in 2013.

The average Medicare rate per patient day at same-store nursing centers for the three months ended June 30, 2014 increased 1.8% compared to the same period in 2013, resulting in an increase in revenue of $0.3 million. This average rate per day for Medicaid patients also increased during the period by 0.6% resulting in an increase in revenue of $0.2 million.

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

	Three Months Ended June 30,
	2014			2013
Skilled nursing occupancy	78.2		%	74.9		%
As a percent of total census:
Medicare census	13.8		%	11.6		%
Managed Care census	3.4		%	2.7		%
As a percent of total revenues:
Medicare revenues	31.3		%	27.8		%
Medicaid revenues	47.6		%	53.5		%
Managed Care revenues	6.4		%	5.6		%
Average rate per day:
Medicare	$	438.46		$	426.14
Medicaid	$	158.47		$	156.45
Managed Care	$	378.53		$	384.55

Operating Expense

Operating expense increased in the second quarter of 2014 to $64.7 million as compared to $50.3 million in the second quarter of 2013, driven primarily by the $11.8 million increase in operating costs attributable to the nursing center operations acquired in 2013, as well as $2.3 million of operating expense associated with the nursing center operations assumed in 2014. The following table summarizes the expense increases attributable to our portfolio growth (in thousands):

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	Three Months Ended June 30,
	2014		2013		Change
Same-store operating expense	$	47,077	$	46,836	$	241
2013 acquisition expense	15,301		3,480		11,821
2014 acquisition expense	2,309		—		2,309
Total expense	$	64,687	$	50,316	$	14,371

Operating expense decreased as a percentage of revenue at 78.6% for the second quarter of 2014 as compared to 81.8% for the second quarter of 2013. The largest component of operating expenses is wages. Considering the aforementioned addition of the new centers, we experienced an increase to $37.9 million in the second quarter of 2014 as compared to $29.6 million in the second quarter of 2013, an increase of $8.3 million, or 28.0%. While wages increased overall, wages as a percentage of revenue decreased in the second quarter of 2014 to 46.1% as compared to 48.2% in the second quarter of 2013, a decrease of 2.1%.

Lease Expense

Lease expense increased in the second quarter of 2014 to $6.3 million as compared to $4.8 million in the second quarter of 2013. The increase in lease expense was primarily attributable to $1.1 million in combined lease expense for the five newly leased nursing centers in 2013. Additionally, the two nursing centers leased in 2014 contributed $0.4 million in expense during the period.

Professional Liability

Professional liability expense was $1.6 million in the second quarter of 2014 compared to $1.8 million in the second quarter of 2013, a decrease of $0.2 million. We were engaged in 53 professional liability lawsuits as of June 30, 2014, compared to 54 as of December 31, 2013. Our quarterly cash expenditures for professional liability costs of continuing operations were $1.1 million and $0.1 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 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 expense was $5.4 million in the second quarter of 2014 as compared to $5.8 million in the second quarter of 2013, a decrease of $0.4 million, and also decreased as a percentage of revenue from 9.4% in 2013 to 6.5% in 2014. The decrease in general and administrative expense is primarily attributable to a decrease in non-recurring, acquisition-related expenses of $0.2 million in the second quarter of 2013.

Depreciation and Amortization

Depreciation and amortization expense was approximately $1.7 million in the second quarter of 2014 as compared to $1.5 million in 2013. The increase in depreciation expense relates to fixed assets at the newly leased and acquired centers.

Interest Expense, Net

Interest expense was $0.9 million in the second quarter of 2014 and $0.7 million in the second quarter of 2013, an increase of $0.2 million. The increase was primarily attributable to higher debt balances in 2014 as a result of the amended Mortgage Loan, which increased the balance of outstanding debt as a result of the acquisition of the Kansas centers, as well as the outstanding balance of the amended Revolver as a result of the on-going CHOW process at newly leased facilities.

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 income taxes of $1.7 million for the second quarter of 2014 as compared to a loss of $3.7 million for the second quarter of 2013. The provision for income taxes was $0.8 million in the second quarter of 2014 as compared to a benefit for income taxes of $1.3 million in the second quarter of 2013. The basic income per common share from continuing operations was $0.15 and the diluted income per common share was $0.14 for the second quarter of 2014, as compared to a loss per common share from continuing operations of $0.43 in the second quarter of 2013.

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Six Months Ended June 30, 2014 Compared With Six Months Ended June 30, 2013

Patient Revenues

Patient revenues were $160.1 million for the six months ended June 30, 2014, as compared to $119.9 million in the six months ended June 30, 2013. This increase is primarily attributable to the acquisition of new facilities during the period. The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):

	Six Months Ended June 30,
	2014		2013		Change
Same-store revenue	$	119,586	$	116,032	$	3,554
2013 acquisition revenue	36,301		3,895		32,406
2014 acquisition revenue	4,225		—		4,225
Total revenue	$	160,112	$	119,927	$	40,185

The overall increase in revenue of $40.2 million is primarily attributable to increased revenue contributions from acquisition activity in 2013 of $32.4 million, as well as the $4.2 million contribution from the two newly leased nursing centers in 2014.

The same-store revenues increased by $3.6 million in the six months ended June 30, 2014 compared to the same period in 2013 primarily attributable to improved census. The largest driver for the increase in same-store revenues is the increase in Medicaid census which increased 2.6% resulting in a $1.6 million increase in revenues for the six months ended June 30, 2014, as compared to the same period in 2013. Medicare census also increased by 3.7% resulting in a $1.1 million increase in revenues in 2014 as compared to 2013. Additionally, Managed Care average daily census increased 8.6% resulting in a revenue increase at our same-store nursing centers of $0.6 million. These increases were offset by a decline in private pay census during the period which resulted in a decrease of $1.1 million in 2014 compared to the same period in 2013.

The average Medicare rate per patient day at same-store nursing centers for the six months ended June 30, 2014 increased 1.3% compared to the same period in 2013, resulting in an increase in revenue of $0.4 million. This average rate per day for Medicaid patients also increased during the period by 0.9% resulting in increased revenue of $0.6 million.

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

	Six Months Ended June 30,
	2014			2013
Skilled nursing occupancy	78.0		%	75.2		%
As a percent of total census:
Medicare census	13.2		%	12.0		%
Managed Care census	3.6		%	3.1		%
As a percent of total revenues:
Medicare revenues	30.0		%	28.4		%
Medicaid revenues	48.4		%	52.8		%
Managed Care revenues	6.7		%	6.2		%
Average rate per day:
Medicare	$	438.08		$	431.38
Medicaid	$	158.16		$	156.32
Managed Care	$	378.14		$	381.18

Operating Expense

Operating expense increased in 2014 to $127.5 million as compared to $97.8 million in 2013, driven primarily by the $26.7 million increase in operating costs attributable to the nursing center operations acquired in 2013, as well as $3.0 million of operating expense associated with the nursing center operations assumed in 2014. The following table summarizes the expense increases attributable to our portfolio growth (in thousands):

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	Six Months Ended June 30,
	2014		2013		Change
Same-store operating expense	$	94,410	$	94,336	$	74
2013 acquisition expense	30,151		3,492		26,659
2014 acquisition expense	2,950		—		2,950
Total expense	$	127,511	$	97,828	$	29,683

Operating expense decreased as a percentage of revenue at 79.6% for 2014 as compared to 81.6% for 2013. The largest component of operating expenses is wages. Considering the aforementioned addition of the new centers, we experienced an increase to $73.9 million in 2014 as compared to $58.6 million in 2013, an increase of $15.3 million, or 26.1%. While wages increased overall, wages as a percentage of revenue decreased in 2014 to 46.2% as compared to 48.9% in 2013, a decrease of 2.7%.

Lease Expense

Lease expense increased in 2014 to $12.2 million as compared to $9.6 million in 2013. The increase in lease expense was primarily attributable to $2.3 million in combined lease expense for the five newly leased nursing centers in 2013. Additionally, the two nursing centers leased in 2014 contributed $0.5 million in expense during the period.

Professional Liability

Professional liability expense was $3.6 million in 2014 compared to $3.3 million in 2013, a increase of $0.3 million. We were engaged in 53 professional liability lawsuits as of June 30, 2014, compared to 54 as of December 31, 2013. Our cash expenditures for professional liability costs of continuing operations were $2.2 million and $2.1 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 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 expense was $10.5 million in 2014 as compared to $10.8 million in 2013, a decrease of $0.3 million, and also decreased as a percentage of revenue from 9.0% in 2013 to 6.6% in 2014. The decrease in general and administrative expense is primarily attributable to a decrease in non-recurring, acquisition-related expenses of $0.2 million in the second quarter of 2013 related to the acquisition of the Kansas portfolio.

Depreciation and Amortization

Depreciation and amortization expense was approximately $3.4 million in 2014 as compared to $2.9 million in 2013. The increase in depreciation expense relates to fixed assets at the newly leased and acquired centers, an primarily driven by an increase of $0.3 million in depreciation expense for the Kansas portfolio.

Interest Expense, Net

Interest expense was $1.8 million in 2014 and $1.3 million in 2013, an increase of $0.5 million. The increase was primarily attributable to higher debt balances in 2014 as a result of the amended Mortgage Loan, which increased the balance of outstanding debt as a result of the acquisition of the Kansas centers, as well as the outstanding balance of the amended Revolver as a result of the on-going CHOW process at newly leased facilities.

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 income taxes of $0.9 million for the six months ended June 30, 2014, as compared to a loss of $6.3 million for the same period in 2013. The provision for income taxes was $0.4 million for the six months ended June 30, 2014, as compared to a benefit for income taxes of $2.6 million for the six months ended June 30, 2013. The basic and diluted income per common share from continuing operations were both $0.07 for the six months ended June 30, 2014, as compared to a loss per common share from continuing operations of $0.67 for the same period in 2013.

Liquidity and Capital Resources

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Liquidity

Our primary source of liquidity is the net cash flow provided by the operating activities of our centers. 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, purchase of additional shares of our common stock, acquisitions, payment of existing debt obligations, preferred stock redemptions 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 used by operating activities of continuing operations totaled $2.2 million in the six months ended June 30, 2014, as compared to $4.6 million in the same period of 2013.

Our cash expenditures related to professional liability claims of continuing operations were $2.2 million and $2.1 million for six months ended June 30, 2014 and 2013, respectively. We will also have on-going cash expenditures related to professional liability claims remaining against our 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 $1.8 million and $21.8 million in 2014 and 2013, respectively. The decrease is a result of the Kansas asset purchase that occurred in the second quarter of 2013.

Financing activities of continuing operations provided cash of $2.8 million in 2014 as compared to cash provided of $20.0 million in 2013 primarily due to the Company's debt restructuring associated with the Kansas acquisition in the second quarter of 2013, as compared primarily to normal debt repayments and draws on the Company's revolving credit facility in 2014.

Dividends

On August 6, 2014, the Board of Directors declared a quarterly dividend of $0.055 per common share payable to shareholders of record as of September 30, 2014, to be paid on October 14, 2014. 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.

Redeemable Preferred Stock

At June 30, 2014, we have outstanding 5,000 shares of Series C Redeemable Preferred Stock (“Preferred Stock”) that has a stated value of approximately $4.9 million which pays an annual dividend rate of 7% of its stated value. Dividends on the Preferred Stock are paid quarterly in cash. The Preferred Stock was issued to Omega in 2006 and is not convertible, but has been redeemable at its stated value at Omega’s option since September 30, 2010, and since September 30, 2007, has been redeemable at its stated value at our option. Redemption under our option or Omega’s is subject to certain limitations. We believe we have adequate resources to redeem the Preferred Stock if Omega were to elect to redeem it.

Professional Liability

The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a wholly-owned, 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. On a per claim basis, coverage for losses in excess of those covered by SHC are maintained through unaffiliated commercial reinsurance carriers. 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, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy include coverage limits of $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. 

As of June 30, 2014, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred, but unreported claims of $27.7 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

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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 June 30, 2014, we had $61.5 million of outstanding long-term debt and capital lease obligations. The $61.5 million total includes $0.5 million in capital lease obligations, $9.0 million currently outstanding on the revolving credit facility, and $8.0 million in a note payable for the asset purchase of the Rose Terrace nursing center in West Virginia. The balance of the long-term debt is comprised of $43.9 million owed on our mortgage loan.

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. Loan acquisition costs of $320,000 associated with the Original Mortgage Loan were written off in conjunction with this restructuring and are recorded in Debt Retirement Costs in the Interim Consolidated Statement of Operations for the six-month period ended June 30, 2013.

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $45.0 million with a five-year maturity through April 30, 2018, and a $20.0 million 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%, which was 4.65% at June 30, 2014, but a portion of the outstanding principal balance under the Amended Mortgage Loan is effectively fixed at 6.87% as a result of the interest rate swap described below. The Amended Mortgage Loan is secured by thirteen 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%, which resulted in an interest rate of 4.65% as of June 30, 2014.

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 $20.0 million in the original Amended Revolver to $27.5 million through September 30, 2014, as a result of the increase in receivables related to new facilities that continue to progress in the change in ownership process. The Second Amendment also provided for a permanent increase in the Amended Revolver capacity to $22.5 million beginning October 1, 2014 through the original maturity date of April 30, 2018, to reflect the expansion of the Company's business through new facility acquisitions. Effective July 1, 2014, subsequent to the end of the second quarter, 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 as defined in the Second Amendment, 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 June 30, 2014, the Company had $9.0 million borrowings outstanding under the revolving credit facility. The outstanding borrowings on the 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 this Revolver are 3.00% of the amount outstanding. The Company has eight letters of credit with a total value of $7.7 million outstanding as of June 30, 2014. Considering the balance of eligible accounts receivable, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $27.5 million, the balance available for borrowing under the revolving credit center is $10.5 million at June 30, 2014.

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 consolidated prior to the date of this transaction. See Note 8 to the Interim Consolidated Financial Statements under Item 1 above (the "Financial Statements") for further information on the VIE considerations. In conjunction with the purchase of the assets, the Company entered into an interest-only $8.0 million term loan ("Rose Terrace Note") with a maturity date of March 27, 2015. The structure of the Rose Terrace Note reflected the Company's intent to sell the property and transfer operations to an unrelated third-party operator. Effective July 1, 2014, subsequent to the end of the second quarter, 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 $16.5 million. The Company also agreed to an amendment to the Master Lease with Omega Health Investors, Inc. 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 these two other skilled nursing facilities located in Danville and Ivydale, West Virginia. Upon completion of the transaction, Diversicare no longer operates any skilled nursing centers in the state of West Virginia. In

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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. As such, the Rose Terrace Note is classified as a Current Liability of Discontinued Operations on the Interim Consolidated Balance Sheet.

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 June 30, 2014.

Our calculated compliance with financial covenants is presented below:

	Requirement	Level at June 30, 2014
Minimum fixed charge coverage ratio	1.10:1.00	1.27:1.00
Minimum adjusted EBITDA	$10.00 million	$18.05 million
EBITDAR (mortgaged centers)	$5.875 million	$9.683 million

As part of the debt agreements entered into in March 2011, we entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and carries a notional equivalent to half of the outstanding principal on the Amended 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.

Receivables

Our operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid or 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 results of operations.

Accounts receivable attributable to patient services of continuing operations totaled $47.5 million at June 30, 2014 compared to $36.6 million at December 31, 2013, representing approximately 45 days and 43 days revenue in accounts receivable, respectively. The increase in accounts receivable is due to increases in payor sources with longer payment cycles, including Managed Care payors, as well as an increase in Medicaid patients undergoing the initial qualification process.

Our accounts receivable included approximately $6.8 million and $5.1 million at June 30, 2014 and December 31, 2013, respectively of unbilled accounts, primarily attributable to newly acquired facilities.  During the change of ownership process, we were required to hold these accounts while waiting for final Medicare and Medicaid approvals.

The allowance for bad debt was $4.6 million at June 30, 2014 as compared to $3.9 million at December 31, 2013. 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.

Off-Balance Sheet Arrangements

We have eight letters of credit outstanding with an aggregate value of approximately $7.7 million as of June 30, 2014, the first of which serves as a security deposit for our facility lease with Omega in the amount of $4.6 million. The second letter of credit serves our initial funding of insurance policies with a captive insurance company in the amount of $1.0 million. The balance of the outstanding letters of credit relate to deposits at various leased facilities where the Company opted to issue letters of credit as a deposit in lieu of cash. These letters of credit were issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.

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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. 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 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 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 “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2013, 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 3. 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 June 30, 2014, we had outstanding borrowings of approximately $60.9 million, $31.0 million of which was 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 $310,000 annually, representing the impact of increased or decreased interest expense on variable rate debt.

ITEM 4. CONTROLS AND PROCEDURES

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), our management, including our chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of June 30, 2014. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly Report on Form 10-Q, is properly recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission’s rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding management’s control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.

Based on an evaluation of the effectiveness of the design and operation of disclosure controls and procedures, our chief executive officer and chief financial officer concluded that, as of June 30, 2014, our disclosure controls and procedures were effective in reaching a reasonable level of assurance that information required to be disclosed by us in the reports that we file or

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submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

PART II — OTHER INFORMATION

ITEM 1. 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, 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 reimbursement and 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 June 30, 2014, we are engaged in 53 professional liability lawsuits. Nine 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 with certainty. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In November 2012, a purported stockholder class action complaint was filed in the Chancery Court for Williamson County, Tennessee (21st Judicial District) against the Company's Board of Directors. This action alleges that the Board of Directors breached its fiduciary duties to stockholders related to its response to certain expressions of interest in a potential strategic transaction from Covington Investments, LLC (“Covington”). The complaint asserts that the Board failed to negotiate or otherwise appropriately consider Covington's proposals. Plaintiff has filed a motion seeking to certify the action as a class action, which is not currently set for hearing. On May 23, 2014, the plaintiff and defendants entered into a memorandum of understanding outlining the terms of a settlement subject to the execution of definitive documentation and court approval. The agreement provides that the Company will adopt and maintain certain corporate governance procedures for a period of at least three years.

In June 2012, a collective action complaint was filed in the U.S. District Court for the U.S. District Court for the Western District of Arkansas against us and certain of our subsidiaries.  The complaint alleges that the defendants violated the Fair Labor Standards Act (FLSA) and seeks unpaid overtime wages as well as liquidated damages.  The Court conditionally certified a nationwide class of all of the Company's hourly employees.  The Company will defend the lawsuit vigorously.

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 collective actions, the purported class action against the Facility or the lawsuit filed against our directors. 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 5. OTHER INFORMATION

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 be of no further force and effect and the Rights expired at the close of business on

38

May 15, 2014. Shareholders do not have to take any action as a result of this termination and this action had no effect on the Company’s common stock.

ITEM 6. EXHIBITS

The exhibits filed as part of this report on Form 10-Q are listed in the Exhibit Index immediately following the signature page.

