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: September 30, 2016

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

6,360,495

(Outstanding shares of the issuer’s common stock as of October 31, 2016)

Part I. FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)

	September 30, 2016			December 31, 2015
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	3,483		$	4,585
Receivables, less allowance for doubtful accounts of $10,196 and $8,180, respectively	39,978			43,819
Other receivables	1,352			1,407
Prepaid expenses and other current assets	3,853			2,223
Income tax refundable	378			347
Current assets of discontinued operations	44			36
Deferred income taxes	7,405			7,999
Total current assets	56,493			60,416
PROPERTY AND EQUIPMENT, at cost	125,356			114,383
Less accumulated depreciation and amortization	(67,245		)	(62,110		)
Property and equipment, net	58,111			52,273
OTHER ASSETS:
Deferred income taxes	14,853			11,762
Deferred lease and other costs, net	196			382
Investment in unconsolidated affiliate	989			798
Other noncurrent assets	2,477			3,994
Acquired leasehold interest, net	7,171			7,459
Total other assets	25,686			24,395
	$	140,290		$	137,084

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)

	September 30, 2016			December 31, 2015
	(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations	$	6,888		$	6,603
Trade accounts payable	10,014			10,136
Current liabilities of discontinued operations	428			345
Accrued expenses:
Payroll and employee benefits	13,698			14,404
Self-insurance reserves, current portion	9,745			10,224
Other current liabilities	6,378			5,652
Total current liabilities	47,151			47,364
NONCURRENT LIABILITIES:
Long-term debt and capitalized lease obligations, less current portion and deferred financing costs	61,816			53,297
Self-insurance reserves, noncurrent portion	10,993			12,344
Other noncurrent liabilities	10,815			10,812
Total noncurrent liabilities	83,624			76,453
COMMITMENTS AND CONTINGENCIES
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, 6,592,000 and 6,513,000 shares issued, and 6,360,000 and 6,281,000 shares outstanding, respectively	66			65
Treasury stock at cost, 232,000 shares of common stock	(2,500		)	(2,500		)
Paid-in capital	21,667			21,142
Accumulated deficit	(9,348		)	(5,053		)
Accumulated other comprehensive loss	(370		)	(387		)
Total shareholders’ equity	9,515			13,267
	$	140,290		$	137,084

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 September 30,
	2016			2015
PATIENT REVENUES, net	$	97,313		$	98,105
EXPENSES:
Operating	79,441			78,501
Lease and rent expense	6,865			7,198
Professional liability	1,977			2,069
General and administrative	7,420			6,378
Depreciation and amortization	1,992			1,887
Total expenses	97,695			96,033
OPERATING INCOME (LOSS)	(382		)	2,072
OTHER EXPENSE:
Equity in net income of unconsolidated affiliate	130			97
Interest expense, net	(1,201		)	(998		)
Total other expense	(1,071		)	(901		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(1,453		)	1,171
BENEFIT (PROVISION) FOR INCOME TAXES	495			(502		)
INCOME (LOSS) FROM CONTINUING OPERATIONS	(958		)	669
LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of tax benefit of $12 and $237, respectively	(17		)	(238		)
NET INCOME (LOSS)	(975		)	431
NET INCOME (LOSS) PER COMMON SHARE:
Per common share – basic
Continuing operations	$	(0.16	)	$	0.11
Discontinued operations	—			(0.04		)
	$	(0.16	)	$	0.07
Per common share – diluted
Continuing operations	$	(0.16	)	$	0.11
Discontinued operations	—			(0.04		)
	$	(0.16	)	$	0.07
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.055		$	0.055
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,212			6,121
Diluted	6,212			6,331

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

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DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands and unaudited)

	Three Months Ended September 30,
	2016			2015
NET INCOME (LOSS)	$	(975	)	$	431
OTHER COMPREHENSIVE INCOME:
Change in fair value of cash flow hedge, net of tax	364			151
Less: reclassification adjustment for amounts recognized in net income	(118		)	(109		)
Total other comprehensive income	246			42
COMPREHENSIVE INCOME (LOSS)	$	(729	)	$	473

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

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DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)

	Nine Months Ended September 30,
	2016			2015
PATIENT REVENUES, net	$	291,063		$	289,618
EXPENSES:
Operating	236,444			232,298
Lease and rent expense	20,971			21,529
Professional liability	5,977			6,150
General and administrative	21,035			18,770
Depreciation and amortization	6,055			5,629
Lease termination costs	2,008			—
Total expenses	292,490			284,376
OPERATING INCOME (LOSS)	(1,427		)	5,242
OTHER EXPENSE:
Equity in net income of unconsolidated affiliate	191			280
Interest expense, net	(3,429		)	(2,997		)
Debt retirement costs	(351		)	—
Total other expense	(3,589		)	(2,717		)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(5,016		)	2,525
BENEFIT (PROVISION) FOR INCOME TAXES	1,834			(1,044		)
INCOME (LOSS) FROM CONTINUING OPERATIONS	(3,182		)	1,481
LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of tax benefit of $33 and $628, respectively	(54		)	(800		)
NET INCOME (LOSS)	(3,236		)	681
NET INCOME (LOSS) PER COMMON SHARE:
Per common share – basic
Continuing operations	$	(0.51	)	$	0.24
Discontinued operations	(0.01		)	(0.13		)
	$	(0.52	)	$	0.11
Per common share – diluted
Continuing operations	$	(0.51	)	$	0.24
Discontinued operations	(0.01		)	(0.13		)
	$	(0.52	)	$	0.11
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.17		$	0.17
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	6,195			6,089
Diluted	6,195			6,310

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)

	Nine Months Ended September 30,
	2016			2015
NET INCOME (LOSS)	$	(3,236	)	$	681
OTHER COMPREHENSIVE INCOME:
Change in fair value of cash flow hedge, net of tax	398			382
Less: reclassification adjustment for amounts recognized in net income	(381		)	(345		)
Total other comprehensive income	17			37
COMPREHENSIVE INCOME (LOSS)	$	(3,219	)	$	718

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

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DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

	Nine Months Ended September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(3,236	)	$	681
Discontinued operations	(54		)	(800		)
Income (loss) from continuing operations	(3,182		)	1,481
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	6,055			5,629
Provision for doubtful accounts	5,785			5,425
Deferred income tax provision (benefit)	(2,329		)	204
Provision for self-insured professional liability, net of cash payments	1,853			2,063
Stock-based compensation	721			924
Equity in net income of unconsolidated affiliate, net of investment	(191		)	(281		)
Debt retirement costs	351			—
Provision for leases in excess of cash payments	(1,640		)	(1,203		)
Lease termination costs, net of cash payments	1,958			—
Other	463			116
Changes in assets and liabilities affecting operating activities:
Receivables, net	(2,071		)	(8,302		)
Prepaid expenses and other assets	(1,620		)	(507		)
Trade accounts payable and accrued expenses	(226		)	1,136
Net cash provided by continuing operations	5,927			6,685
Discontinued operations	(3,572		)	(4,896		)
Net cash provided by operating activities	2,355			1,789
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(11,596		)	(3,624		)
Acquisition of property and equipment through business combination	—			(7,000		)
Change in restricted cash	1,658			2,490
Deposits and other deferred balances	—			(9		)
Net cash used in continuing operations	(9,938		)	(8,143		)
Discontinued operations	—			—
Net cash used in investing activities	(9,938		)	(8,143		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(70,883		)	(14,002		)
Proceeds from issuance of debt	80,855			21,941
Financing costs	(1,884		)	(192		)
Issuance and redemption of employee equity awards	(105		)	(31		)
Payment of common stock dividends	(1,025		)	(1,008		)
Payment for preferred stock restructuring	(477		)	(462		)
Net cash provided by financing activities	6,481			6,246
Discontinued operations	—			—
Net cash provided by financing activities	$	6,481		$	6,246

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DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

(continued)

	Nine Months Ended September 30,
	2016			2015
NET DECREASE IN CASH AND CASH EQUIVALENTS	$	(1,102	)	$	(108	)
CASH AND CASH EQUIVALENTS, beginning of period	4,585			3,818
CASH AND CASH EQUIVALENTS, end of period	$	3,483		$	3,710
SUPPLEMENTAL INFORMATION:
Cash payments of interest	$	2,906		$	2,711
Cash payments of income taxes	$	521		$	216

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

SEPTEMBER 30, 2016 AND 2015

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 nine 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. Additionally, 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, Missouri, Ohio, Tennessee, and Texas.

As of September 30, 2016, the Company’s continuing operations consist of 54 nursing centers with 5,879 licensed nursing beds. The Company owns 17 and leases 37 of its nursing centers. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 496 licensed assisted and residential living beds.

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. 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 8 to the interim consolidated financial statements.