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SIGNATURES

Pursuant to the requirements 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.
August 7, 2014
	By:	/s/ Kelly J. Gill
		Kelly J. Gill
		President and Chief Executive Officer, Principal Executive Officer and
		An Officer Duly Authorized to Sign on Behalf of the Registrant
	By:	/s/ James R. McKnight, Jr.
		James R. McKnight, Jr.
		Executive Vice President and Chief Financial Officer and
		An Officer Duly Authorized to Sign on Behalf of the Registrant

40

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).
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).
4.2	Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7, 1998).
4.3	Amendment No. 1 to the Amended and Restated Rights Agreement, dated March 19, 2005, by and between the Company and SunTrust Bank, as Rights Agent (incorporated by reference to Exhibit 2 to Form 8-A/A filed on March 24, 2005).
4.4	Second Amendment to the Amended and Restated Rights Agreement, dated August 15, 2008, by and between the Company and ComputerShare Trust Company, N.A., as successor to SunTrust Bank (incorporated by reference to Exhibit 3 to Form 8-A/A filed on August 18, 2008).
4.5	Third Amendment to Amended and Restated Rights Agreement, dated August 14, 2009, between the Company and Computershare Trust Company, N.A, as successor to SunTrust Bank, (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form 8-A/A filed on August 14, 2009).
4.6	Fourth Amendment to Amended and Restated Rights Agreement, dated May 7, 2014, between the Company and Computershare Trust Company, N.A, as successor to SunTrust Bank, as Rights Agent (incorporated by reference to Exhibit 5 to the Company's Registration Statement on Form 8-A/A filed on May 8, 2014).
10.1	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.
10.2	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.
10.3	Fifteenth Amendment to Consolidated Amended and Restated Master Lease dated as of June 30, 2014 by and between the Company and Sterling Acquisition Corp.
10.4	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).
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

41

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

42

EX-10.1

THIRD AMENDMENT TO
AMENDED AND RESTATED TERM LOAN AND SECURITY AGREEMENT

THIS THIRD AMENDMENT TO AMENDED AND RESTATED TERM LOAN AND SECURITY AGREEMENT (this “Amendment”) is entered into as of July 1, 2014, by and among THE PRIVATEBANK AND TRUST COMPANY, an Illinois banking corporation (“Administrative Agent”) in its capacity as administrative agent for the Lenders (as defined below), the Lenders and DIVERSICARE AFTON OAKS, LLC, DIVERSICARE BRIARCLIFF, LLC, DIVERSICARE CHISOLM, LLC, DIVERSICARE HARTFORD, LLC, DIVERSICARE OF CHANUTE, LLC, DIVERSICARE OF COUNCIL GROVE, LLC, DIVERSICARE OF HAYSVILLE, LLC, DIVERSICARE OF SEDGWICK, LLC, DIVERSICARE OF LARNED, LLC, DIVERSICARE WINDSOR HOUSE, LLC, DIVERSICARE HILLCREST, LLC, DIVERSICARE LAMPASAS, LLC, DIVERSICARE HOLDING COMPANY, LLC, DIVERSICARE KANSAS, LLC, and DIVERSICARE YORKTOWN, LLC, each a Delaware limited liability company (individually and collectively, (“Borrower”).

WHEREAS, Borrower, Administrative Agent, and the financial institutions thereto (the “Lenders”) are parties to that certain Amended and Restated Term Loan and Security Agreement dated as of April 30, 2013, as amended by that certain First Amendment to Amended and Restated Term Loan and Security Agreement dated as of November 1, 2013 and that certain Second Amendment to Amended and Restated Term Loan and Security Agreement dated as of March 31, 2014 (as the same may be further amended or modified from time to time, the “Loan Agreement”); and

WHEREAS, Borrower, Administrative Agent and Lenders desire to amend the Loan Agreement as provided in and subject to the terms and conditions of this Amendment.

NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

1.Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to such terms in the Loan Agreement.

2.Amendments. Subject to the terms and conditions contained herein, Borrower, Administrative Agent and Lenders hereby amend the Loan Agreement as follows:

(a)The definition of “Affiliated Revolving Borrowers” in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:

“Affiliated Revolving Borrowers” means each of the entities identified on Schedule 1 attached hereto.

3.Continuing Effect; No Waiver. Except as expressly set forth in Section 2 of this Amendment, nothing in this Amendment shall constitute a modification or alteration of the terms, conditions or covenants of the Loan Agreement or any other Financing Agreement, or a waiver of any other terms or provisions thereof, and the Loan Agreement and the other Financing Agreements shall remain unchanged and shall continue in full force and effect, in each case as modified hereby. Administrative Agent’s and Lender’s failure, at any time or times hereafter, to require strict performance by Borrower of any provision or term of the Loan Agreement, this Amendment or the Financing Agreements shall not waive, affect or diminish any right of Administrative Agent or any Lender hereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver by Administrative Agent and a Lender of a breach of this Amendment or any Event of Default under the Loan Agreement shall not, except as expressly set forth herein, suspend, waive or affect any other breach of this Amendment or any Event of Default under the Loan Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Amendment, shall be deemed to have been suspended or waived by Administrative Agent and Lenders unless such suspension or waiver is (i) in writing and signed by Administrative Agent and Lenders and (ii) delivered to Borrower. In no event shall Administrative Agent’s and Lenders’ execution and delivery of this Amendment establish a course of dealing among Administrative Agent, Lenders, Borrower or any other obligor, or in any other way obligate Administrative Agent and Lenders to hereafter provide any amendments or waivers with respect to the Loan Agreement. The terms and provisions of this Amendment shall be limited precisely as written and shall not be deemed (i) to be a consent to an amendment or a modification of any other term or condition of the Loan Agreement or of any of the Financing Agreements (except as expressly provided herein); or (ii) to prejudice any right or remedy which Administrative Agent and Lenders may now have under or in connection with the Loan Agreement or any of the Financing Agreements. In the event any ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

4.Reaffirmation and Confirmation. Borrower hereby ratifies, affirms, acknowledges and agrees that the Loan Agreement and the other Financing Agreements represent the valid, enforceable and collectible obligations of Borrower, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Financing Agreement. Borrower hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Liabilities. The Liens and rights securing payment of the Liabilities are hereby ratified and confirmed

2

by Borrower in all respects. Upon the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import shall mean and be a reference to the Loan Agreement, as amended by this Amendment.

5.Representations and Warranties. In order to induce Administrative Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Administrative Agent and Lenders (which representations and warranties shall survive the execution and delivery hereof), both before and after giving effect to this Amendment that:

(a)This Amendment has been duly authorized, validly executed and delivered by one or more Duly Authorized Officers of Borrower, and each of this Amendment, the Loan Agreement as amended hereby, and each of the other Financing Agreements to which Borrower is a party, constitutes the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, subject to bankruptcy, insolvency or other similar laws affecting the enforcement of creditor’s rights and remedies generally;

(b)The execution and delivery of this Amendment and performance by Borrower under this Amendment, the Loan Agreement and each of the other Financing Agreements to which Borrower is a party do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over Borrower that has not already been obtained, nor be in contravention of or in conflict with the organizational documents of Borrower or any provision of any statute, judgment, order, indenture, instrument, agreement, or undertaking, to which Borrower is party or by which Borrower’s respective assets or properties are bound;

(c)Each of the representations and warranties of each Borrower contained in the Loan Agreement and the other Financing Agreements to which Borrower is a party are true and correct in all material respects (without duplication of any materiality carve out already provided therein) on and as of the date hereof, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date); and

(d)No Default or Event of Default will result after giving effect to this Amendment, and no event has occurred that has had or could reasonably be expected to have a Material Adverse Effect after giving effect to this Amendment.

6.Conditions to Effectiveness of Consent. This Amendment shall become effective as of the date first written above upon the satisfaction of the following conditions precedent:

(a)Each party hereto shall have executed and delivered this Amendment to Administrative Agent;

3

(b)Borrower shall have delivered (or caused its Affiliates to deliver) to Administrative Agent the fully executed First Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement contemplated to be delivered in connection with this Amendment; and

(c)Borrower shall have delivered to Administrative Agent resolutions of the Borrower’s governing body authorizing the execution and delivery of this Amendment.

7.Release.

(a)In consideration of, among other things, the consent and amendments provided for herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower (on behalf of themselves and their respective subsidiaries, Affiliates, successors and assigns), and, to the extent permitted by applicable law, and the same is claimed by right of, through or under the above, for their past, present and future employees, directors, members, managers, partners, agents, representatives, officers, directors, and equity holders (all collectively, with Borrower, the “Releasing Parties”), do hereby unconditionally, irrevocably, fully, and forever remise, satisfy, acquit, release and discharge Administrative Agent and Lenders and each of Administrative Agent’s and Lender’s past, present and future officers, directors, agents, employees, attorneys, parent, shareholders, successors, assigns, subsidiaries and Affiliates and all other persons and entities to whom Administrative Agent or Lenders would be liable if such persons or entities were found in any way to be liable to any of the Releasing Parties (collectively, the “Lender Parties”), of and from any and all manner of action and actions, cause and causes of action, claims, cross-claims, charges, demands, counterclaims, suits, proceedings, disputes, debts, dues, sums of money, accounts, bonds, covenants, contracts, controversies, damages, judgments, liabilities, damages, costs, expenses, executions, liens, claims of liens, claims of costs, penalties, attorneys’ fees, or any other compensation, recovery or relief on account of any liability, obligation, demand, proceedings or cause of action of whatever nature, whether in law, equity or otherwise (including, without limitation, those arising under 11 U.S.C. §§ 541-550 and interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses, and incidental, consequential and punitive damages payable to third parties), whether known or unknown, fixed or contingent, joint and/or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, contractual or tortious, direct, indirect, or derivative, asserted or unasserted, foreseen or unforeseen, suspected or unsuspected, now existing, heretofore existing or which may have heretofore accrued against any or all of Lender Parties, whether held in a personal or representative capacity, that the Releasing Parties (or any of them) have or may have against the Lender Parties or any of them (whether directly or indirectly) and which are based on any act, fact, event, action or omission or any other matter, condition, cause or thing occurring at or from any time prior to and including the date hereof in any way, directly or indirectly arising out of, connected with or relating to this Amendment, the Loan Agreement or any other Financing

4

Agreement and the transactions contemplated hereby and thereby, the Collateral or the Liabilities, and all other agreements, certificates, instruments and other documents and statements (whether written or oral) related to any of the foregoing, other than any applicable good faith claim as to which a final determination is made in a judicial proceeding (in which Administrative Agent and any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that Administrative Agent acted in a grossly negligent manner or with actual willful misconduct or illegal activity. Borrower acknowledges that Administrative Agent and Lenders are specifically relying upon the representations, warranties and agreements contained herein and that such representations, warranties and agreements constitute a material inducement to Administrative Agent and Lenders in entering into this Amendment.

(b)Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.

(c)To the furthest extent permitted by law, Borrower hereby knowingly, voluntarily, intentionally and expressly waives and relinquishes any and all rights and benefits that it respectively may have as against Lender Parties under any law, rule or regulation of any jurisdiction that would or could have the effect of limiting the extent to which a general release extends to claims which a Lender Party or Releasing Party does not know or suspect to exist as of the date hereof. Borrower hereby acknowledges that the waiver set forth in the prior sentence was separately bargained for and that such waiver is an essential term and condition of this Amendment.

8.Miscellaneous.

(a)Costs and Expenses. Borrower, jointly and severally, agrees to pay on demand all costs and expenses of Administrative Agent (including, without limitation, the reasonable fees and expenses of outside counsel for Administrative Agent) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided herein shall survive any termination of this Amendment and the Loan Agreement as amended hereby.

(b)Financing Agreement. This Amendment shall constitute a Financing Agreement.

(c)Titles. Titles and section headings herein shall be without substantive meaning and are provided solely for the convenience of the parties.

5

(d)Severability; Etc. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Amendment. The parties hereto have participated jointly in the negotiation and drafting of this Amendment. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

(e)Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, no Borrower may assign any of its respective rights or obligations under this Amendment without the prior written consent of Administrative Agent.

9.Further Assurances. Borrower shall, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, certificates, instruments, reaffirmations, amendments, documents and assurances as may from time to time be necessary or as Administrative Agent may from time to time reasonably request in order to more fully carry out the intent and purposes of this Amendment and the other documents entered into in connection herewith.

10.Governing Law. This Amendment shall be a contract made under and governed by, and construed and enforced in accordance with, the internal laws of the State of Illinois without regard to conflicts of law principles.

11.Counterparts; Fax Signatures. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Consent. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally valid, effective and enforceable as a signed original for all purposes.

[Signature pages follow]

6

IN WITNESS WHEREOF, the parties hereto have duly executed this Third Amendment to Amended and Restated Term Loan and Security Agreement as of the day and year first above written.

BORROWER:
DIVERSICARE AFTON OAKS, LLC
DIVERSICARE BRIARCLIFF, LLC
DIVERSICARE CHISOLM, LLC
DIVERSICARE HARTFORD, LLC
BY:	DIVERSICARE LEASING CORP., its sole member
	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: Executive Vice President & Chief Financial Officer
DIVERSICARE OF CHANUTE, LLC
DIVERSICARE OF COUNCIL GROVE, LLC
DIVERSICARE OF HAYSVILLE, LLC
DIVERSICARE OF SEDGWICK, LLC
DIVERSICARE OF LARNED, LLC
BY:	Diversicare Kansas, LLC, its sole member
	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: Executive Vice President & Chief Financial Officer
DIVERSICARE WINDSOR HOUSE, LLC
DIVERSICARE HILLCREST, LLC
DIVERSICARE LAMPASAS, LLC
DIVERSICARE YORKTOWN, LLC

Signature Page to Third Amendment to
Amended and Restated Term Loan and Security Agreement

BY:	DIVERSICARE LEASING CORP., its sole member
	By:	/s/James R. McKnight, Jr.
	Name: James R. McKnight, Jr.
	Its: Executive Vice President & Chief Financial Officer

DIVERSICARE HOLDING COMPANY, LLC

By:/s/James R. McKnight, Jr.        

Name: James R. McKnight, Jr.

Its:     Executive Vice President &

Chief Financial Officer

DIVERSICARE KANSAS, LLC

By:/s/James R. McKnight, Jr.        

Name: James R. McKnight, Jr.

Its:     Executive Vice President &

     Chief Financial Officer

Signature Page to Third Amendment to
Amended and Restated Term Loan and Security Agreement

ADMINISTRATIVE AGENT:

THE PRIVATEBANK AND TRUST COMPANY, in its capacity as administrative agent

By:/s/Adam D. Panos                

Name: Adam D. Panos

Its: Managing Director

Signature Page to Third Amendment to
Amended and Restated Term Loan and Security Agreement

LENDER:

THE PRIVATEBANK AND TRUST COMPANY

By:/s/Adam D. Panos                

Name: Adam D. Panos

Its: Managing Director

Signature Page to Third Amendment to
Amended and Restated Term Loan and Security Agreement

LENDER:

BANKERS TRUST COMPANY

By:/s/Jon M. Doll                

Name: Jon M. Doll

Its: Vice President

Signature Page to Third Amendment to
Amended and Restated Term Loan and Security Agreement

LENDER:

BOKF, NA D/B/A BANK OF OKLAHOMA

By:/s/Ryan Kirk                

Name: Ryan Kirk

Its: Vice President

Signature Page to Third Amendment to
Amended and Restated Term Loan and Security Agreement

LENDER:

CIT FINANCE LLC

By:/s/Barbara Perich                

Name: Barbara Perich

Its: Director

SCHEDULE 1

(AFFILIATED REVOLVING BORROWERS)

Name	State of Incorporation or Formation	Principal Place of Business and Chief Executive Office
Advocat Ancillary Services, Inc.	Tennessee corporation	1621 Galleria Blvd., Brentwood, TN 37027
Advocat Finance, Inc.	Delaware corporation	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Management Services Co.	Tennessee corporation	1621 Galleria Blvd., Brentwood, TN 37027
Advocat Distribution Services, Inc.	Tennessee corporation	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Assisted Living Services, Inc.	Tennessee corporation	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Assisted Living Services NC, LLC	Tennessee limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Leasing Corp.	Tennessee corporation	1621 Galleria Blvd., Brentwood, TN 37027
Sterling Health Care Management, Inc.	Kentucky corporation	1621 Galleria Blvd., Brentwood, TN 37027
Senior Care Cedar Hills, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Senior Care Golfcrest, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Senior Care Golfview, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Senior Care Florida Leasing, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Senior Care Southern Pines, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Afton Oaks, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Assisted Living Services NC I, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Assisted Living Services NC II, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Briarcliff, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Chisolm, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Hartford, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Hillcrest, LLC,	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Lampasas, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Pinedale, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Windsor House, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Yorktown, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Ballinger, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Doctors, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Estates, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Humble, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Katy, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Normandy Terrace, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Texas I, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Treemont, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Rose Terrace, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Paris, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Therapy Services, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Chanute, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Council Grove, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Haysville, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Sedgwick, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Larned, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Highlands, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Holding Company, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Kansas, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare Leasing Company II, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Seneca Place, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Bradford Place, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Providence, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Siena Woods, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of St. Theresa, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Big Springs, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Nicholasville, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Avon, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Mansfield, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Riverside, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of Chateau, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
Diversicare of St. Joseph, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027

CONSENT AND REAFFIRMATION

The undersigned (“Guarantor”) hereby (i) confirms and agrees with The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as administrative agent (together with its successors and assigns, “Administrative Agent”) that Guarantor’s Amended and Restated Guaranty dated as of April 30, 2013 made in favor of Administrative Agent (as amended or modified, “Guaranty”), remains in full force and effect and is hereby ratified and confirmed in all respects, including with regard to the Amended and Restated Term Loan and Security Agreement dated as of April 30, 2013, as amended by that certain First Amendment to Amended and Restated Term Loan and Security Agreement dated as of November 1, 2013, and that certain Second Amendment to Amended and Restated Term Loan and Security Agreement dated as of March 31, 2014, and as further amended by the foregoing Third Amendment to Amended and Restated Term Loan and Security Agreement (“Amendment”), and each reference to the term “Borrower” in the Guaranty shall also include New Borrower and each reference to the “Loan Agreement” shall refer to the Loan Agreement as amended by the Amendment; (ii) represents and warrants to Administrative Agent, which representations and warranties shall survive the execution and delivery hereof, that Guarantor’s representations and warranties contained in the Guaranty are true and correct as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations expressly related solely to an earlier date, in which case such representations were true and correct on and as of such earlier date (and except for the representations in Section 10(b) thereof which were true and correct on and as of the date when made); (iii) agrees and acknowledges that such ratification and confirmation is not a condition to the continued effectiveness of the Amendment or the Guaranty; and (iv) agrees that neither such ratification and confirmation, nor Administrative Agent’s solicitation of such ratification and confirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or confirmation from the undersigned with respect to subsequent amendments or modifications, if any, to the Loan Agreement, as amended by the Amendment or any other Financing Agreement (as defined in the Loan Agreement, as amended by the Amendment). The execution, delivery and effectiveness of this instrument shall not operate as a waiver of any right, power or remedy of Administrative Agent under or pursuant to the Guaranty. Guarantor acknowledges and agrees that Guarantor has received and reviewed a fully-executed copy of the Amendment (and any other instrument, document or agreement executed or delivered in connection therewith) and understands the contents thereof. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes. This instrument shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles.

Dated: July 1, 2014

DIVERSICARE HEALTHCARE SERVICES, INC. (F/K/A ADVOCAT INC.)

By:/s/Kelly J. Gill            

Name:    Kelly J. Gill

Its:    President and Chief Executive Officer

Signature Page to Third Amendment to
Amended and Restated Term Loan and Security Agreement

EX-10.2

THIRD AMENDMENT AND CONSENT TO
AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT

THIS THIRD AMENDMENT AND CONSENT TO AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT (this “Amendment”) dated as of July 1, 2014 is by and among THE PRIVATEBANK AND TRUST COMPANY, an Illinois banking corporation (together with its successors and assigns, “Administrative Agent”) in its capacity as administrative agent for the Lenders (as defined below), the Lenders, DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, and certain of its affiliates parties hereto identified on the signature pages as “Original Borrower” (individually and collectively, “Original Borrower”), and DIVERSICARE OF NICHOLASVILLE, LLC, DIVERSICARE OF RIVERSIDE, LLC, DIVERSICARE OF CHATEAU, LLC, DIVERSICARE OF ST. JOSEPH, LLC, DIVERSICARE OF AVON, LLC, and DIVERSICARE OF MANSFIELD, LLC, each a Delaware limited liability company (individually and collectively, “New Borrower”). New Borrower and Original Borrower are hereinafter referred to individually and collectively as, “Borrower”.

RECITALS:

WHEREAS, Original Borrower, Administrative Agent, and the financial institutions signatories thereto (the “Lenders”) are parties to that certain Amended and Restated Revolving Loan and Security Agreement dated as of April 30, 2013, as amended by that certain First Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement dated as of November 1, 2013, and that certain Second Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement dated as of March 31, 2014 (as the same may be further amended or modified from time to time, the “Loan Agreement”); all capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement; and

WHEREAS, Borrower, Administrative Agent and Lenders desire to amend the Loan Agreement as provided in and subject to the terms and conditions of this Amendment.

NOW, THEREFORE, for and in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

1.Consents. Subject to the satisfaction of the conditions set forth in Section 7 below and in reliance upon the representations and warranties set forth in Section 6 below, Administrative Agent and the Lenders (as the Required Lenders pursuant to the Loan Agreement) hereby consent to each of the following:

(a) the formation by Diversicare Leasing Company II, LLC (“DLC II”), of New Borrower, each a wholly-owned subsidiary of DLC II, for the purpose of entering into the leases identified on Exhibit A attached hereto and made a part hereof (“Exhibit A”); and

(b) the entering into by Diversicare of Providence, LLC, which is the current lessee and operator of the Providence facility (“Providence”), of that certain Indiana Inter-Governmental Transfer program (the “IGT Arrangement”) with an Indiana county hospital (the “Indiana Hospital”) to be designated by Providence (subject to the approval of the Administrative Agent, which approval will not be unreasonably withheld), with respect to such facility’s Medicaid reimbursement. In connection with the IGT Arrangement, Providence will enter into a sublease agreement with the Indiana Hospital and the Indiana Hospital will become the new licensed operator of the Providence facility and the owner of the Accounts generated therefrom. Diversicare Management Services Co. will enter into a new management agreement with Indiana Hospital to operate the Providence facility on behalf of Indiana Hospital’s behalf and receive a management fee.

2.Joinder and Assumption. From and after the date hereof, New Borrower hereby absolutely and unconditionally (i) joins as and becomes a party to the Loan Agreement as a Borrower thereunder and to each Financing Agreement to which Original Borrower is a party, (ii) assumes, as a joint and several obligor thereunder, all of the obligations, liabilities and indemnities of a Borrower under the Loan Agreement and all other Financing Agreements, (iii) covenants and agrees to be bound by and adhere to all of the terms, covenants, waivers, releases, agreements and conditions of or respecting a Borrower with respect to the Loan Agreement and the other Financing Agreements and all of the representations and warranties contained in the Loan Agreement and the other Financing Agreements with respect to New Borrower, and (iv) collaterally assigns and transfers to Administrative Agent (for the benefit of Lenders and itself) and hereby grants to Administrative Agent (for the benefit of Lenders and itself) a continuing first-priority security interest in all of New Borrower’s now owned and existing and hereafter acquired and arising Collateral, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of all of the Liabilities, subject to any applicable Intercreditor Agreements. New Borrower hereby authorizes Administrative Agent to file at any time uniform commercial code financing statements in such jurisdictions and offices as Administrative Agent deems necessary in connection with the perfection of a security interest in all of New Borrower’s now owned or hereafter arising or acquired Collateral, including, without limitation, Accounts and Deposit Accounts of New Borrower, and all proceeds and products thereof. From and after the date hereof, any reference to the term “Borrower” in the Loan Agreement and the Financing Agreements shall also include New Borrower.

3.Supplementation of Certain Disclosure Schedules. In connection with the joinder of New Borrower to the Loan Agreement, Schedule 1 (Borrowers), Schedule 1.1(a) (Facilities), Schedule 7.8 (Names), Schedule 7.12 (Organizational Chart), Schedule 7.33 (Capitalization) and Schedule 7.36 (Commercial Leases) of the Loan Agreement shall be supplemented from and after the date of this Amendment as set forth on the applicable and respective schedules attached hereto and made a part hereof so that such schedules shall reflect the matters intended to be shown thereon as of the date of this Amendment, including the termination of the Omega Master Lease Agreement with respect to the Boone Health Care Center and Laurel Nursing & Rehab Center Facilities in West Virginia and the sale of the Rose Terrace Facility occurring contemporaneously herewith.

4.Amendments to Loan Agreement. Subject to the terms and conditions contained herein, Borrower, Administrative Agent and Lenders hereby amend the Loan Agreement as follows:

(a)The following definitions shall be inserted in correct alphabetical order into Section 1.1 of the Loan Agreement:

(i)“Aviv Third Amendment Intercreditor Agreements” means each Subordination and Intercreditor Agreement in favor of Administrative Agent identified on Exhibit B attached hereto and made a part hereof (as amended or modified from time to time, collectively, the “Aviv Third Amendment Intercreditor Agreements”).

(ii)“Aviv Third Amendment Lease Documents” means each real estate lease identified on Exhibit A attached hereto and made a part hereof for the Nicholasville Facility, the St. Joseph Facilities, the Avon Facility and the Mansfield Facility identified therein, together with the security agreements, documents, instruments and agreements executed in connection therewith, in each case as the same may be amended or modified in conformity with Section 9.16 of the Loan Agreement (collectively, the “Aviv Third Amendment Lease Documents”).

(iii)“Aviv Third Amendment Lessors” means Nicholasville Property, L.L.C., St. Joseph Missouri Property, L.L.C., Avon Ohio, L.L.C. and Mansfield Aviv, L.L.C., each a Delaware limited liability company and the Lessors under their respective Aviv Third Amendment Lease Documents.

(b)    The definition of “Financing Agreements” in Section 1.1 of the Loan Agreement shall hereafter be deemed to also include this Amendment and each of the documents identified in Sections 7(c), (d), (e), and (n) in this Amendment.

(c)    The definition of “Maximum Revolving Facility” in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:

“Maximum Revolving Facility” means an amount equal to Twenty-Seven Million Five Hundred Thousand and No/100 Dollars ($27,500,000.00).

(d)    The definition of “Intercreditor Agreements” in Section 1.1 of the Loan Agreement is hereby modified by also inserting a reference to the Aviv Third Amendment Intercreditor Agreements.

(e)    The definition of “Restricted Agreements” in Section 1.1 of the Loan Agreement shall hereafter be deemed to also include the Aviv Third Amendment Lease Documents.

(f)    The definition of “Revolving Loan Commitment” in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:

“Revolving Loan Commitment” means, as to any Lender, such Lender’s commitment to make Loans, and to issue or participate in Letters of Credit, under this Agreement. The amount of each Lender’s Revolving Loan Commitment is set forth on Annex A attached hereto and made a part hereof (as amended, modified or supplemented from time to time in accordance with the terms hereof).

(g)    The definition of “Eligible Accounts” in Section 1.1 of the Loan Agreement is hereby amended by inserting the following new subsection (ii) at the end of subsection (h) thereof:

(ii)    notwithstanding the ninety (90) day periods prescribed by subsection (a) above (and subsection (i) after the proviso immediately below), (1) solely for the six (6) month period from June 1, 2014 through and including November 30, 2014 and solely with respect to the Accounts of Borrower generated by the operations of the Nicholasville Facility, (2) solely for the six (6) month period from July 1, 2014 through and including December 31, 2014, and solely with respect to Accounts of Borrower generated by the operations of the St. Joseph Facilities, and (3) solely for the six (6) month period from August 1, 2014 through and including January 31, 2015 with respect to the Accounts of Borrower generated by the operations of the Avon Facility and the Mansfield Facility, Accounts that are to be paid pursuant to a Medicare Provider Agreement or a Medicaid Provider Agreement, Private Insurance Managed Care Accounts, or any otherwise Eligible Accounts, which do not remain unpaid more than one hundred eighty (180) days from the invoice date, shall be Eligible Accounts; provided, however, Private Pay Accounts and Medicaid pending Accounts shall not be considered Eligible Accounts; and, provided further, one hundred percent (100%) of all credit amounts in any of the foregoing Eligible Account categories shall be deducted from the “current” Accounts as reasonably determined by the Administrative Agent in its reasonable credit judgment.

(h)    Section 9.1 of the Loan Agreement shall be amended by inserting the following at the end thereof: “ , and (xii) Liens in favor of the Aviv Third Amendment Lessors in accordance with the Aviv Third Amendment Lease Documents, subject in all cases to the provisions of the Aviv Third Amendment Intercreditor Agreements, respectively.

(i)    Section 9.10(a) of the Loan Agreement is hereby amended and restated in its entirety as follows:

“Borrower shall not make any payment, directly or indirectly, to the Aviv Lessor, Aviv CHP, Aviv Third Amendment Lessors, Aviv Twinbrook, or Omega (or any Affiliate or Subsidiary thereof) in contravention of any of the Intercreditor Agreements.”

(j)    Each of the amounts identified in the “Dollar Allocation” designations set forth in Annex A to the Loan Agreement are hereby respectively amended and restated in their entirety as follows:

(i)    The PrivateBank and Trust Company - $12,903,846.15;

(ii)    Bankers Trust Company –$5,288,461.54;

(iii)    CIT Finance LLC - $5,923,076.92; and

(iv)    BOKF, NA d/b/a Bank of Oklahoma - $3,384,615.39.

5.No Other Amendments. Borrower acknowledges and expressly agrees that this Amendment is limited to the extent expressly set forth herein and shall not constitute a modification or amendment of the Loan Agreement or any other Financing Agreements or a course of dealing at variance with the terms or conditions of the Loan Agreement or any other Financing Agreements (other than as expressly set forth in this Amendment, the Second Note Modifications, the First Pledge Amendment (each as defined below) and the signed Reaffirmation attached hereto).

6.Representations and Warranties. Borrower hereby represents and warrants to and in favor of Administrative Agent and Lenders, which representations and warranties shall survive the execution and delivery hereof, as follows:

(a)Each of the representations and warranties of each Borrower (including Original Borrower and New Borrower) contained in the Loan Agreement and the other Financing Agreements to which Borrower is a party are true and correct in all material respects (without duplication of any materiality carve out already provided therein) on and as of the date hereof, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date); the principal place of business and chief executive office for New Borrower is as set forth on Schedule 1 (as revised pursuant to Section 3 hereof);

(b)New Borrower has the limited liability company power and authority (i) to enter into the Loan Agreement as amended by this Amendment and (ii) to do all acts and things as are required or contemplated hereunder to be done, observed and performed by New Borrower;

(c)This Amendment has been duly authorized, validly executed and delivered by one or more Duly Authorized Officers of Borrower, and each of this Amendment, the Loan Agreement as amended hereby, and each of the other Financing Agreements to which Borrower is a party, constitutes the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, subject to bankruptcy, insolvency or other similar laws affecting the enforcement of creditor’s rights and remedies generally;

(d)The execution and delivery of this Amendment and performance by Borrower under this Amendment, the Loan Agreement and each of the other Financing Agreements to which Borrower is a party do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over Borrower that has not already been obtained, nor be in contravention of or in conflict with the organizational documents of Borrower, or any provision of any statute, judgment, order, indenture, instrument, agreement, or undertaking, to which Borrower is party or by which Borrower’s respective assets or properties are bound; and

(e)No Default or Event of Default will result after giving effect to this Amendment, and no event has occurred that has had or could reasonably be expected to have a Material Adverse Effect after giving effect to this Amendment.

7.Conditions Precedent to Effectiveness of this Amendment. The consents set forth in Section 1 hereof and the amendments contained in Section 4 of this Amendment shall become effective on the date hereof as long as each of the following conditions precedent is satisfied as determined by Administrative Agent:

(a)all of the representations and warranties of Borrower under Section 6 hereof, which are made as of the date hereof, are true and correct;

(b)receipt by Administrative Agent of duly executed signature pages to this Amendment from Borrower;

(c)receipt by Administrative Agent of duly executed signature pages to (collectively, the “Third Note Modifications”) the Third Modifications to Amended and Restated Revolving Credit Notes dated as of the date hereof from Borrower (to, respectively, PrivateBank and Bankers Trust Company) and to the Third Modifications to Revolving Credit Notes dated as of the date hereof from Borrower (to, respectively, Bank of Oklahoma and CIT Finance LLC);

(d)receipt by Administrative Agent of a duly executed signature page to the Reaffirmation of Amended and Restated Guaranty from Guarantor, as provided in the attachment hereto (“Guaranty Reaffirmation”);

(e)receipt by Administrative Agent of duly executed signature pages to the Second Amendment to Pledge Agreement dated as of the date hereof, among DLC II, New Borrower, Borrower Agent and Administrative Agent (the “Second Pledge Amendment”);

(f)receipt by Administrative Agent of copies of resolutions of the governing body of New Borrower authorizing the execution, delivery and performance by New Borrower of the Loan Agreement, as amended by this Amendment, and each of the other instruments, agreements and documents entered into in connection with this Amendment to which New Borrower is a party (including with respect to the security interest and equity pledge provided in favor of Administrative Agent), certified by a Duly Authorized Officer of New Borrower;

(g)receipt by Administrative Agent of copies of resolutions of the governing body of Original Borrower authorizing the execution, delivery and performance by Original Borrower of this Amendment and each of the other instruments, agreements and documents entered into in connection with this Amendment to which Original Borrower is a party, certified by a Duly Authorized Officer of Original Borrower;

(h)receipt by Administrative Agent of UCC tax, lien, pending suit, bankruptcy and judgment searches on New Borrower (and each of its trade names and assumed names), each as of a recent date, the results of which must be in form and substance acceptable to Administrative Agent;

(i)receipt by Administrative Agent of good standing certificates for New Borrower from the Delaware Secretary of State and certificates of authorization for New Borrower from the Secretary of State of the State of Kentucky, Missouri and Ohio, as applicable (as of a recent date);

(j)receipt by Administrative Agent of an opinion of Harwell Howard Hyne Gabbert & Manner, the legal counsel to Borrower and Guarantor, in form and substance reasonably satisfactory to Administrative Agent;

(k)receipt by Administrative Agent of a certified copy of New Borrower’s certificate of formation, certified by the Delaware Secretary of State (as of a recent date);

(l)receipt by Administrative Agent of a true, correct and complete copy of the operating agreement of New Borrower, certified by a Duly Authorized Officer of New Borrower;

(m)UCC Financing Statements, as requested by Administrative Agent, naming New Borrower as debtor and Administrative Agent as secured party with respect to the Collateral, together with such UCC termination statements necessary to release all Liens (other than Permitted Liens) in any of the Collateral except Administrative Agent, and other documents as Administrative Agent deems necessary or appropriate, shall have been filed in all jurisdictions that Administrative Agent deems necessary or advisable;

(n)receipt of a Third Amendment to the Blocked Account Agreement, in form and substance reasonably acceptable to Administrative Agent;

(o)receipt of certificates from Borrower’s insurance carriers evidencing Administrative Agent as additional insured with respect to New Borrower’s general liability insurance;

(p)receipt by Administrative Agent of a true, correct and complete copy of the Management Agreements between New Borrower and Manager available as of the date hereof, certified by a Duly Authorized Officer of New Borrower;

(q)receipt by Administrative Agent of a true, correct and complete copy of each of the Aviv Third Amendment Lease Documents available as of the date hereof, certified by a Duly Authorized Officer of New Borrower;

(r)receipt by Administrative Agent of a duly signed and completed Perfection Certificate with respect to New Borrower;

(s)UCC Amendment Statement naming DLC II as debtor and Administrative Agent as secured party with respect to the equity of New Borrower pledged pursuant to the Second Pledge Amendment shall have been filed in all jurisdictions that Administrative Agent deems necessary or advisable (including the Tennessee Secretary of State);

(t)receipt by Administrative Agent of copies of resolutions of the governing body of DLC II authorizing the execution, delivery and performance by DLC II of the Second Pledge Amendment, certified by a Duly Authorized Officer of DLC II;

(u)receipt by Administrative Agent of copies of resolutions of the governing body of Guarantor authorizing the execution, delivery and performance by Guarantor of the Guaranty Reaffirmation, certified by a Duly Authorized Officer of Guarantor;

(v)receipt by Administrative Agent of copies of the supplemented Schedule 1 (Borrowers), Schedule 1.1(a) (Facilities), Schedule 7.8 (Names), Schedule 7.12 (Organizational Chart), Schedule 7.33 (Capitalization) and Schedule 7.36 (Commercial Leases) of the Loan Agreement;

(w)receipt by Administrative Agent of a Third Amendment to the Term Loan Agreement dated of even date herewith by and among the Affiliated Term Borrowers, the Lenders and the Administrative Agent, and the Reaffirmation and Consent thereto from Guarantor as provided in the attachment thereto;

(x)receipt of any applicable Letter of Credit Document (including an amendment to the Master Letter of Credit Agreement or an entirely new Master Letter of Credit Agreement) as Administrative Agent may require in connection with this Amendment;

(y)receipt of a fully completed Borrowing Base Certificate, signed on behalf of Borrower by a Duly Authorized Officer; and

(z)receipt by Administrative Agent of such other certificates, schedules, exhibits, documents, opinions, instruments, reaffirmations, amendments or consents Administrative Agent may reasonably require, if any.