The interim consolidated financial statements for the three and nine month periods ended September 30, 2016 and 2015, 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 September 30, 2016, and the results of operations for the three and nine month periods ended September 30, 2016 and 2015, and cash flows for the nine month periods ended September 30, 2016 and 2015. The Company’s balance sheet information at December 31, 2015, was derived from its audited consolidated financial statements as of December 31, 2015.

The results of operations for the periods ended September 30, 2016 and 2015 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, 2015.

3. RECENT ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which 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.  In March 2016, the FASB issued an update to ASU No. 2014-09 in the form of ASU No. 2016-08, which amended the principal-versus-agent implementation guidance and illustrations in the new revenue guidance. The update clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued another update to the new revenue standard in the form of ASU No. 2016-10, which amends the guidance on identifying performance obligations and the implementation guidance on licensing. In May 2016, ASU No. 2016-12 was issued, which amends the new revenue recognition guidance on transition, collectibility, noncash consideration and the presentation of taxes. The new revenue standard (including updates) will be effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The Company will adopt the requirements of this standard effective January 1, 2018, and are currently evaluating the impact of the adoption on our financial condition and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs(Topic 835), which amends and simplifies the presentation of debt issuance costs. The main provisions of the standard require that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, and amortization of the debt issuance costs must be reported as interest expense. The Company adopted ASU No. 2015-03 as of January 1, 2016. The new standard was applied on a retroactive basis and the Company has complied with the applicable disclosures for a change in accounting principle. The adoption of this guidance has not had a material impact on the Company's consolidated financial statements.

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In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on the Company's balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. Upon adoption, the Company anticipates reclassifying deferred income taxes of approximately $7,405,000 from current to non-current assets.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is currently assessing the impact of this new accounting pronouncement on the Company's results of operations, financial position, and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of accounting for shared-based payment transactions, including the income tax consequences and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact of this new accounting pronouncement on the Company's results of operations, financial position, and cash flows.

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

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 February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") which modified the terms of the Original Mortgage Loan and the Original Revolver Agreements dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to $100,000,000 allocated between a $72,500,000 Mortgage Loan ("Amended Mortgage Loan") and a $27,500,000 Revolver ("Amended Revolver"). The Amended Mortgage Loan consists of a $60,000,000 term loan facility and a $12,500,000 acquisition loan facility. Loan acquisition costs associated with the Amended Mortgage Loan and the Amended Revolver were capitalized in the amount of $1,812,000 and are being amortized over the five-year term of the agreements. Additionally, the Glasgow term loan balance was consolidated into the new Credit Agreement.

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72,500,000 with a five-year maturity through February 26, 2021, and a $27,500,000 Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities are based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000,000. As of September 30, 2016, the interest rate related to the Amended Mortgage Loan was 4.52%. The Amended Mortgage Loan is secured by seventeen 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 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. The Amended Mortgage Loan balance was $61,484,000 as of September 30, 2016, consisting of $59,195,000 on the term loan facility and $2,289,000 on the acquisition loan facility.

As of September 30, 2016, the Company had $9,000,000 borrowings outstanding under the Amended Revolver compared to $12,900,000 outstanding as of December 31, 2015. The outstanding borrowings on the revolver primarily compensate for accumulated Medicaid and Medicare receivables at recently acquired facilities as these facilities proceed through the change in ownership process with CMS. Annual fees for letters of credit issued under the Amended Revolver are 3.00% of the amount

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outstanding. The Company has ten letters of credit with a total value of $7,868,000 outstanding as of September 30, 2016. Considering the balance of eligible accounts receivable, the letters 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 Amended Revolver was $6,981,000 at September 30, 2016.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. As of September 30, 2016, the Company was compliant with the amended covenants as described in Note 10 to the interim consolidated financial statements.

Interest Rate Swap Transaction

As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company 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. In conjunction with the Amendment to the Credit Agreement, the Company amended the terms of its interest rate swap on February 26, 2016. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the initial notional amount of $30,000,000 at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amount.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis, and at September 30, 2016, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $957,000 at September 30, 2016. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The liability related to the interest rate swap included in accumulated other comprehensive loss at September 30, 2016 is $593,000, 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. COMMITMENTS AND CONTINGENCIES

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 and Tennessee, as well as the Company’s formerly operated Arkansas and West Virginia 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 seven 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 self-insured retention levels per claim and 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 $19,878,000 as of September 30, 2016. 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 this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company's past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company's ultimate professional liability cost for current periods.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third-party claims administrator, contain information relevant to the actual expense already incurred

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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 September 30, 2016, the Company is engaged in 62 professional liability lawsuits. Ten lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $2,779,000 and $3,306,000 for the nine months ended September 30, 2016 and 2015, 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.