8.    Reaffirmation; References to Loan Agreement; Etc.

(a)    Borrower acknowledges and agrees that all of Borrower’s obligations and Liabilities under the Loan Agreement and the other Financing Agreements, as amended hereby, are and shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. The first priority perfected security interests and Liens and rights in the Collateral securing payment of the Liabilities are hereby ratified and confirmed by Borrower in all respects.

(b)    Upon the effectiveness of this Amendment, each reference in the Loan Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import shall mean and be a reference to the Loan Agreement, as amended by this Amendment.

(c)    The failure by Administrative Agent, at any time or times hereafter, to require strict performance by any Borrower of any provision or term of the Loan Agreement, this Amendment or any of the Financing Agreements shall not waive, affect or diminish any right of Administrative Agent hereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver by Administrative Agent of a breach of this Amendment or any Event of Default under or pursuant to the Loan Agreement shall not, except as expressly set forth in a writing signed by Administrative Agent, suspend, waive or affect any other breach of this Amendment or any Event of Default under or pursuant to the Loan Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of any Borrower contained in this Amendment, shall be deemed to have been suspended or waived by Administrative Agent unless such suspension or waiver is (i) in writing and signed by Administrative Agent (and, if applicable, the Required Lenders) and (ii) delivered to Borrower by Administrative Agent or its counsel.

(d)    In no event shall Administrative Agent’s execution and delivery of this Amendment establish a course of dealing among Administrative Agent, any Borrower, pledgor or Guarantor or any other obligor, or in any other way obligate Administrative Agent to hereafter provide any amendments or modifications or, if at any time applicable, consents or waivers with respect to the Loan Agreement or any other Financing Agreement. The terms and provisions of this Amendment shall be limited precisely as written and shall not be deemed (x) to be a consent to any amendment or modification of any other term or condition of the Loan Agreement or of any of the Financing Agreements (except as expressly provided herein or in the other documents entered into in connection herewith, including the Third Note Modifications, the Second Pledge Amendment, and the Guaranty Reaffirmation); or (y) to prejudice any right or remedy which Administrative Agent may now have under or in connection with the Loan Agreement or any of the other Financing Agreements. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

(e)    Except as expressly provided herein (or in the other documents entered into in connection herewith, including the Third Note Modifications, the Second Pledge Amendment, and the Guaranty Reaffirmation), the Loan Agreement and all of the other Financing Agreements shall remain unaltered, and the Loan Agreement and all of the other Financing Agreements shall remain in full force and effect and are hereby ratified and confirmed in all respects.

(f)    Borrower shall deliver to Administrative Agent when available a true, correct and complete copy of the applicable nursing home license for New Borrower.

9.Release.

(a)    In consideration of, among other things, the consent and amendments provided for herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower (on behalf of themselves and their respective subsidiaries, Affiliates, successors and assigns), and, to the extent permitted by applicable law and the same is claimed by right of, through or under the above, for their past, present and future employees, directors, members, managers, partners, agents, representatives, officers, directors, and equity holders (all collectively, with Borrower, the “Releasing Parties”), do hereby unconditionally, irrevocably, fully, and forever remise, satisfy, acquit, release and discharge Administrative Agent, Issuing Lender, and Lenders and each of Administrative Agent’s, Issuing Lender’s and Lender’s past, present and future officers, directors, agents, employees, attorneys, parent, shareholders, successors, assigns, subsidiaries and Affiliates and all other persons and entities to whom Administrative Agent or Lenders would be liable if such persons or entities were found in any way to be liable to any of the Releasing Parties (collectively, the “Lender Parties”), of and from any and all manner of action and actions, cause and causes of action, claims, cross-claims, charges, demands, counterclaims, suits, proceedings, disputes, debts, dues, sums of money, accounts, bonds, covenants, contracts, controversies, damages, judgments, liabilities, damages, costs, expenses, executions, liens, claims of liens, claims of costs, penalties, attorneys’ fees, or any other compensation, recovery or relief on account of any liability, obligation, demand, proceedings or cause of action of whatever nature, whether in law, equity or otherwise (including, without limitation, those arising under 11 U.S.C. §§ 541-550 and interest or other carrying costs, penalties, legal, accounting and other professional fees and expenses, and incidental, consequential and punitive damages payable to third parties), whether known or unknown, fixed or contingent, joint and/or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, contractual or tortious, direct, indirect, or derivative, asserted or unasserted, foreseen or unforeseen, suspected or unsuspected, now existing, heretofore existing or which may have heretofore accrued against any or all of Lender Parties, whether held in a personal or representative capacity, that the Releasing Parties (or any of them) have or may have against the Lender Parties or any of them (whether directly or indirectly) and which are based on any act, fact, event, action or omission or any other matter, condition, cause or thing occurring at or from any time prior to and including the date hereof in any way, directly or indirectly arising out of, connected with or relating to this Amendment, the Loan Agreement or any other Financing Agreement and the transactions contemplated hereby and thereby, the Collateral or the Liabilities, and all other agreements, certificates, instruments and other documents and statements (whether written or oral) related to any of the foregoing, other than any applicable good faith claim as to which a final determination is made in a judicial proceeding (in which Administrative Agent and any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that Administrative Agent acted in a grossly negligent manner or with actual willful misconduct or illegal activity. Borrower acknowledges that Administrative Agent and Lenders are specifically relying upon the representations, warranties and agreements contained herein and that such representations, warranties and agreements constitute a material inducement to Administrative Agent and Lenders in entering into this Amendment.

(b)    Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.

(c)    To the furthest extent permitted by law, Borrower hereby knowingly, voluntarily, intentionally and expressly waives and relinquishes any and all rights and benefits that it respectively may have as against Lender Parties under any law, rule or regulation of any jurisdiction that would or could have the effect of limiting the extent to which a general release extends to claims which a Lender Party or Releasing Party does not know or suspect to exist as of the date hereof. Borrower hereby acknowledges that the waiver set forth in the prior sentence was separately bargained for and that such waiver is an essential term and condition of this Amendment (and without which the consent in Section 1 and the amendments in Section 4 hereof would not have been agreed to by Administrative Agent and Lenders).

10.    Costs and Expenses. Without limiting the obligation of Borrower to reimburse Administrative Agent for all costs, fees, disbursements and expenses incurred by Administrative Agent as specified in the Loan Agreement, Borrower agrees to and shall pay on demand all reasonable costs, fees, disbursements and expenses of Administrative Agent in connection with the preparation, negotiation, revision, execution and delivery of this Amendment and the other agreements, amendments, modifications, reaffirmations, instruments and documents contemplated hereby, including, without limitation, reasonable attorneys’ fees and out-of-pocket expenses.

11.    Post-Closing Covenants. Borrower shall deliver to Administrative Agent as soon as available, true, correct and complete, fully-signed copies of each of the following, which must be in form and substance reasonably satisfactory to Administrative Agent:

(a)    any of the Aviv Third Amendment Lease Documents (i.e., Ohio) not furnished pursuant to Section 7(q) hereof;

(b)    any of the insurance certificates (i.e., Ohio) not furnished pursuant to Section 7(o) hereof;

(c)    any of the Management Agreements (i.e., Ohio) not furnished pursuant to Section 7(p) hereof; and

(d)    all of the sublease agreement, operations transfer agreement, management agreement, intangible property license agreement, assignment and assumption of admission agreement, loan agreement, security agreement and other instruments, agreements and documents regarding or otherwise relating to the IGT Arrangement (including any such instruments, agreements and documents reasonably requested by Administrative Agent).

12.    Financing Agreement. This Amendment shall constitute a Financing Agreement.

13.    Titles. Titles and section headings herein shall be without substantive meaning and are provided solely for the convenience of the parties.

14.    Severability; Etc. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Amendment. The parties hereto have participated jointly in the negotiation and drafting of this Amendment. In the event an ambiguity or question of intent or interpretation arises, this Amendment shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Amendment.

15.    Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, no Borrower may assign any of its respective rights or obligations under this Amendment without the prior written consent of Administrative Agent.

16.    Further Assurances. Borrower shall, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, certificates, instruments, reaffirmations, amendments, documents and assurances as may from time to time be necessary or as Administrative Agent may from time to time reasonably request in order to more fully carry out the intent and purposes of this Amendment and the other documents entered into in connection herewith, including, without limitation, the Second Note Modifications, the First Pledge Amendment, and the Guaranty Reaffirmation.

17.    Counterparts; Faxes. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes.

18.    Governing Law. This Amendment shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have duly executed this Third Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement as of the day and year first above written.

ORIGINAL BORROWER:

BORROWER: DIVERSICARE MANAGEMENT SERVICES CO. ADVOCAT ANCILLARY SERVICES, INC. ADVOCAT FINANCE, INC. DIVERSICARE MANAGEMENT SERVICES CO. ADVOCAT DISTRIBUTION SERVICES, INC. DIVERSICARE ASSISTED LIVING SERVICES, INC. DIVERSICARE ASSISTED LIVING SERVICES NC, LLC DIVERSICARE LEASING CORP. STERLING HEALTH CARE MANAGEMENT, INC.
By:	/s/James R. McKnight, Jr.
Name:		James R. McKnight, Jr.
Its:		Executive Vice President & Chief Financial Officer

SENIOR CARE CEDAR HILLS, LLC SENIOR CARE GOLFCREST, LLC SENIOR CARE GOLFVIEW, LLC SENIOR CARE SOUTHERN PINES, LLC
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:	DIVERSICARE LEASING CORP., its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer

SENIOR CARE FLORIDA LEASING, LLC DIVERSICARE AFTON OAKS, LLC DIVERSICARE BRIARCLIFF, LLC DIVERSICARE CHISOLM, LLC DIVERSICARE HARTFORD, LLC DIVERSICARE HILLCREST, LLC DIVERSICARE LAMPASAS, LLC DIVERSICARE PINEDALE, LLC DIVERSICARE WINDSOR HOUSE, LLC DIVERSICARE YORKTOWN, LLC DIVERSICARE ROSE TERRACE, LLC DIVERSICARE THERAPY SERVICES, LLC DIVERSICARE HIGHLANDS, LLC
BY:	DIVERSICARE LEASING CORP., its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer
DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer

DIVERSICARE BALLINGER, LLC DIVERSICARE DOCTORS, LLC DIVERSICARE ESTATES, LLC DIVERSICARE HUMBLE, LLC DIVERSICARE KATY, LLC DIVERSICARE NORMANDY TERRACE, LLC DIVERSICARE TREEMONT, LLC DIVERSICARE PARIS, LLC
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer

DIVERSICARE TEXAS I, LLC
By:	/s/James R. McKnight, Jr.
Name:		James R. McKnight, Jr.
Its:		Executive Vice President & Chief Financial Officer

DIVERSICARE OF CHANUTE, LLC DIVERSICARE OF COUNCIL GROVE, LLC DIVERSICARE OF HAYSVILLE, LLC DIVERSICARE OF SEDGWICK, LLC DIVERSICARE OF LARNED, LLC
BY:	Diversicare Kansas, LLC its sole member
	By:	/s/James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & Chief Financial Officer

DIVERSICARE HOLDING COMPANY, LLC

By: /s/James R. McKnight, Jr            

Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE KANSAS, LLC

By: /s/James R. McKnight, Jr            

Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE LEASING COMPANY II, LLC

By: /s/James R. McKnight, Jr            

Name: James R. McKnight, Jr.

Its: Executive Vice President and

Chief Financial Officer

DIVERSICARE OF SENECA PLACE, LLC

DIVERSICARE OF BRADFORD PLACE, LLC

DIVERSICARE OF PROVIDENCE, LLC

DIVERSICARE OF SIENA WOODS, LLC

DIVERSICARE OF ST. THERESA, LLC

By: DIVERSICARE LEASING COMPANY II, LLC, its sole member

By: /s/James R. McKnight, Jr            

Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE OF BIG SPRINGS, LLC

By: DIVERSICARE LEASING COMPANY II, LLC, its sole member

By: /s/James R. McKnight, Jr            

Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer

NEW BORROWER:

DIVERSICARE OF NICHOLASVILLE, LLC

DIVERSICARE OF AVON, LLC

DIVERSICARE OF MANSFIELD, LLC

DIVERSICARE OF RIVERSIDE, LLC

DIVERSICARE OF CHATEAU, LLC

DIVERSICARE OF ST. JOSEPH, LLC

By: DIVERSICARE LEASING COMPANY II, LLC, its sole member

By: /s/James R. McKnight, Jr            

Name:	James R. McKnight, Jr.
Its:	Executive Vice President & Chief Financial Officer

Acknowledged and Agreed: DIVERSICARE HEALTHCARE SERVICES, INC. (F/K/A ADVOCAT INC.)
/s/Kelly J. Gill
Name:	Kelly J. Gill
Its:	President and Chief Executive Officer

ADMINISTRATIVE AGENT:

THE PRIVATEBANK AND TRUST COMPANY, in its capacity as administrative agent

By:/s/Adam D. Panos                

Name: Adam D. Panos

Its: Managing Director

LENDER:

THE PRIVATEBANK AND TRUST COMPANY

By:/s/Adam D. Panos                

Name: Adam D. Panos

Its: Managing Director

LENDER: BANKERS TRUST COMPANY
By: /s/Jon M. Doll
Name:	Jon M. Doll
Its:	Vice President

LENDER: BOKF, NA D/B/A BANK OF OKLAHOMA
By: /s/Ryan Kirk
Name:	Ryan Kirk
Its:	Vice President

LENDER: CIT FINANCE LLC
By: /s/Barbara Perich
Name:	Barbara Perich
Its:	Director

REAFFIRMATION OF AMENDED AND RESTATED GUARANTY

The undersigned (“Guarantor”) hereby (i) confirms and agrees with The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as administrative agent (together with its successors and assigns, “Administrative Agent”) that Guarantor’s Amended and Restated Guaranty dated as of April 30, 2013 made in favor of Administrative Agent (as amended or modified, “Guaranty”), remains in full force and effect and is hereby ratified and confirmed in all respects, including with regard to the Amended and Restated Revolving Loan and Security Agreement dated as of April 30, 2013, as amended by that certain First Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement and that certain Second Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement dated as of March 31, 2014, and as further amended by the foregoing Third Amendment and Consent to Amended and Restated Revolving Loan and Security Agreement (“Amendment”), and each reference to the term “Borrower” in the Guaranty shall also include New Borrower and each reference to the “Loan Agreement” shall refer to the Loan Agreement as amended by the Amendment; (ii) represents and warrants to Administrative Agent, which representations and warranties shall survive the execution and delivery hereof, that Guarantor’s representations and warranties contained in the Guaranty are true and correct as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations expressly related solely to an earlier date, in which case such representations were true and correct on and as of such earlier date (and except for the representations in Section 10(b) thereof which were true and correct on and as of the date when made); (iii) agrees and acknowledges that such ratification and confirmation is not a condition to the continued effectiveness of the Amendment or the Guaranty; and (iv) agrees that neither such ratification and confirmation, nor Administrative Agent’s solicitation of such ratification and confirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or confirmation from the undersigned with respect to subsequent amendments or modifications, if any, to the Loan Agreement, as amended by the Amendment or any other Financing Agreement (as defined in the Loan Agreement, as amended by the Amendment). The execution, delivery and effectiveness of this instrument shall not operate as a waiver of any right, power or remedy of Administrative Agent under or pursuant to the Guaranty. Guarantor acknowledges and agrees that Guarantor has received and reviewed a fully-executed copy of the Amendment (and any other instrument, document or agreement executed or delivered in connection therewith) and understands the contents thereof. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes. This instrument shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles.

Dated as of: July __, 2014

DIVERSICARE HEALTHCARE SERVICES, INC. (F/K/A ADVOCAT INC.)

By:/s/Kelly J. Gill                

Name:    Kelly J. Gill

Its:    President and Chief Executive Officer

EXHIBIT A

1.    Lease by and between Nicholasville Property, L.L.C., a Delaware limited liability company (“Lessor”) and Diversicare of Nicholasville, LLC, a Delaware limited liability company (“Lessee”), dated as of May 28, 2014 and commencing June 1, 2014, for the lease of a nursing home facility formerly known as Royal Manor Health Care, having an address of 100 Sparks Ave., Nicholasville, Kentucky, now known and operated by the Lessee as Diversicare of Nicholasville (the “Nicholasville Facility”).

2.    Master Lease by and between St. Joseph Missouri Property, L.L.C., a Delaware limited liability company (“Lessor”) and Diversicare of Chateau, LLC, a Delaware limited liability company, Diversicare of Riverside, LLC, a Delaware limited liability company, and Diversicare of St. Joseph, LLC, a Delaware limited liability company (collectively , “Lessee”), dated as of June __, 2014 and commencing July 1, 2014, for the lease by each Lessee, respectively, of: (i) a nursing home facility known as Saxton Care Chateau having an address of 811 N. 9th Street, St. Joseph, Missouri, to be known and operated by the Lessee as St. Joseph Chateau; (ii) a nursing home facility known as Saxton Riverside Care Center and an assisted living facility known as Saxton’s Country Villa having an address of 1616 Weisenborn Road, St. Joseph, Missouri, to be known and operated by the Lessee as Riverside Place; and (iii) a nursing home facility and independent living facility known as Saxton Health Care Inn having an address of 3002 N. 18th Street, St. Joseph, Missouri, to be known and operated by Lessee as Diversicare of St. Joseph (collectively, the “St. Joseph Facilities”).

3.     Lease to be executed by and between Avon Ohio, L.L.C. (“Lessor”) and Diversicare of Avon, LLC, a Delaware limited liability company (“Lessee”), having an anticipated commencement date of August 1, 2014, for the lease of a nursing home facility known as Good Samaritan Nursing Home having an address of 32900 Detroit Road, Avon, Ohio, to be known and operated by Lessee as Diversicare of Avon (the “Avon Facility”).

4.    Lease to be executed by and between Mansfield Aviv, L.L.C., a Delaware limited liability company (“Lessor”), and Diversicare of Mansfield, L.L.C., a Delaware limited liability company, having an anticipated commencement date of August 1, 2014, for the lease of a residential care facility known as Ontario Commons having an address of 2124 Park Avenue West, Ontario, Ohio, to be known and operated by Lessee as Diversicare of Mansfield (the “Mansfield Facility”).

EXHIBIT B

AVIV THIRD AMENDMENT INTERCREDITOR AGREEMENTS

1.    Subordination and Intercreditor Agreement (Aviv-Nicholasville) dated as of July 1, 2014, made by and among The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as Administrative Agent for the Lenders described therein (together with its successors and assigns “PrivateBank”), Diversicare of Nicholasville, LLC, a Delaware limited liability company (“Borrower”) and Nicholasville Kentucky Property, L.L.C. a Delaware limited liability company (“Lessor”).