Civil Investigative Demand ("CID")

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

In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the two facilities that were the subject of the original CID. In connection with this matter, between July 2013 and early February 2016, the Company has received three civil investigative demands (a form of subpoena) for documents and information relating to our practices and policies for rehabilitation, and other services, our preadmission evaluation forms ("PAEs") required by TennCare and our Pre-Admission Screening and Resident Reviews ("PASRRs"). We have responded to those requests. The DOJ has also issued CID's for testimony from current and former employees of the Company. The DOJ’s civil investigation of the Company's practices and policies for rehabilitation now covers all of the Company’s facilities, but thus far only documents from six of our facilities have been requested.

In June 2016, the Company received an authorized investigative demand (a form of subpoena) for documents in connection with a criminal investigation by the DOJ related to our practices with respect to PAEs and PASRRs, and the Company has provided documents responsive to this subpoena. The Company cannot predict the outcome of these investigations or any possible related proceedings, and the outcome could have a materially adverse effect on the Company, including the imposition of damages, criminal charges, fines, penalties and/or a corporate integrity agreement. The Company is committed to provide caring and professional services to its patients and residents in compliance with applicable laws and regulations.

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, 2007 until June 30, 2008, the Company is completely self-insured for workers' compensation exposure. From July 1, 2008 through September 30, 2016, 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 $193,000 at September 30, 2016. The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,224,000 as of September 30, 2016. 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 September 30, 2016, 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

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is $666,000 at September 30, 2016. The differences between actual settlements and reserves are included in expense in the period finalized.

6. 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. In June 2016, our shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common stock authorized under the Plan from 150,000 shares to 350,000 shares. No grants can be made under the Stock Purchase Plan after April 25, 2028.

In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”), followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation rights, stock options and other share and cash based awards. 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 the nine months ended September 30, 2016 and 2015, the Compensation Committee of the Board of Directors approved grants totaling approximately 83,000 and 74,000 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. Summarized activity of the equity compensation plans is presented below:

			Weighted
	Options/		Average
	SOSARs		Exercise Price
Outstanding, December 31, 2015	232,000		$	6.97
Granted	—		—
Exercised	(1,000	)	3.91
Expired or cancelled	—		—
Outstanding, September 30, 2016	231,000		$	6.98
Exercisable, September 30, 2016	222,000		$	6.83

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			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2015	141,000		$	9.07
Granted	83,000		8.87
Dividend Equivalents	3,000		8.87
Vested	(68,000	)	7.85
Cancelled	(7,000	)	9.80
Outstanding, September 30, 2016	152,000		$	9.47

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, 2015	62,000		$	9.58
Granted	17,000		8.87
Dividend Equivalents	1,000		8.86
Vested	(27,000	)	6.13
Cancelled	—		—
Outstanding, September 30, 2016	53,000		$	11.10

Prior to 2015, 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 related to SOSARs and stock options 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 2016 and 2015, previously granted SOSARs and Options remain outstanding as of September 30, 2016. The following table summarizes information regarding stock options and SOSAR grants outstanding as of September 30, 2016:

	Weighted
	Average			Intrinsic			Intrinsic
Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$10.21 to $11.59	$	10.88	61,000	$	—	52,000	$	—
$2.37 to $6.21	$	5.55	170,000	$	754,000	170,000	$	754,000
			231,000			222,000

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 $721,000 and $924,000 in the nine month periods ended September 30, 2016 and 2015, respectively.

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7. EARNINGS (LOSS) PER COMMON SHARE

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss)
Income (loss) from continuing operations	$	(958	)	$	669		(3,182		)	1,481
Loss from discontinued operations, net of income taxes	(17		)	(238		)	(54		)	(800		)
Net income (loss)	$	(975	)	$	431		$	(3,236	)	$	681

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	(0.16	)	$	0.11		$	(0.51	)	$	0.24
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.13		)
Net income (loss) per common share – basic	$	(0.16	)	$	0.07		$	(0.52	)	$	0.11
Per common share – diluted
Income (loss) from continuing operations	$	(0.16	)	$	0.11		$	(0.51	)	$	0.24
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.13		)
Net income (loss) per common share – diluted	$	(0.16	)	$	0.07		$	(0.52	)	$	0.11
Weighted Average Common Shares Outstanding:
Basic	6,212			6,121			6,195			6,089
Diluted	6,212			6,331			6,195			6,310

The effects of 231,000 and 16,000 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share in the nine months ended September 30, 2016 and 2015, respectively, because these securities would have been anti-dilutive.

8. 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%. 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 September 30, 2016, was $989,000 as compared to $798,000 at December 31, 2015. 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 income of unconsolidated affiliate for the quarter ended September 30, 2016, was $130,000 as compared to $97,000 for the quarter ended September 30, 2015. For the nine-month period ended September 30, 2016, the equity in the net income of unconsolidated affiliate was $191,000 compared to $280,000 for the nine-month period ended September 30, 2015.

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9. BUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS

2016 Acquisitions

On August 15, 2016, the Company entered into an Operation Transfer Agreement with Golden Living to assume the operations of 22 facilities in Alabama and Mississippi, which became effective in the fourth quarter of 2016. Refer to Note 10 of the interim consolidated financial statements for further discussion on the Company's acquisition of these facilities.

On February 26, 2016, the Company exercised its purchase options to acquire the real estate assets for Diversicare of Hutchinson in Hutchinson, Kansas and Clinton Place in Clinton, Kentucky for $4,250,000 and $3,300,000, respectively. The Company has operated these facilities since February 2015 and April 2012, respectively. Hutchinson is an 85-bed skilled nursing facility, and Clinton is an 88-bed skilled nursing facility. As a result of the consummation of the Agreements, the Company allocated the purchase price and acquisition costs between the assets acquired. 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 assets acquired is as follows:

	Hutchinson		Clinton Place
Purchase Price	$	4,250,000	$	3,300,000
Acquisition Costs	43,000		34,000
	$	4,293,000	$	3,334,000
Allocation:
Buildings	3,443,000		2,898,000
Land	365,000		267,000
Furniture, Fixtures and Equipment	485,000		169,000
	$	4,293,000	$	3,334,000

2015 Acquisitions

On February 1, 2015, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Barren County Health Care Center, Inc. to acquire certain land, improvements, furniture, fixtures and equipment, personal property and intangible property, together comprising a 94-bed skilled nursing center in Glasgow, Kentucky, for an aggregate purchase price of $7,000,000.

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

	February 1, 2015
Purchase Price	$	7,000,000
Land	672,000
Buildings	5,778,000
Furniture, Fixtures, and Equipment	550,000
	$	7,000,000

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On November 1, 2015, the Company entered into an Asset Purchase Agreement with Haws Fulton Investors, LLC to acquire certain land, improvements, furniture, fixtures and equipment, personal property and intangible property, together comprising a 60-bed skilled nursing center in Fulton, Kentucky, for an aggregate purchase price of $3,900,000.

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

	November 1, 2015
Purchase Price	$	3,900,000
Land	300,000
Buildings	3,338,000
Furniture, Fixtures, and Equipment	262,000
	$	3,900,000

2016 Lease Termination

On May 31, 2016, the Company entered into an Agreement with Avon Ohio, LLC to amend the original lease agreement, thus terminating the Company's right of possession of the facility. As a result, the Company incurred lease termination costs of $2,008,000 in the second quarter of 2016. Under the amended agreement, the Company is required to pay $300,000 per year through the term of the original lease agreement, July 31, 2024. For accounting purposes, this transaction was not reported as a discontinued operation, which is in accordance with the modified authoritative guidance for reporting discontinued operations, effective January 1, 2015. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results.

10. SUBSEQUENT EVENTS

Golden Living

On October 1, 2016, the Company entered into a Master Lease Agreement (the "Lease") with Golden Living (the "Lessor") to directly lease eight facilities located in Mississippi from the Lessor, which resulted in the following business acquisitions: (i) a 152-bed skilled nursing facility known as Golden Living Center - Amory; (ii) a 130-bed skilled nursing facility known as Golden Living Center - Batesville; (iii) a 58-bed skilled nursing facility known as Golden Living Center - Brook Manor; (iv) a 119-bed skilled nursing facility known as Golden Living Center - Eupora; (v) a 140-bed skilled nursing facility known as Golden Living Center - Ripley; (vi) a 140-bed skilled nursing facility known as Golden Living Center - Southaven; (vii) a 120-bed skilled nursing facility known as Golden Living Center - Eason Blvd; (viii) a 60-bed skilled nursing facility known as Golden Living Center - Tylertown. The Lease has an initial term of ten years. The Company also assumed the individual leases of a 120-bed facility known as Broadmoor Nursing Home, with an initial lease term often years, and a 99-bed skilled nursing facility known as Leake County Nursing Home, with a lease term of two years.