2.    Subordination and Intercreditor Agreement (Aviv-Missouri Facilities) dated as of July 1, 2014 made by and among (i)The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as Administrative Agent for the Lenders described therein (together with its successors and assigns, “PrivateBank”), (ii) Diversicare of Riverside , LLC, Diversicare of Chateau, LLC, and Diversicare of St. Joseph, LLC, each a Delaware limited liability company (referred to individually and collectively as, “Borrower”), and (iii) St. Joseph Missouri Property, L.L.C., a Delaware limited liability company (“Lessor”).

3.    Subordination and Intercreditor Agreement) to be made by and among The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as Administrative Agent for the Lenders described therein (together with its successors and assigns, “PrivateBank”), Diversicare of Avon, LLC, a Delaware limited liability company (“Borrower”) and Avon Ohio L.L.C. a Delaware limited liability company (“Lessor”), to be executed in connection with the Lease to be made by and between Lessor and Borrower , as Lessee, having an anticipated commencement date of August 1, 2014, for the lease of a nursing home facility known as Good Samaritan Nursing Home having an address of 32900 Detroit Road, Avon, Ohio, to be known and operated by Lessee as Diversicare of Avon (the “Avon Facility’).

4.    Subordination and Intercreditor Agreement) to be made by and among The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as Administrative Agent for the Lenders described therein (together with its successors and assigns, “PrivateBank”), Diversicare of Mansfield, LLC, a Delaware limited liability company (“Borrower”) and Avon Ohio L.L.C. a Delaware limited liability company (“Lessor”), to be executed in connection the Lease to be made by and between Lessor and Borrower, as Lessee, having an anticipated commencement date of August 1, 2014, for the lease of a residential care facility known as Ontario Commons having an address of 2124 Park Avenue West, Ontario, Ohio, to be known and operated by Lessee as Diversicare of Mansfield (the “Mansfield Facility”).

EX-10.3

FIFTEENTH AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

This Fifteenth Amendment to Consolidated Amended and Restated Master Lease (this “Amendment”) is executed and delivered as of June 30, 2014 by and between STERLING ACQUISITION CORP., a Kentucky corporation (“Lessor”), the address of which is 200 International Circle, Suite 3500, Hunt Valley, MD 21030, and DIVERSICARE LEASING CORP., a Tennessee corporation, the address of which is 1621 Galleria Boulevard, Brentwood, TN 37027.

RECITALS:

A.    Lessee has executed and delivered to Lessor a Consolidated Amended and Restated Master Lease dated as of November 8, 2000, but effective as of October 1, 2000, as amended by a First Amendment to Consolidated Amended and Restated Master Lease dated as of September 30, 2001, a Second Amendment to Consolidated Amended and Restated Master Lease dated as of June 15, 2005, a Third Amendment to Consolidated Amended and Restated Master Lease dated as of October 20, 2006, a Fourth Amendment to Consolidated Amended and Restated Master Lease dated as of April 1, 2007, a Fifth Amendment to Consolidated Amended and Restated Master Lease dated as of August 10, 2007, a Sixth Amendment to Consolidated Amended and Restated Master Lease dated as of March 14, 2008, a Seventh Amendment to Consolidated Amended and Restated Master Lease dated as of October 24, 2008, an Eighth Amendment to Consolidated Amended and Restated Master Lease dated as of March 31, 2009, a Ninth Amendment to Consolidated Amended and Restated Master Lease dated as of May 5, 2009, a Tenth Amendment to Consolidated Amended and Restated Master Lease dated as of September 8, 2009, and a Eleventh Amendment to Consolidated Amended and Restated Master Lease dated as of April 18, 2011, a Twelfth Amendment to Consolidated Amended and Restated Master Lease dated as of January 22, 2013 (the “Twelfth Amendment”), a Thirteenth Amendment to Consolidated Amended and Restated Master Lease dated as of August 1, 2013, and a Fourteenth Amendment to Consolidated Amended and Restated Master Lease dated as of January 31, 2014 (collectively, the “Existing Master Lease”) pursuant to which Lessee leases from Lessor certain healthcare facilities.

B.    Lessor, certain Affiliates of Lessor listed on Exhibit A (the “New Lessor Entities”), and parties listed on Exhibit B (the “New Tenant Entities”) to this Amendment have entered into an Agreement to Enter into Master Lease dated as of April 2, 2014, pursuant to which certain of the New Tenant Entities shall execute and deliver to the New Lessor Entities a Master Lease (the “New Master Lease”) covering the two (2) Facilities located in West Virginia and listed on Exhibit C to this Amendment (the “West Virginia Facilities”).

C.    Lessor and Lessee desire to terminate the Existing Master Lease as to the West Virginia Facilities, and, effective as of such termination, to reduce the Non-Texas Base Rent by One Million Nine Hundred Thousand Dollars ($1,900,000), all on the terms and conditions of this Amendment.

D.     In addition, Lessor and Lessee desire to extend the draw period for the Tenant improvement allowance provided for in the Twelfth Amendment until September 30, 2014.

NOW THEREFORE, the parties agree as follows:

1.Definitions. Any capitalized term used but not defined in this Amendment will have the meaning assigned to such term in the Master Lease. From and after the date of this Amendment, each reference in the Existing Master Lease or the other Transaction Documents to the “Lease” or “Master Lease” means, as applicable, the Existing Master Lease as modified by this Amendment.

2.Termination as to West Virginia Facilities. Effective as of, and conditioned upon, the occurrence of the “Commencement Date” under the New Master Lease (the “New Lease Commencement”), (a) the Master Lease is terminated as to the West Virginia Facilities, and only as to the West Virginia Facilities; and (b) Exhibits A-27 and A-28 of the Master Lease are amended and restated in its entirety as follows:

Exhibit A-27 and A-28

Intentionally Omitted.

Effective as of, and conditioned upon, the occurrence of the New Lease Commencement, Lessee shall be and hereby is released from any further obligations first arising under the Master Lease from and after the New Lease Commencement Date as to the West Virginia Facilities. Notwithstanding the foregoing, the obligations of Lessee under the Master Lease with respect to matters first arising prior to the New Lease Commencement shall survive the termination of the Master Lease as to the West Virginia Facilities. Lessee acknowledges and agrees that the New Lessors, as successors in interest to Lessor, are also indemnified parties under Section 21.1 of the Master Lease; subject, however, to the exclusions for the gross negligence or willful misconduct, and the indemnity obligations, of the Lessor under Section 21.1 of the Master Lease.

3.Non-Texas Base Rent Reduction. Effective as of, and conditioned upon, the New Lease Commencement, the definition of Non-Texas Base Rent is hereby amended and restated in its entirety as follows:

Non-Texas Base Rent:

(A)     During the Initial Term, the Non-Texas Base Rent shall be:

(1)    For period prior to the New Lease Commencement, the Non-Texas Base Rent as set forth in the Existing Master Lease;

(2)    For the period from the New Lease Commencement thru September 30, 2014, the monthly sum of Nine Hundred Eighty Three Thousand Four Hundred Eighty Eight and 81/100 Dollars ($983,488.81), which on an annual basis would be Eleven Million Eight Hundred One Thousand Eight Hundred Sixty Five and 75/100 Dollars ($11,801,865.75) (the “2014 Annual NTBR”);

(3)     For the Lease Year commencing on October 1, 2014, the product of the 2014 Annual NTBR and One Hundred Three Percent (103%);

(4)    For each of the each of the remaining Lease Years of the first Renewal Term, the product of the Non-Texas Base Rent during the previous Lease Year and and One Hundred Three Percent (103%).

Under no circumstances will the Non-Texas Base Rent in any Lease Year be less than the Non-Texas Base Rent during the preceding Lease Year.

(B)    During the second Renewal Term, the Non-Texas Base Rent shall be:

(1)    For the first Lease Year of the second Renewal Term, the greater of (a) the product of the Non-Texas Base Rent during the last Lease Year of the Initial Term and One hundred Three percent (103%), and (b) the Fair Market Rent for the Facilities other than the Texas Facilities on the first day of such Renewal Term as agreed upon by Lessor and Lessee, or, if prior to the commencement of the Renewal Term they are unable to agree, as determined by an appraisal pursuant to Article XXXII of this Lease; provided, however, that the Non-Texas Base Rent for the first Lease Year of the second Renewal Term shall not exceed one hundred ten percent (110%) of the Non-Texas Base Rent for the Lease Year immediately preceding the commencement of the second Renewal Term; and

(2)    For each of the second (2^nd) through the twelfth (12^th) Lease Years during the second Renewal Term, the lesser of (i) the Non-Texas Base Rent for the first (1st) Lease Year of the second Renewal Term, increased by a percentage equal to two (2) times the percentage increase in the CPI (if positive) from the commencement date of the second Renewal Term to the Adjustment Date in each of the second (2^nd) through twelfth (12^th) Lease Years, as applicable (the “Adjustment Date”), and (ii) the product of the Non-Texas Base Rent during the first (1^st) Lease Year of the second Renewal Term and the following factor:

Lease Year During Second Renewal Term	Applicable Factor
2	1.030
3	1.061
4	1.093
5	1.126
6	1.159
7	1.194
8	1.230
9	1.267
10	1.305
11	1.344
12	1.384

Under no circumstances will the Non-Texas Base Rent in any Lease Year during the Renewal Term be less than the Non-Texas Base Rent during the preceding Lease Year.

4.Proceeds to Lessor; OTA; No Prorations with Lessor. All proceeds from the lease of the West Virginia Facilities shall be paid to Lessor. Lessee shall enter into an operations transfer agreement in form and substance reasonably acceptable to Lessee with the new operators of the West Virginia Facilities providing for the proration of revenues and expenses. The operations transfer agreement shall also include such indemnities from and in favor of Lessee as may be customarily included in transactions of this type in form and substance reasonably acceptable to Lessee. Lessee shall prorate all Impositions pursuant to the operations transfer agreement and such proration shall be in full satisfaction of the Lessee’s and Lessor’s obligation to prorate such Impositions pursuant to Section 4.3 of the Master Lease.

5.Schedule 1 to Amended and Restated Security Agreement. Effective as of, and conditioned upon, the New Lease Commencement, Schedule 1 to the Amended and Restated Security Agreement between Lessee, as debtor, and Lessor, as secured party, is hereby amended and restated by Schedule 1 to this Amendment. After the occurrence of the New Lease Commencement, Lessor will file or record any UCC-3 termination statements necessary to terminate, release or amend, as applicable, any UCC-1 financing statements to extent such financing statements cover the West Virginia Facilities.

6.Tenant Improvement Allowance. Section 3 of the Twelfth Amendment is hereby amended and restated in its entirety as follows:

3.    Tenant Improvement Allowance. Pursuant to the Second Amendment, Lessor made available to Lessee an Improvement Allowance of Five Million Dollars ($5,000,000). Pursuant to the Third Amendment, Lessor made an additional Improvement Allowance of Five Million Dollars ($5,000,000) available to Lessee. Pursuant to the Ninth Amendment, Lessor made an additional Improvement Allowance of Five Million Dollars ($5,000,000) available to Lessee. Pursuant to the Eleventh Amendment, Lessor made an additional Improvement Allowance of Five Million Dollars ($5,000,000) available to Lessee. Lessor hereby makes available to Lessee an additional improvement allowance equal to Five Million Dollars ($5,000,000) to be used for certain capital improvements to the Facilities. Such additional improvement allowance shall be used only for completion of capital improvements to the Facilities listed on Exhibit B to this Amendment, which shall be approved and constructed in accordance with the terms and provisions of Paragraph 2 of the Second Amendment. The term “Capital Improvements” as and where used in Paragraph 2 of the Second Amendment shall be deemed to include such capital improvements. The additional improvement allowance shall be requested and disbursed in accordance with the provisions of Paragraph 3 of the Second Amendment. The term “Improvement Allowance”, as and where used in Paragraph 3 of the Second Amendment, shall be deemed to include and refer to the additional improvement allowance provided for in this paragraph, except that such additional improvement allowance shall be available for Capital Improvements completed on or before August 31, 2014 and the final request for disbursement shall be no later than October 31, 2014. The annual Base Rent payable under the Existing Master Lease shall be increased by the Improvement Allowance Adjustment Amount for each disbursement of such additional improvement allowance as provided in Paragraph 4 of the Second Amendment. In the event Lessor fails to pay Lessee any installment request for the additional improvement allowance as provided in Paragraph 3 of the Second Amendment, Lessee shall have the rights and remedies provided in Paragraph 4 of the Second Amendment and the provisions of Paragraph 4 of the Second Amendment shall apply to Lessee’s exercise of such rights and remedies

7.Representations and Warranties of Lessee. Lessee hereby represents and warrants to Lessor that (i) it has the right and power and is duly authorized to enter into this Amendment; and (ii) the execution of this Amendment does not and will not constitute a breach of any provision contained in any agreement or instrument to which Lessee is or may become a party or by which Lessee is or may be bound or affected.

8.Expenses of Lender. Lessee shall pay all reasonable expenses of Lessor incurred in connection with this Amendment, including reasonable attorneys fees and expenses.

9.Execution and Counterparts. This Amendment may be executed in any number of counterparts, each of which, when so executed and delivered, shall be deemed to be an original, but when taken together shall constitute one and the same Amendment.

10.Headings. Section headings used in this Amendment are for reference only and shall not affect the construction of the Amendment.

11.Enforceability. Except as expressly and specifically set forth herein, the Existing Master Lease remains unmodified and in full force and effect. In the event of any discrepancy between the Existing Master Lease and this Amendment, the terms and conditions of this Amendment will control and the Existing Master Lease is deemed amended to conform hereto.

[SIGNATURE PAGES AND ACKNOWLEDGEMENTS FOLLOW]

LESSOR:

STERLING ACQUISITION CORP.,

a Kentucky corporation

By: /s/ Daniel J. Booth        

Name: Daniel J. Booth

Title:    Chief Operating Officer

STATE OF MARYLAND    )

COUNTY OF BALTIMORE    )

This instrument was acknowledged before me on the _10th__ day of June, 2014, by Daniel J. Booth, the COO of STERLING ACQUISITION CORP., a Kentucky corporation, on behalf of said company.

/s/ Judith A. Jacobs                                            Notary Public, Baltimore County, MD

My commission expires:

LESSEE:

DIVERSICARE LEASING CORP.,

a Tennessee corporation

By:    /s/ James R. McKnight, Jr._______

Name:    James R. McKnight, Jr.

Title: Executive Vice President and Chief Financial Officer

STATE OF TENNESSEE        )

COUNTY OF WILLIAMSON    )

This instrument was acknowledged before me on the 20^th day of June, 2014, by James R. McKnight, Jr., the Executive Vice President and Chief Financial Officer of DIVERSICARE LEASING CORP., a Tennessee corporation, on behalf of said company

/s/ Jacqueline S. Reed            

Notary Public, Tenn. County, Williamson

My commission expires:

The undersigned hereby consent to the transactions contemplated by this Amendment to ratify and affirm their respective Guaranties, Pledge Agreements, Security Agreements, Subordination Agreements and other Transaction Documents, and acknowledge and agree that the performance of the Master Lease and obligations described therein are secured by their Guaranties, Pledge Agreements, Security Agreement, Subordination Agreement and other Transaction Documents on the same terms and conditions in effect prior to this Amendment.

DIVERSICARE HEALTHCARE SERVICES, INC., a Delaware corporation f/k/a Advocat, Inc.

By:    /s/ James r. McKnight, Jr.        

Name:    James R. McKnight, Jr.

Title: Executive Vice President and Chief Financial Officer

STATE OF TENNESSEE         )

COUNTY OF WILLIAMSON    )

The foregoing instrument was acknowledged before me this 20^th day of June, 2014, by James R. McKnight, Jr., the Executive Vice President and Chief Financial Officer of Diversicare Healthcare Services, INC., a Delaware corporation f/k/a Advocat, Inc, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Jacqueline S. Reed                

Notary Public, Tenn. County, Williamson

My Commission Expires:

DIVERSICARE MANAGEMENT SERVICES CO.,

a Tennessee corporation

By:    /s/ James r. McKnight, Jr.        

Name:    James R. McKnight, Jr.

Title: Executive Vice President and Chief Financial Officer

STATE OF TENNESSEE         )

COUNTY OF WILLIAMSON    )

The foregoing instrument was acknowledged before me this 20^th day of June, 2014, by James R. McKnight, Jr., the Executive Vice President and Chief Financial Officer of DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Jacqueline S. Reed                    

Notary Public, Tenn. County, Williamson

My Commission Expires:

ADVOCAT FINANCE INC.,

a Delaware corporation

By:    /s/ James r. McKnight, Jr.        

Name:    James R. McKnight, Jr.

Title: Executive Vice President and Chief Financial Officer

STATE OF TENNESSEE         )

COUNTY OF WILLIAMSON    )

The foregoing instrument was acknowledged before me this 20^th day of June, 2014, by James R. McKnight, Jr., the Executive Vice President and Chief Financial Officer of ADVOCAT FINANCE INC., a Delaware corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Jacqueline S. Reed            

Notary Public, Tenn. County, Williamson

My Commission Expires:

STERLING HEALTH CARE

MANAGEMENT, INC., a Kentucky corporation

By:    /s/ James r. McKnight, Jr.        _

Name:    James R. McKnight, Jr.

Title: Executive Vice President and Chief Financial Officer

STATE OF TENNESSEE         )

COUNTY OF WILLIAMSON    )

The foregoing instrument was acknowledged before me this 20^th day of June, 2014, by James R. McKnight, Jr., the Executive Vice President and Chief Financial Officer of STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.

/s/ Jacqueline S. Reed                

Notary Public, Tenn. County, Williamson

My Commission Expires:

DIVERSICARE TEXAS I, LLC

By:    /s/ James r. McKnight, Jr.        

Name:    James R. McKnight, Jr.

Title: Executive Vice President and Chief Financial Officer

DIVERSICARE BALLINGER, LLC

DIVERSICARE DOCTORS, LLC

DIVERSICARE ESTATES, LLC

DIVERSICARE HUMBLE, LLC

DIVERSICARE KATY, LLC

DIVERSICARE NORMANDY TERRACE, LLC

DIVERSICARE TREEMONT, LLC

BY:    DIVERSICARE TEXAS I, LLC,

its sole member

By:    /s/ James r. McKnight, Jr.        

Name:    James R. McKnight, Jr.

Title: Executive Vice President and Chief Financial Officer

STATE OF TENNESSEE         )

COUNTY OF WILLIAMSON     )

The foregoing instrument was acknowledged before me this 20^th day of June, 2014, by James R. McKnight, Jr., the Executive Vice President and Chief Financial Officer of DIVERSICARE TEXAS I, LLC, on behalf of itself and as the sole member of each of DIVERSICARE BALLINGER, LLC, DIVERSICARE DOCTORS, LLC, DIVERSICARE ESTATES, LLC, DIVERSICARE HUMBLE, LLC, DIVERSICARE KATY, LLC, DIVERSICARE NORMANDY TERRACE, LLC, and DIVERSICARE TREEMONT, LLC, each a Delaware limited liability company, on behalf of the limited liability companies, who acknowledged the same to be his or her free act and deed and the free act and deed of the limited liability companies.

/s/ Jacqueline S. Reed                

Notary Public, Tenn. County, Williamson

My Commission Expires:

New Lessor Entities

To be formed subsidiaries of Omega Healthcare Investors, Inc. expected to be named as follows:

OHI Asset (WV) Danville, LLC

OHI Asset (WV) Ivydale, LLC

Each a Delaware limited liability company

New Tenant Entities

AMFM, LLC,

a West Virginia limited liability company

SOUTHERN INVESTMENT AND LEASING COMPANY, LLC,

a West Virginia limited liability company

HILLCREST HEALTH CARE CENTER, LLC,

a West Virginia limited liability company

CLAY HEALTH CARE CENTER, LLC,

a West Virginia limited liability company

West Virginia Facilities

1.	Boone Health Care Center, Inc.	Lick Creek Road, P.O. Box 605	Danville	Boone	WV	25053
2.	Laurel Nursing & Rehab Center	HC 75, Box 153, Clinic Road	Ivydale	Clay	WV	25113

1.	Best Care, Inc.	2159 Dogwood Ridge	Wheelersburg	Scioto	OH	45694
2.	Boyd Nursing and Rehab Center	12800 Princeland Drive	Ashland	Boyd	KY	41102
3.	Canterbury Health Center	1720 Knowles Road	Phoenix City	Russell	AL	36867
4.	Carter Nursing & Rehab Center	250 McDavid Boulevard, P.O. Box 904	Grayson	Carter	KY	41143
5.	Elliott Nursing & Rehab Center	Howard Creek Road, P.O. Box 694, Route 32 East	Sandy Hook	Elliott	KY	41171
6.	Hardee Manor Care Center	401 Orange Place	Wauchula	Hardee	FL	33873
7.	Laurel Manor Health Center	902 Buchanan Road, P.O. Box 505	New Tazewell	Claiborne	TN	37825
8.	Lynwood Nursing Home	4164 Halls Mill Road	Mobile	Mobile	AL	36693
9.	Manor House of Dover	537 Spring Street, P.O. Box 399	Dover	Stewart	TN	37058
10.	Mayfield Rehab and Special Care Center	200 Mayfield Drive	Smyrna	Rutherford	TN	37167
11.	Northside Health Care	700 Hutchins Ave	Gadsden	Etowah	AL	35901
12.	South Shore Nursing & Rehab Center	James Hannah Drive, P.O. box 489	South Shore	Greenup	KY	41175
13.	West Liberty Nursing & Rehab Center	774 Liberty Road, P.O. Box 219, Route 5 Wells Hill	West Liberty	Morgan	KY	41472
14.	Westside Health Care Center	4320 Judith Lane	Huntsville	Madison	AL	35805
15.	Wurtland Nursing & Rehab Center	100 Wurtland Avenue, P.O. Box 677	Wurtland	Greenup	KY	41144

Derwent – 6.18.14    1

EX-31.1

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 quarterly report on Form 10-Q 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: August 7, 2014

/s/ Kelly J. Gill

Kelly J. Gill

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

(ii) CERTIFICATION

I, James Reed McKnight, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q 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: August 7, 2014

/s/ James Reed McKnight, Jr.

James Reed McKnight, Jr.

Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q

OF DIVERSICARE HEALTHCARE SERVICES, INC.

FOR THE QUARTER ENDED JUNE 30, 2014

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 Quarterly Report on Form 10-Q for Diversicare Healthcare Services, Inc. (the “Company”) for the period ending June 30, 2014 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 August 7, 2014.

/s/ Kelly J. Gill

Kelly J. Gill

Chief Executive Officer

/s/ James Reed McKnight, Jr.

James Reed 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.

XML

Variable Interest Entity (Details Textual) (USD $) In Thousands, unless otherwise specified		0 Months Ended	6 Months Ended
	Jun. 30, 2014 Bed Entity	Mar. 27, 2014 Rose Terrace Nursing Center	Jun. 30, 2014 Minimum	Jun. 30, 2014 Maximum	Dec. 28, 2011 Variable Interest Entity, Not Primary Beneficiary Culloden, WV Bed
Variable Interest Entity, Not Primary Beneficiary [Abstract]
Number of variable interest entity	1
Number of licensed nursing beds	5,282				90
Agreement provides company right to purchase			110.00%	120.00%
Purchase Price		$ 7,693

XML

Long-Term Debt and Interest Rate Swap (Details) (USD $)	0 Months Ended	6 Months Ended								0 Months Ended	6 Months Ended
	May 01, 2014	Jun. 30, 2014 Letter_Of_Credit Center	Dec. 31, 2013	Jun. 30, 2014 Interest rate swap	Jun. 30, 2014 Loans Payable	Jun. 30, 2014 Revolving credit facility	Mar. 30, 2014 Revolving credit facility	May 01, 2013 Revolving credit facility	Jun. 30, 2014 LIBOR	May 01, 2014 Credit Agreement	Jun. 30, 2014 Credit Agreement	May 01, 2013 Credit Agreement	Mar. 31, 2014 Maximum Revolving credit facility	Jun. 30, 2014 Revolving credit facility Revolving Credit Facility Interest at 4.5% Percent Above LIBOR	Dec. 31, 2013 Revolving credit facility Revolving Credit Facility Interest at 4.5% Percent Above LIBOR	Mar. 27, 2014 Loans Payable Rose Terrace Note	Jun. 30, 2014 Letter of Credit Revolving Credit Facility Interest at 4.5% Percent Above LIBOR
Long-Term Debt and Interest Rate Swap (Textual) [Abstract]
Revolving credit facility and the maximum loan												$ 65,000,000
Long-term debt for syndicate of banks mortgage debt	45,000,000	45,000,000
Long-term debt revolving credit facility						22,500,000	20,000,000	20,000,000					27,500,000
Loan acquisition costs										1,341,000
Term of debt agreement											5 years
Long-term debt five year maturity		5 years
Mortgage loan with principal and interest payable monthly based		25 years
Long-term debt interest based on LIBOR		4.50%							4.50%
Long-term debt fixed based on the interest rate swap		6.87%		6.87%
Notional Amount of interest rate derivatives				21,973,000
Debt interest rate at period end					4.65%
Number of owned nursing centers secured		13
Borrowings outstanding														9,000,000	3,000,000		7,712,000
Letters of credit issued under Revolver outstanding		3.00%
Number of letters of credit		8
Borrowing under the revolving credit facility						10,524,000
Amount of term loan																8,000,000
Liability at fair value				(959,000)
Accumulated other comprehensive loss		594,000	569,000	(594,000)
Net income tax benefit				$ 364,000

XML

Discontinued Operations (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended				6 Months Ended					6 Months Ended
	Jun. 30, 2014 Center Bed	Jun. 30, 2013	Jun. 30, 2014 Center Bed	Jun. 30, 2013	Dec. 31, 2013	Oct. 01, 2013 Center	Jun. 30, 2014 Leased Skilled Nursing Centers	Jun. 30, 2013 Leased Skilled Nursing Centers	Jan. 22, 2013 Omega Healthcare Investors, Inc.	Sep. 01, 2013 Omega Healthcare Investors, Inc. Arkansas Facility Bed	Jan. 22, 2013 Omega Healthcare Investors, Inc. Arkansas Facility	Jun. 30, 2014 West Virginia Rose Terrace Nursing Center	Jun. 30, 2013 West Virginia Rose Terrace Nursing Center	May 31, 2014 West Virginia Rose Terrace Nursing Center Center	Apr. 03, 2014 West Virginia Rose Terrace Nursing Center Center
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Number of nursing centers	46		46			4								3	2
Revenue from discontinued operations							$ 0	$ 31,880				$ 10,989	$ 10,222
Income (loss) from discontinued operations	128	242	(484)	569			(739)	(87)				660	906
Number of nursing centers under lease terminated										11	11
Number of licensed nursing beds	5,282		5,282							1,181
Annual decrease in rent payable, amount									5,000
Current assets of discontinued operations	2,913		2,913		2,870
Current liabilities of discontinued operations	$ 8,823		$ 8,823		$ 1,359

XML

Consolidation and Basis of Presentation of Financial Statements

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements include the operations and accounts of Diversicare Healthcare Services 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 related to a nursing center in West Virginia that was dissolved in the first quarter of 2014 as a result of the asset purchase of the Rose Terrace nursing center as further described in Note 8, and is no longer consolidated into the interim consolidated financial statements of the Company. The investment in an unconsolidated affiliate (a 50 percent-owned joint venture partnership) is accounted for using the equity method and is described in Note 9.

The interim consolidated financial statements for the three and six month periods ended June 30, 2014 and 2013, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at June 30, 2014, and the results of operations for the three month and six month periods ended June 30, 2014 and 2013, and cash flows for the six month periods ended June 30, 2014 and 2013. The Company’s balance sheet information at December 31, 2013, was derived from its audited consolidated financial statements as of December 31, 2013.

The results of operations for the periods ended June 30, 2014 and 2013 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

XML

Stock-Based Compensation (Restricted Stock and Restricted Stock Units Activity) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
Restricted Stock Units (RSUs)
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Outstanding, December 31, 2013	118
Granted	68
Dividend Equivalents	2
Vested	(40)
Cancelled	(1)
Outstanding June 30, 2014	147
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Abstract]
Outstanding, December 31, 2013	$ 5.41
Granted	$ 5.51
Dividend Equivalents	$ 6.86
Vested	$ 5.47
Cancelled	$ 5.42
Outstanding June 30, 2014	$ 5.45
Employee Stock
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Outstanding, December 31, 2013	41
Granted	25
Dividend Equivalents	1
Vested	(21)
Cancelled	0
Outstanding June 30, 2014	46
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Weighted Average Grant Date Fair Value [Abstract]
Outstanding, December 31, 2013	$ 5.35
Granted	$ 5.51
Dividend Equivalents	$ 6.86
Vested	$ 5.70
Cancelled	$ 0.00
Outstanding June 30, 2014	$ 5.30

XML

Share-Based Compensation (Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding and Exercisable) (Details) (Stock Options and Stock Appreciation Rights (SARs), USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2014
Stock Options and Stock Appreciation Rights (SARs)
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding, December 31, 2013	333
Granted	0
Exercised	(1)
Expired or cancelled	(27)
Outstanding, June 30, 2014	305
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Abstract]
Outstanding, December 31, 2013	$ 6.64
Granted	$ 0.00
Exercised	$ 2.37
Expired or cancelled	$ 7.49
Outstanding, June 30, 2014	$ 6.58
Exercisable, shares	262
Exercisable, Weighted Average Exercise Price	$ 6.71

XML

Stock-Based Compensation (Schedule of Stock Options Outstanding and Exercisable) (Details) (Stock Options and Stock Appreciation Rights (SARs), USD $) In Thousands, except Per Share data, unless otherwise specified			6 Months Ended
	Jun. 30, 2014	Dec. 31, 2013	Jun. 30, 2014 $10.40 to $11.59	Jun. 30, 2014 $2.37 to $6.21
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Range of Exercise Prices, Maximum			$ 10.4	$ 2.37
Range of Exercise Prices, Maximum			$ 11.59	$ 6.21
Weighted Average Exercise Prices	$ 6.58	$ 6.64	$ 11.13	$ 5.32
Grants Outstanding	306		63	243
Intrinsic Value-Grants Outstanding			$ 0	$ 529
Grants Exercisable	262		63	199
Intrinsic Value- Grants Exercisable			$ 0	$ 450

XML

Earnings (Loss) Per Common Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Numerator: Income (loss) amounts attributable to Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$ 973	$ (2,421)	$ 540	$ (3,695)
Less: (income) loss attributable to noncontrolling interests	0	(16)	25	(34)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc.	973	(2,437)	565	(3,729)
PREFERRED STOCK DIVIDENDS	(86)	(86)	(172)	(172)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	887	(2,523)	393	(3,901)
Income (loss) from discontinued operations, net of income taxes	128	242	(484)	569
NET INCOME (LOSS) FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS	$ 1,015	$ (2,281)	$ (91)	$ (3,332)
Per common share – basic
Continuing operations (in dollars per share)	$ 0.15	$ (0.43)	$ 0.07	$ (0.67)
Income from discontinued operations Operating income (loss), net of taxes (in dollars per share)	$ 0.02	$ 0.04	$ (0.08)	$ 0.10
Discontinued operations, net of taxes (in dollars per share)	$ 0.02	$ 0.04	$ (0.08)	$ 0.10
Net income (loss) (in dollars per share)	$ 0.17	$ (0.39)	$ (0.01)	$ (0.57)
Per common share – diluted
Income (loss) from continuing operations (in dollars per share)	$ 0.14	$ (0.43)	$ 0.07	$ (0.67)
Income (loss) from discontinued operations Operating income (loss), net of taxes (in dollars per share)	$ 0.02	$ 0.04	$ (0.08)	$ 0.10
Discontinued operations, net of taxes (in dollars per share)	$ 0.02	$ 0.04	$ (0.08)	$ 0.10
Net income (loss) (in dollars per share)	$ 0.16	$ (0.39)	$ (0.01)	$ (0.57)
Denominator: Weighted Average Common Shares Outstanding:
Basic ( in shares)	6,015	5,874	5,995	5,861
Diluted (shares)	6,181	5,874	5,995	5,861

XML

Business

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BUSINESS

BUSINESS

Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare Healthcare Services” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Ohio, Tennessee, and Texas. The Company's operating results also include the results of certain discontinued operations that have been reclassified on the face of the financial statements to reflect the discontinued status of these operations.

As of June 30, 2014, the Company’s continuing operations consist of 46 nursing centers with 5,282 licensed nursing beds. The Company owns 13 and leases 33 of its nursing centers. The nursing center and licensed bed count includes the following recent business development activity:

• The 73-bed facility in Nicholasville, Kentucky, for which the Company entered into a lease agreement and assumed operations effective June 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the fourth quarter of 2014.

• The 135-bed facility in Huntsville, Alabama, for which the Company entered into a lease agreement and assumed operations effective March 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the third quarter of 2014.

• The 442 licensed nursing beds at the four recently leased skilled nursing centers, three in Ohio and one in Indiana, which we have operated since October 1, 2013. The Medicaid and Medicare certification processes were completed for these four leased facilities in the first quarter of 2014. In addition to the licensed nursing beds, these four centers also include 270 licensed assisted living beds which are not included in the licensed nursing bed count.

• The 107-bed facility in Louisville, Kentucky, for which the Company entered into a lease agreement in August 2013. The Medicare certification processes for this facility was completed in the first quarter of 2014. The Medicaid certification process was completed in the second quarter of 2014.

• The Kansas centers acquired in May 2013, which comprise five skilled nursing centers and 418 licensed beds. The Medicaid certification process was completed for these facilities during the second quarter of 2013, and the Medicare certification process was completed for these facilities during the third quarter of 2013.

BUSINESS DEVELOPMENT

Acquisitions

On March 6, 2013, the Company entered into an asset purchase agreement ("the Agreement") with Cumberland & Ohio Co. of Texas, as receiver of the assets of SeniorTrust of Florida, Inc. to acquire certain land, improvements, furniture, fixtures and equipment, and personal property of five facilities, all located in Kansas, for an aggregate purchase price of $15,500,000. The purchase of the Kansas facilities was completed on May 1, 2013. The Company also incurred $338,000 in acquisition-related expenses associated with this transaction. The five facilities acquired under the Agreement include the following:

• 77-bed skilled nursing facility known as Chanute HealthCare Center

• 119-bed skilled nursing facility known as Haysville HealthCare Center

• 80-bed skilled nursing facility known as Larned HealthCare Center

• 62-bed skilled nursing facility known as Sedgwick HealthCare Center

• 80-bed skilled nursing facility known as Council Grove HealthCare Center

As a result of the consummation of the Agreement, the Company allocated the purchase price of $15,500,000 between the assets associated with the transaction based on the fair value of the acquired net assets. In addition to the assets acquired in the transaction, the Company also assumed liabilities of $758,000 which resulted in total cash outlay of $14,742,000. 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:

	As of May 1, 2013
Purchase Price	$	15,500,000
Land	$	2,130,000
Buildings	12,127,000
Furniture, fixtures, and equipment	1,200,000
Inventory	43,000
Less: Liabilities assumed	$	758,000
Total cash paid	$	14,742,000

Lease Agreements

On June 1, 2014, the Company assumed operations at Diversicare of Nicholasville, an existing 73-bed facility in Nicholasville, Kentucky. The nursing center is owned by a real estate investment trust ("REIT"), and 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.

On October 1, 2013, the Company assumed operations at four existing nursing centers, three in Ohio and one in Indiana. The nursing centers are owned by a REIT and the lease of these centers provides for an initial 15-year lease term with a 5-year renewal option. This transaction represents an increase in the Company's footprint in the Midwest, expanding into one new state, Indiana, and increasing our presence in Ohio to four nursing centers. All four of the centers were 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 August 1, 2013, the Company assumed operations at Seneca Place, an existing 107-bed facility in Louisville, Kentucky.  The nursing center is owned by a REIT, and 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.

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Earnings (Loss) Per Common Share (Details Textual) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2013
Earnings (Loss) Per Common Share (Textual) [Abstract]
Antidilutive shares excluded from computation of diluted earnings per share	326	326

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Interim Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
CURRENT ASSETS:
Cash and cash equivalents	$ 4,071	$ 3,781
Receivables, less allowance for doubtful accounts of $4,582 and $3,879, respectively	42,678	32,658
Other receivables	1,187	1,118
Prepaid expenses and other current assets	1,925	2,442
Income tax refundable	747	763
Current assets of discontinued operations	2,913	2,870
Deferred income taxes	6,666	6,579
Total current assets	60,187	50,211
PROPERTY AND EQUIPMENT, at cost	95,310	93,572
Less accumulated depreciation and amortization	(51,678)	(48,516)
Discontinued operations, net	8,502	8,987
Property and equipment, net	52,134	54,043
OTHER ASSETS:
Deferred income taxes	15,804	15,912
Deferred financing and other costs, net	1,860	1,914
Investment in unconsolidated affiliate	428	487
Other noncurrent assets	6,217	5,698
Acquired leasehold interest, net	8,036	8,228
Noncurrent assets of discontinued operations	969	1,251
Total other assets	33,314	33,490
Total assets	145,635	137,744
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations	10,334	4,549
Trade accounts payable	9,356	7,177
Current liabilities of discontinued operations	8,823	1,359
Accrued expenses:
Payroll and employee benefits	13,203	12,255
Self-insurance reserves, current portion	12,777	11,711
Other current liabilities	4,829	5,116
Total current liabilities	59,322	42,167
NONCURRENT LIABILITIES:
Long-term debt and capitalized lease obligations, less current portion	43,120	43,552
Self-insurance reserves, noncurrent portion	16,146	16,375
Noncurrent liabilities of discontinued operations	0	5,952
Other noncurrent liabilities	14,484	15,214
Total noncurrent liabilities	73,750	81,093
COMMITMENTS AND CONTINGENCIES
Series C redeemable preferred stock, $.10 par value, 5,000 shares authorized, issued and outstanding	4,918	4,918
SHAREHOLDERS’ EQUITY:
Series A preferred stock, authorized 200,000 shares, $.10 par value, none issued and outstanding	0	0
Common stock, authorized 20,000,000 shares, $.01 par value, 6,388,000 and 6,307,000 shares issued, and 6,156,000 and 6,075,000 shares outstanding, respectively	63	63
Treasury stock at cost, 232,000 shares of common stock	(2,500)	(2,500)
Paid-in capital	19,883	19,570
Accumulated deficit	(9,207)	(8,435)
Accumulated other comprehensive loss	(594)	(569)
Total shareholders’ equity of Diversicare Healthcare Services, Inc.	7,645	8,129
Noncontrolling interest	0	1,437
Total shareholders’ equity	7,645	9,566
Total liabilities and shareholder's equity	$ 145,635	$ 137,744

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Interim Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Statement of Comprehensive Income [Abstract]
NET INCOME (LOSS)	$ 1,101	$ (2,179)	$ 56	$ (3,126)
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax	84	110	224	110
Less: reclassification adjustment for amounts recognized in net income	(129)	(78)	(248)	(78)
Total other comprehensive income (loss)	(45)	32	(24)	32
COMPREHENSIVE INCOME (LOSS)	1,056	(2,147)	32	(3,094)
Less: comprehensive (income) loss attributable to noncontrolling interest	0	(16)	25	(34)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	$ 1,056	$ (2,163)	$ 57	$ (3,128)

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Business Development (Details) (USD $) In Thousands, unless otherwise specified	0 Months Ended			0 Months Ended			0 Months Ended								0 Months Ended		0 Months Ended
	Oct. 01, 2013	Jun. 30, 2014 Bed Center	Oct. 01, 2013 Center	Mar. 01, 2014 Huntsville, Alabama Option Center Bed	Mar. 01, 2014 Huntsville, Alabama Center Bed	Oct. 01, 2013 Skilled Nursing Center Center	May 01, 2014 Kansas Skilled Nursing Center	May 01, 2013 Kansas Skilled Nursing Center	May 01, 2013 Kansas Skilled Nursing Center	May 01, 2013 Kansas Chanute HealthCare Center Skilled Nursing Center Bed	May 01, 2013 Kansas Council Grove HealthCare Center Skilled Nursing Center Bed	May 01, 2013 Kansas Haysville HealthCare Center Skilled Nursing Center Bed	May 01, 2013 Kansas Larned HealthCare Center Skilled Nursing Center Bed	May 01, 2013 Kansas Sedgwick HealthCare Center Skilled Nursing Center Bed	Jun. 01, 2014 Nicholasville, Kentucky	Jun. 01, 2014 Nicholasville, Kentucky Bed	Aug. 01, 2013 Louisville, KY	Aug. 01, 2013 Louisville, KY Bed	Oct. 01, 2013 Ohio Skilled Nursing Center Center	Oct. 01, 2013 Indiana Skilled Nursing Center Center
Entity Location [Line Items]
Number of nursing centers		46	4		7	4													3	1
Purchase Price								$ 15,500
Acquisition-related expenses								338
Number of licensed nursing beds		5,282			135					77	80	119	80	62		73		107
Less: Liabilities assumed									758
Total cash outlay							$ 14,742	$ 14,742
Lease agreement term	15 years			10 years											15 years		15 years
Lease renewal period	5 years			5 years											5 years		5 years
Maximum number of capital lease renewal periods				2

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Business Development (Tables)

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

The allocation for the net assets acquired is as follows:

	As of May 1, 2013
Purchase Price	$	15,500,000
Land	$	2,130,000
Buildings	12,127,000
Furniture, fixtures, and equipment	1,200,000
Inventory	43,000
Less: Liabilities assumed	$	758,000
Total cash paid	$	14,742,000

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Business Development (Schedule of Assets Acquired) (Details) (Skilled Nursing Center, Kansas, USD $) In Thousands, unless otherwise specified	0 Months Ended
	May 01, 2014	May 01, 2013	May 01, 2013
Skilled Nursing Center | Kansas
Business Acquisition [Line Items]
Purchase Price		$ 15,500
Land			2,130
Buildings			12,127
Furniture, fixtures, and equipment			1,200
Inventory			43
Less: Liabilities assumed			758
Total cash paid	$ 14,742	$ 14,742

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Consolidation and Basis of Presentation of Financial Statements (Details)	Jun. 30, 2014 Entity
Consolidation and Basis of Presentation of Financial Statements (Textual) [Abstract]
Number of variable interest entity	1
Percentage of owned joint venture Investment in nonconsolidated affiliate	50.00%

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Interim Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 56	$ (3,126)
Discontinued operations	484	(569)
Income (loss) from continuing operations	540	(3,695)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	3,440	2,938
Provision for doubtful accounts	2,780	1,830
Deferred income tax benefit	36	(4,214)
Provision for self-insured professional liability, net of cash payments	827	771
Stock-based compensation	295	357
Equity in net losses of unconsolidated affiliate, net of investment	59	(36)
Debt retirement costs	0	320
Other	(315)	(124)
Changes in assets and liabilities affecting operating activities:
Receivables, net	(13,166)	(5,640)
Prepaid expenses and other assets	(146)	1,929
Trade accounts payable and accrued expenses	3,447	974
Net cash provided by (used in) continuing operations	(2,203)	(4,590)
Discontinued operations	(491)	5,056
Net cash provided by operating activities	(2,694)	466
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(1,826)	(2,416)
Acquisition of property and equipment through business combination	0	(14,742)
Change in restricted cash	35	(4,641)
Deposits and other deferred balances	(43)	0
Net cash used in continuing operations	(1,834)	(21,799)
Discontinued operations	(5)	(546)
Net cash used in investing activities	(1,839)	(22,345)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(4,412)	(22,805)
Proceeds from issuance of debt	9,765	45,000
Financing costs	(114)	(1,341)
Issuance and redemption of employee equity awards	78	33
Payment of common stock dividends	(662)	(323)
Payment of preferred stock dividends	(172)	(172)
Distributions to noncontrolling interest	(1,410)	(104)
Payment for preferred stock restructuring	(298)	(288)
Net cash provided by continuing operations	2,775	20,000
Discontinued operations	2,048	(100)
Net cash provided by (used in) investing activities	4,823	19,900
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	290	(1,979)
CASH AND CASH EQUIVALENTS, beginning of period	3,781	5,928
CASH AND CASH EQUIVALENTS, end of period	4,071	3,949
SUPPLEMENTAL INFORMATION:
Cash payments of interest, net of amounts capitalized	1,652	1,076
Cash payments of income taxes	$ 33	$ 45

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Interim Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Allowance for doubtful accounts receivable	$ 4,582	$ 3,879
Redeemable preferred stock, par value (dollars per share)	$ 0.1	$ 0.10
Redeemable preferred stock, shares authorized (shares)	5,000	5,000
Redeemable preferred stock, shares issued (shares)	5,000	5,000
Redeemable preferred stock, shares outstanding (shares)	5,000	5,000
Preferred stock, par value (dollars per share)	$ 0.1	$ 0.10
Preferred stock, shares authorized (shares)	200,000	200,000
Preferred stock, shares issued (shares)	0	0
Preferred stock, shares outstanding (shares)	0	0
Common stock, par value (dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (shares)	20,000,000	20,000,000
Common stock, shares issued (shares)	6,388,000	6,307,000
Common stock, shares outstanding (shares)	6,156,000	6,075,000
Treasury stock, shares (shares)	232,000	232,000

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Business Development

6 Months Ended

Jun. 30, 2014

Organization, Consolidation and Presentation of Financial Statements [Abstract]

BUSINESS DEVELOPMENT

BUSINESS

Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare Healthcare Services” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast, Midwest, and Southwest. The Company’s centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company’s nursing centers also offer a variety of comprehensive rehabilitation services, as well as nutritional support services. The Company's continuing operations include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Ohio, Tennessee, and Texas. The Company's operating results also include the results of certain discontinued operations that have been reclassified on the face of the financial statements to reflect the discontinued status of these operations.

As of June 30, 2014, the Company’s continuing operations consist of 46 nursing centers with 5,282 licensed nursing beds. The Company owns 13 and leases 33 of its nursing centers. The nursing center and licensed bed count includes the following recent business development activity:

• The 73-bed facility in Nicholasville, Kentucky, for which the Company entered into a lease agreement and assumed operations effective June 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the fourth quarter of 2014.

• The 135-bed facility in Huntsville, Alabama, for which the Company entered into a lease agreement and assumed operations effective March 1, 2014. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the third quarter of 2014.

• The 442 licensed nursing beds at the four recently leased skilled nursing centers, three in Ohio and one in Indiana, which we have operated since October 1, 2013. The Medicaid and Medicare certification processes were completed for these four leased facilities in the first quarter of 2014. In addition to the licensed nursing beds, these four centers also include 270 licensed assisted living beds which are not included in the licensed nursing bed count.

• The 107-bed facility in Louisville, Kentucky, for which the Company entered into a lease agreement in August 2013. The Medicare certification processes for this facility was completed in the first quarter of 2014. The Medicaid certification process was completed in the second quarter of 2014.

• The Kansas centers acquired in May 2013, which comprise five skilled nursing centers and 418 licensed beds. The Medicaid certification process was completed for these facilities during the second quarter of 2013, and the Medicare certification process was completed for these facilities during the third quarter of 2013.

BUSINESS DEVELOPMENT

Acquisitions

On March 6, 2013, the Company entered into an asset purchase agreement ("the Agreement") with Cumberland & Ohio Co. of Texas, as receiver of the assets of SeniorTrust of Florida, Inc. to acquire certain land, improvements, furniture, fixtures and equipment, and personal property of five facilities, all located in Kansas, for an aggregate purchase price of $15,500,000. The purchase of the Kansas facilities was completed on May 1, 2013. The Company also incurred $338,000 in acquisition-related expenses associated with this transaction. The five facilities acquired under the Agreement include the following:

• 77-bed skilled nursing facility known as Chanute HealthCare Center

• 119-bed skilled nursing facility known as Haysville HealthCare Center

• 80-bed skilled nursing facility known as Larned HealthCare Center

• 62-bed skilled nursing facility known as Sedgwick HealthCare Center

• 80-bed skilled nursing facility known as Council Grove HealthCare Center

As a result of the consummation of the Agreement, the Company allocated the purchase price of $15,500,000 between the assets associated with the transaction based on the fair value of the acquired net assets. In addition to the assets acquired in the transaction, the Company also assumed liabilities of $758,000 which resulted in total cash outlay of $14,742,000. 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:

	As of May 1, 2013
Purchase Price	$	15,500,000
Land	$	2,130,000
Buildings	12,127,000
Furniture, fixtures, and equipment	1,200,000
Inventory	43,000
Less: Liabilities assumed	$	758,000
Total cash paid	$	14,742,000

Lease Agreements

On June 1, 2014, the Company assumed operations at Diversicare of Nicholasville, an existing 73-bed facility in Nicholasville, Kentucky. The nursing center is owned by a real estate investment trust ("REIT"), and 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.

On October 1, 2013, the Company assumed operations at four existing nursing centers, three in Ohio and one in Indiana. The nursing centers are owned by a REIT and the lease of these centers provides for an initial 15-year lease term with a 5-year renewal option. This transaction represents an increase in the Company's footprint in the Midwest, expanding into one new state, Indiana, and increasing our presence in Ohio to four nursing centers. All four of the centers were 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 August 1, 2013, the Company assumed operations at Seneca Place, an existing 107-bed facility in Louisville, Kentucky.  The nursing center is owned by a REIT, and 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.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Jul. 31, 2014
Document and Entity Information [Abstract]
Entity Registrant Name	Diversicare Healthcare Services, Inc.
Entity Central Index Key	0000919956
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,156,428

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Discontinued Operations

6 Months Ended

Jun. 30, 2014

Discontinued Operations and Disposal Groups [Abstract]

DISCONTINUED OPERATIONS

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 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. The Company concurrently entered into an operations transfer agreement with respect to the two other skilled nursing facilities located in Danville and Ivydale, West Virginia. Effective May 31, 2014, the Company determined that these three centers, based on the progress of the underlying contingencies and conditions associated with the asset purchase agreement, met the requirements for classification as discontinued operations. As a result, the three facilities are reflected as discontinued operations for all periods in the accompanying financial statements. The Company finalized the transaction on July 1, 2014, and is disclosed as a subsequent event in Note 12.

These centers contributed revenues of $10,989,000 and $10,222,000 and net income of $660,000 and $906,000 during the six months ended June 30, 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

Effective September 1, 2013, the Company entered into an agreement with Omega Healthcare Investors, Inc. ("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 Consolidated Amended and Restated Master Lease ("Master Lease") most recently amended on January 22, 2013. 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.

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 interim consolidated financial statements. These centers contributed revenues of $0 and $31,880,000 and net loss of $739,000 and $87,000 during the six months ended June 30, 2014 and 2013, respectively.  The net loss in 2014 primarily relates to professional liability expense incurred during the first quarter of 2014. 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.

The discontinued assets and liabilities of the disposed skilled nursing centers have been reclassified and are segregated in the interim consolidated balance sheets as assets and liabilities of discontinued operations. The current asset amounts, which are primarily composed of net accounts receivable of $2,913,000 and $2,870,000 at June 30, 2014 and December 31, 2013, respectively. The current liabilities are primarily composed of outstanding short-term debt on the Rose Terrace facility, trade payables, and various accrued expenses of $8,823,000 and $1,359,000 at June 30, 2014 and December 31, 2013, respectively. The Company expects to collect the balance of the accounts receivable and pay the remaining trade payables and accrued expenses in the ordinary course of business. The short-term debt related to the Rose Terrace facility was paid in full in conjunction with the sale of the facility on July 1, 2014. The Company did not transfer the accounts receivable or liabilities to the new owners or operators of the facilities. Further, in accordance with Company accounting policy, the reserve for professional liability and workers' compensation will remain in the consolidated liability accounts as future payment of these liabilities will be paid through the Company's future operating cash flows.

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Interim Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Income Statement [Abstract]
PATIENT REVENUES, net	$ 82,313	$ 61,488	$ 160,112	$ 119,927
EXPENSES:
Operating	64,687	50,316	127,511	97,828
Lease and rent expense	6,251	4,804	12,218	9,581
Professional liability	1,556	1,758	3,617	3,265
General and administrative	5,381	5,779	10,495	10,763
Depreciation and amortization	1,705	1,496	3,440	2,938
Total expenses	79,580	64,153	157,281	124,375
OPERATING INCOME (LOSS)	2,733	(2,665)	2,831	(4,448)
OTHER INCOME (EXPENSE):
Equity in net income (loss) of unconsolidated affiliate	(56)	22	(59)	(215)
Interest expense, net	(949)	(745)	(1,841)	(1,285)
Debt retirement costs	0	(320)	0	(320)
Total other expense	(1,005)	(1,043)	(1,900)	(1,820)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	1,728	(3,708)	931	(6,268)
BENEFIT (PROVISION) FOR INCOME TAXES	(755)	1,287	(391)	2,573
Income (loss) from continuing operations	973	(2,421)	540	(3,695)
INCOME FROM DISCONTINUED OPERATIONS:
Operating income, net of tax	128	242	(484)	569
Income from discontinued operations	128	242	(484)	569
NET INCOME (LOSS)	1,101	(2,179)	56	(3,126)
Less: (income) loss attributable to noncontrolling interests	0	(16)	25	(34)
NET INCOME (LOSS) ATTRIBUTABLE TO DIVERSICARE HEALTHCARE SERVICES, INC.	1,101	(2,195)	81	(3,160)
PREFERRED STOCK DIVIDENDS	(86)	(86)	(172)	(172)
NET INCOME (LOSS) FOR DIVERSICARE HEALTHCARE SERVICES, INC. COMMON SHAREHOLDERS	$ 1,015	$ (2,281)	$ (91)	$ (3,332)
Per common share – basic
Continuing operations (in dollars per share)	$ 0.15	$ (0.43)	$ 0.07	$ (0.67)
Discontinued operations (in dollars per share)	$ 0.02	$ 0.04	$ (0.08)	$ 0.10
Net income (loss) (in dollars per share)	$ 0.17	$ (0.39)	$ (0.01)	$ (0.57)
Per common share – diluted
Continuing operations (in dollars per share)	$ 0.14	$ (0.43)	$ 0.07	$ (0.67)
Discontinued operations (in dollars per share)	$ 0.02	$ 0.04	$ (0.08)	$ 0.10
Net income (loss) (in dollars per share)	$ 0.16	$ (0.39)	$ (0.01)	$ (0.57)
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$ 0.055	$ 0.055	$ 0.11	$ 0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ( in shares)	6,015	5,874	5,995	5,861
Diluted (shares)	6,181	5,874	5,995	5,861

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Insurance Matters

6 Months Ended

Jun. 30, 2014

Insurance [Abstract]

INSURANCE MATTERS

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, 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, Tennessee, and West Virginia as well as the Company’s formerly operated Arkansas facilities. Several of the Company’s nursing centers in Alabama, Kentucky, Ohio, and Texasare also covered under this policy. The SHC policy provides coverage limits of either $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. The remaining nursing centers are covered by one of three claims made professional liability insurance policies purchased from entities unaffiliated with the Company. These policies provide coverage limits of $1,000,000 per claim and have sublimits of $3,000,000 per center, with varying aggregate policy limits. 

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 likely exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and estimated future claims of $27,695,000 as of June 30, 2014. 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 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 the current portion of this reserve. Merlinos & Associates, Inc. (“Merlinos”) assisted management in the preparation of an estimate of the appropriate accrual for the current claims period and for incurred, but not reported, general and professional liability claims based on data furnished as of May 31, 2014.  The Company used this estimate from Merlinos in the preparation of its estimate of liability for incurred, but unreported professional liability claims as of as of June 30, 2014.

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.

As of June 30, 2014, the Company is engaged in 53 professional liability lawsuits. Nine 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 Company’s cash expenditures for self-insured professional liability costs from continuing operations were $2,225,000 and $2,134,000 for the six months ended June 30, 2014 and 2013, respectively.

The Company follows current accounting guidance set forth in FASB ASU 2010-24, “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 assets and equal liabilities of $70,000 at June 30, 2014 and $440,000 at December 31, 2013, 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 June 30, 2014, 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 $328,000 at June 30, 2014. The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,130,000 as of June 30, 2014. 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 June 30, 2014, 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 $900,000 at June 30, 2014. The differences between actual settlements and reserves are included in expense in the period finalized.

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Long-Term Debt and Interest Rate Swap

6 Months Ended

Jun. 30, 2014

Debt Disclosure [Abstract]

LONG-TERM DEBT AND INTEREST RATE SWAP

LONG-TERM DEBT AND INTEREST RATE SWAP

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.

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 a notional amount of $21,973,000. As of June 30, 2014, the interest rate related to the Amended Mortgage Loan was 4.65%. The Amended Mortgage Loan is secured by thirteen 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. The Second Amendment also provided for a permanent increase in the Amended Revolver capacity to $22,500,000 beginning October 1, 2014 through the original maturity date of April 30, 2018, to reflect the expansion of the Company's business through new facility acquisitions.

As of June 30, 2014, the Company had $9,000,000 borrowings outstanding under the revolving credit facility compared to $3,000,000 outstanding as of December 31, 2013. The outstanding borrowings on the 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 this Revolver are 3.00% of the amount outstanding. The Company has eight letters of credit with a total value of $7,712,000 outstanding as of June 30, 2014. Considering the balance of eligible accounts receivable, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $27,500,000, the balance available for borrowing under the revolving credit center is $10,524,000 at June 30, 2014.

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 consolidated prior to the date of this transaction. See Note 8 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 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 12. This transaction closed on July 1, 2014. As such, the Rose Terrace Note is classified as a Current Liability of Discontinued Operations on the Interim Consolidated Balance Sheet.

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 June 30, 2014.

Interest Rate Swap Transaction

As part of the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company designated its interest rate swap as a cash flow hedge and the earnings component of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction with the amendment to the credit facility, the Company retained the previously agreed upon interest rate swap terms, and redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount of $21,973,000 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 Company assesses the effectiveness of its interest rate swap on a quarterly basis, and at June 30, 2014, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $959,000 at June 30, 2014. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The balance of accumulated other comprehensive loss at June 30, 2014 is $594,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $364,000. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a valuation 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 interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB guidance set forth in ASC 820, Fair Value Measurement.

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Business (Details)	Jun. 30, 2014 Center Bed State	Oct. 01, 2013 Bed Center	Jun. 01, 2014 Nicholasville, Kentucky Bed	Mar. 01, 2014 Huntsville, Alabama Bed Center	Oct. 01, 2013 Ohio and Indiana Bed	Oct. 01, 2013 Ohio Center	Oct. 01, 2013 Indiana Center	Aug. 01, 2013 Louisville, KY Bed	May 01, 2013 Kansas Bed Center
Entity Location [Line Items]
Number of states in which entity operates	8
Number of nursing centers	46	4		7		3	1		5
Number of licensed nursing beds	5,282		73	135	442			107	418
Number of nursing center facilities owned	13
Number of nursing center facilities leased	33
Number of beds not included in recently leased skilled nursing center		270

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Subsequent Events

6 Months Ended

Jun. 30, 2014

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

SUBSEQUENT EVENTS

Effective July 1, 2014, subsequent to the end of the second quarter, 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 $16.5 million. The Company also agreed to an amendment to the Master Lease with Omega Health Investors, Inc. 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. 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.

In a separate and unrelated transaction, the Company also completed a transaction to enter the state of Missouri through the assumption of operations of three facilities totaling 339 skilled nursing beds effective July 1, 2014. This portfolio is expected to contribute in excess of $17 million in annual revenues with initial lease terms of 15 years.

Also 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 as defined in the Second Amendment, 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.

Effective August 1, 2014, the Company completed a transaction to assume operations of two facilities in Ohio. The facilities included in this transaction are Avon Place, a 142-bed skilled nursing facility, and Ontario Commons, a 42-bed assisted living facility. The assumption of operations at Ontario Commons represents the Company's first and only all-assisted living facility in the current portfolio. These facilities are expected to contribute in excess of $9 million in annual revenues with initial lease terms of 10 years.

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Variable Interest Entity

6 Months Ended

Jun. 30, 2014

Business Combinations [Abstract]

VARIABLE INTEREST ENTITY

VARIABLE INTEREST ENTITY

Accounting guidance requires that a variable interest entity (“VIE”) must be consolidated by the primary beneficiary in accordance with the provisions set forth in FASB ASC 810, Consolidation, as mentioned in Note 2 above. The primary beneficiary is the party that has both the power to direct activities of a VIE that most significantly impact the entity's economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. We perform an ongoing qualitative analysis to determine if we are the primary beneficiary of a VIE. The Company had one variable interest entity related to a nursing center in West Virginia that was dissolved in the first quarter of 2014 as a result of the asset purchase of the Rose Terrace nursing center, and is no longer consolidated into the interim consolidated financial statements of the Company.

Rose Terrace Health and Rehabilitation Center

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 VIE 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 11, the Company sold the Rose Terrace facility and all assets associated with the facility. As a result of these events, the entity is no longer considered a VIE as of June 30, 2014.

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Stock-Based Compensation

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

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 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. 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 2014 and 2013, the Compensation Committee of the Board of Directors approved grants totaling approximately 68,000 and 69,000 shares of restricted common stock to certain employees and members of the Board of Directors, respectively. The fair value of restricted shares are determined as the quoted market price of the underlying common shares at the date of the grant. The restricted shares typically vest 33% 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. In addition to the shares of restricted common stock granted in 2013, the Compensation Committee of the Board of Directors also approved grants of approximately 55,000 unrestricted shares of common stock to certain employees. These shares were granted without restrictions and considered fully vested upon the date of the grant.

Summarized activity of the equity compensation plans is presented below:

			Weighted
			Average
	Shares		Exercise Price
Outstanding, December 31, 2013	333,000		$	6.64
Granted	—		—
Exercised	(1,000	)	2.37
Expired or cancelled	(27,000	)	7.49
Outstanding, June 30, 2014	305,000		$	6.58
Exercisable, June 30, 2014	262,000		$	6.71

			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2013	118,000		$	5.41
Granted	68,000		5.51
Dividend Equivalents	2,000		6.86
Vested	(40,000	)	5.47
Cancelled	(1,000	)	5.42
Outstanding June 30, 2014	147,000		$	5.45

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, 2013	41,000		$	5.35
Granted	25,000		5.51
Dividend Equivalents	1,000		6.86
Vested	(21,000	)	5.70
Cancelled	—		—
Outstanding June 30, 2014	46,000		$	5.30

Prior to 2013, the Compensation Committee of the Board of Directors also approved grants of Stock Only Stock Appreciation Rights (“SOSARs”) and Stock Options at the market price of the Company's common stock on the grant date. The SOSARs and Options vest 33% on the first, second and third anniversaries of the grant date, and expire 10 years from the grant date. The SOSARs and Options were valued and recorded in the same manner, and will be settled with issuance of new stock for the difference between the market price on the date of exercise and the exercise price. The Company estimated the total recognized and unrecognized compensation using the Black-Scholes-Merton equity grant valuation model.

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.

While no SOSARs or Options were granted during 2014 and 2013, previously granted SOSARs and Options remain outstanding as of June 30, 2014. The following table summarizes information regarding stock options and SOSAR grants outstanding as of June 30, 2014:

	Weighted
	Average		Intrinsic		Intrinsic
Range of	Exercise	Grants	Value-Grants	Grants	Value-Grants
Exercise Prices	Prices	Outstanding	Outstanding	Exercisable	Exercisable
$10.40 to $11.59	11.13	63,000	—	63,000	—
$2.37 to $6.21	5.32	243,000	529,000	199,000	450,000
		306,000		262,000

Stock-based compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded total stock-based compensation expense of $295,000 and $357,000 in the six month periods ended June 30, 2014 and 2013, respectively.

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Earnings (Loss) Per Common Share

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

EARNINGS (LOSS) PER COMMON SHARE

EARNINGS (LOSS) PER COMMON SHARE

Information with respect to basic and diluted net earnings (loss) per common share is presented below in thousands, except per share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Numerator: Income (loss) amounts attributable to Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	973		$	(2,421	)	$	540		$	(3,695	)
Less: income (loss) attributable to noncontrolling interests	—			(16		)	25			(34		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc.	973			(2,437		)	565			(3,729		)
Preferred stock dividends	(86		)	(86		)	(172		)	(172		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	887			(2,523		)	393			(3,901		)
Income (loss) from discontinued operations, net of income taxes	128			242			(484		)	569
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	1,015		$	(2,281	)	$	(91	)	$	(3,332	)

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014			2013
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	0.15	$	(0.43	)	$	0.07		$	(0.67	)
Income (loss) from discontinued operations
Operating income (loss), net of taxes	0.02		0.04			(0.08		)	0.10
Discontinued operations, net of taxes	0.02		0.04			(0.08		)	0.10
Net income (loss) per common share – basic	$	0.17	$	(0.39	)	$	(0.01	)	$	(0.57	)
Per common share – diluted
Income (loss) from continuing operations	$	0.14	$	(0.43	)	$	0.07		$	(0.67	)
Income (loss) from discontinued operations
Operating income (loss), net of taxes	0.02		0.04			(0.08		)	0.10
Discontinued operations, net of taxes	0.02		0.04			(0.08		)	0.10
Net income (loss) per common share - diluted	$	0.16	$	(0.39	)	$	(0.01	)	$	(0.57	)
Denominator: Weighted Average Common Shares Outstanding:
Basic	6,015		5,874			5,995			5,861
Diluted	6,181		5,874			5,995			5,861

The effects of 326,000 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share for the three-month and six-month periods ended June 30, 2013, because these securities would have been anti-dilutive due to the net loss. The weighted average common shares for basic and diluted earnings for common shares were the same due to the year-to-date loss in these periods.

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Equity Method Investment

6 Months Ended

Jun. 30, 2014

Equity Method Investments and Joint Ventures [Abstract]

EQUITY METHOD INVESTMENT

EQUITY METHOD INVESTMENT

The investment in unconsolidated affiliate reflected on the interim consolidated balance sheet relates to a pharmacy joint venture partnership in which the Company owns 50%. The joint venture was initially funded by the Company and its partner and began operations during 2012. This investment in unconsolidated affiliate is accounted for using the equity method as the Company exerts significant influence, but does not control or otherwise consolidate the entity. The investment in unconsolidated affiliate balance at June 30, 2014, was $428,000 as compared to $487,000 at December 31, 2013. Additionally, the Company's share of the net profits and losses of the unconsolidated affiliate are reported in equity in net earnings or losses of unconsolidated affiliate in our statement of operations. The Company's equity in the net losses of unconsolidated affiliate for the six month period ended June 30, 2014, was $59,000 as compared to $215,000 for the six month period ended June 30, 2013.

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Equity Method Investment (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Equity Method Investments and Joint Ventures [Abstract]
Percentage of owned joint venture Investment in nonconsolidated affiliate	50.00%		50.00%
Investment in unconsolidated affiliate	$ 428		$ 428		$ 487
Equity in net income (loss) of unconsolidated affiliate	$ (56)	$ 22	$ (59)	$ (215)

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Earnings (Loss) Per Common Share (Tables)

6 Months Ended

Jun. 30, 2014

Earnings Per Share [Abstract]

Basic and diluted net income (loss) per common share

Information with respect to basic and diluted net earnings (loss) per common share is presented below in thousands, except per share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Numerator: Income (loss) amounts attributable to Diversicare Healthcare Services, Inc. common shareholders:
Income (loss) from continuing operations	$	973		$	(2,421	)	$	540		$	(3,695	)
Less: income (loss) attributable to noncontrolling interests	—			(16		)	25			(34		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc.	973			(2,437		)	565			(3,729		)
Preferred stock dividends	(86		)	(86		)	(172		)	(172		)
Income (loss) from continuing operations attributable to Diversicare Healthcare Services, Inc. common shareholders	887			(2,523		)	393			(3,901		)
Income (loss) from discontinued operations, net of income taxes	128			242			(484		)	569
Net income (loss) attributable to Diversicare Healthcare Services, Inc. common shareholders	$	1,015		$	(2,281	)	$	(91	)	$	(3,332	)

	Three Months Ended June 30,					Six Months Ended June 30,
	2014		2013			2014			2013
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	0.15	$	(0.43	)	$	0.07		$	(0.67	)
Income (loss) from discontinued operations
Operating income (loss), net of taxes	0.02		0.04			(0.08		)	0.10
Discontinued operations, net of taxes	0.02		0.04			(0.08		)	0.10
Net income (loss) per common share – basic	$	0.17	$	(0.39	)	$	(0.01	)	$	(0.57	)
Per common share – diluted
Income (loss) from continuing operations	$	0.14	$	(0.43	)	$	0.07		$	(0.67	)
Income (loss) from discontinued operations
Operating income (loss), net of taxes	0.02		0.04			(0.08		)	0.10
Discontinued operations, net of taxes	0.02		0.04			(0.08		)	0.10
Net income (loss) per common share - diluted	$	0.16	$	(0.39	)	$	(0.01	)	$	(0.57	)
Denominator: Weighted Average Common Shares Outstanding:
Basic	6,015		5,874			5,995			5,861
Diluted	6,181		5,874			5,995			5,861

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Insurance Matters (Details) (USD $)	6 Months Ended
	Jun. 30, 2014 Lawsuit	Jun. 30, 2013	Dec. 31, 2013
Malpractice Insurance [Line Items]
Number of professional liability lawsuits	53
Cash expenditures for self-insured professional liability costs	$ 2,225,000	$ 2,134,000
Non-current receivables for workers' compensation policy	70,000		440,000
Other Insurance Industry Disclosures [Abstract]
Liability for workers compensation claims	328,000
Workers compensation insurance, non current receivable for excess premiums paid	1,130,000
Health insurance, maximum self-insured annual amount per individual	175,000
Liability for reported claims and estimates for incurred but unreported claims	900,000
Scheduled for trial or arbitration over next 12 months
Malpractice Insurance [Line Items]
Number of professional liability lawsuits	9
Professional malpractice liability insurance
Malpractice Insurance [Line Items]
Liability for reported and estimated future claims	27,695,000
Prefunded deductible policy
Malpractice Insurance [Line Items]
Insurance policy coverage limits per claim	500,000
Other Insurance Industry Disclosures [Abstract]
Professional liability insurance, annual coverage limit per facility	3,000,000
SHC Risk Carriers, Inc | Professional malpractice liability insurance
Malpractice Insurance [Line Items]
Insurance policy coverage limits per claim	500,000
Annual sublimit per center	1,000,000
Maximum annual coverage	5,000,000
Unaffiliated Entities | Professional malpractice liability insurance
Malpractice Insurance [Line Items]
Insurance policy coverage limits per claim	1,000,000
Annual sublimit per center	$ 3,000,000
Number of types of professional liability insurance policies	3

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Interim Consolidated Statements of Operations (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Income Statement [Abstract]
Tax effect on operating income	$ 419	$ 142	$ 348	$ (334)

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Recent Accounting Guidance

6 Months Ended

Jun. 30, 2014

Accounting Changes and Error Corrections [Abstract]

RECENT ACCOUNTING GUIDANCE

RECENT ACCOUNTING GUIDANCE

In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments in this update require an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

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, 2017. 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.

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Stock-Based Compensation (Details) (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation	$ 295	$ 357
Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grant of restricted common stock (shares)	68,000	69,000
Vest of restricted stock on each year (percentage)	33.00%
Stock Compensation Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grant of restricted common stock (shares)	55,000
2005 Long Term Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares reserved for future issuance	700,000
Expiration period	10 years
2008 Stock Purchase Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares reserved for future issuance	150,000
Percentage of quoted market price offering rate	85.00%
Restriction period	2 years
2010 Long Term Incentive Plan | Stock Only Stock Appreciation Rights (SOSARS)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares reserved for future issuance	380,000

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Subsequent Events (Details) (USD $)	0 Months Ended									0 Months Ended		0 Months Ended					0 Months Ended				0 Months Ended
	Oct. 01, 2013	Jun. 30, 2014 Bed Center	Oct. 01, 2013 Center	Jun. 30, 2014 Revolving credit facility	Mar. 30, 2014 Revolving credit facility	May 01, 2013 Revolving credit facility	Mar. 31, 2014 Revolving credit facility Maximum	May 31, 2014 Rose Terrace Nursing Center West Virginia Center	Apr. 03, 2014 Rose Terrace Nursing Center West Virginia Center	Jul. 01, 2014 Subsequent Event Missouri	Jul. 01, 2014 Subsequent Event Missouri Bed Center	Jul. 01, 2014 Subsequent Event Missouri Scenario, Forecast	Aug. 01, 2014 Subsequent Event Ohio	Aug. 01, 2014 Subsequent Event Ohio Center	Aug. 01, 2014 Subsequent Event Ohio Avon Place Bed	Aug. 01, 2014 Subsequent Event Ohio Ontario Commons Bed	Aug. 01, 2014 Subsequent Event Ohio Scenario, Forecast	Jul. 01, 2014 Subsequent Event Rose Terrace Nursing Center Culloden, WV Bed	Jul. 01, 2014 Subsequent Event Rose Terrace Nursing Center West Virginia Facility	Jul. 01, 2014 Subsequent Event Rose Terrace Nursing Center Danville and Ivydale, West Virginia Facility	Jul. 01, 2014 Subsequent Event Rose Terrace Nursing Center Rose Terrace Note Loans Payable
Subsequent Event [Line Items]
Number of licensed nursing beds		5,282									339				142	42		90
Purchase price																		$ 16,500,000
Number of nursing centers		46	4					3	2		3			2					2	2
Payment of balance of mortgage loan outstanding																					8,000,000
Expected annual revenues												17,000,000					9,000,000
Long-term debt revolving credit facility				$ 22,500,000	$ 20,000,000	$ 20,000,000	$ 27,500,000
Lease agreement term	15 years									15 years			10 years

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Stock-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award

Summarized activity of the equity compensation plans is presented below:

			Weighted
			Average
	Shares		Exercise Price
Outstanding, December 31, 2013	333,000		$	6.64
Granted	—		—
Exercised	(1,000	)	2.37
Expired or cancelled	(27,000	)	7.49
Outstanding, June 30, 2014	305,000		$	6.58
Exercisable, June 30, 2014	262,000		$	6.71

Schedule of Share-based Compensation, Restricted Stock and Restricted Stock Units Activity

			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2013	118,000		$	5.41
Granted	68,000		5.51
Dividend Equivalents	2,000		6.86
Vested	(40,000	)	5.47
Cancelled	(1,000	)	5.42
Outstanding June 30, 2014	147,000		$	5.45

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, 2013	41,000		$	5.35
Granted	25,000		5.51
Dividend Equivalents	1,000		6.86
Vested	(21,000	)	5.70
Cancelled	—		—
Outstanding June 30, 2014	46,000		$	5.30

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions

The following table summarizes information regarding stock options and SOSAR grants outstanding as of June 30, 2014:

	Weighted
	Average		Intrinsic		Intrinsic
Range of	Exercise	Grants	Value-Grants	Grants	Value-Grants
Exercise Prices	Prices	Outstanding	Outstanding	Exercisable	Exercisable
$10.40 to $11.59	11.13	63,000	—	63,000	—
$2.37 to $6.21	5.32	243,000	529,000	199,000	450,000
		306,000		262,000