On November, 1 2016, the Company amended and restated the Lease ("Amended Lease") with the Lessor to directly lease an additional twelve facilities located in Alabama from the Lessor, which resulted in the following business acquisitions: (i) a 87-bed skilled nursing facility known as Golden Living Center - Arab; (ii) a 180-bed skilled nursing facility known as Golden Living Center - Meadowood; (iii) a 132-bed skilled nursing facility known as Golden Living Center - Riverchase; (iv) a 100-bed skilled nursing facility known as Golden Living Center - Boaz; (v) a 154-bed skilled nursing facility known as Golden Living Center - Foley; (vi) a 50-bed skilled nursing facility known as Golden Living Center - Hueytown; (vii) a 85-bed skilled nursing facility known as Golden Living Center - Lanett; (viii) a 138-bed skilled nursing facility known as Golden Living Center - Montgomery; (ix) a 120-bed skilled nursing facility known as Golden Living Center - Oneonta; (x) a 173-bed skilled nursing facility known as Golden Living Center - Oxford; (xi) a 94-bed skilled nursing facility known as Golden Living Center - Pell City; (xii) a 123-bed skilled nursing facility known as Golden Living Center - Winfield. The Amended Lease has an initial term of ten years.

The completion of this acquisition brings the Company's operations to 76 nursing centers with 8,453 skilled nursings beds. They are expected to be accretive to earnings early in the Company's tenure as the operator of the Facilities.

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Debt Modification

On October 3, 2016, the Company executed an Amendment to the Amended and Restated Revolving Loan and Security Agreement (the "Amended Revolver") with a syndicate of financial institutions and banks, including The PrivateBank and Trust Company, the administering agent, which modifies the terms of the Amended and Restated Revolving Loan and Security Agreement (the "Original Revolver"), dated February 26, 2016. The Amended Revolver increases the Company's maximum revolving facility to $52,250,000; provided that the maximum revolving facility be reduced to $42,250,000 on August 1, 2017.

The Amended Revolver amends certain provisions to our financial covenants including the following: the minimum Adjusted EBITDA shall not be less than $8,500,000 for the quarter ending September 30, 2016; $9,500,000 for the quarter ending December 31, 2016; $10,000,000 for the quarter ending March 31, 2017; $11,500,000 for the quarter ending June 30, 2017; and $13,000,000 for the quarter ending September 30, 2017 and for each quarter thereafter.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Diversicare Healthcare Services, Inc. (together with its subsidiaries, “Diversicare” or the “Company”) provides long-term care services to nursing center patients in nine 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. Additionally, 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, Missouri, Ohio, Tennessee, and Texas.

As of September 30, 2016, the Company’s continuing operations consist of 54 nursing centers with 5,879 licensed nursing beds. The Company owns 17 and leases 37 of its nursing centers. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 496 licensed assisted living and residential beds.

Strategic Operating Initiatives

During the third quarter of 2010, we identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives included: improving skilled mix in our nursing centers, improving our average Medicare rate, implementing Electronic Medical Records (“EMR”) to improve Medicaid capture, accelerating center renovations and completing strategic acquisitions. We have experienced success in these initiatives and expect to continue to build on these improvements. 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
	September 30, 2016			September 30, 2010
As a percent of total census:
Medicare census	11.4		%	12.3		%
Managed Care census	3.5		%	1.3		%
Total skilled mix census	14.9		%	13.6		%
As a percent of total revenues:
Medicare revenues	27.2		%	29.3		%
Managed Care revenues	6.9		%	2.8		%
Total skilled mix revenues	34.1		%	32.1		%
Medicare average rate per day:	$	455.69		$	394.23

The initiatives have developed positive results in growing our skilled patient population, increasing the Managed Care census to 3.5% of total census in the third quarter of 2016, as compared to 1.3% in the third quarter of 2010, and total skilled mix census to 14.9% from 13.6% over the same period.

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Implementing Electronic Medical Records to improve Medicaid capture:

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
	September 30, 2016		September 30, 2010
Medicaid average rate per day:	$	169.51	$	147.93

Completing strategic acquisitions and dispositions:

Our strategic operating initiatives include a renewed focus on completing strategic acquisitions. We continue to pursue and investigate opportunities to acquire, lease or develop new centers, focusing primarily on opportunities within our existing geographic areas of operation.

On October 1, 2016 and November 1, 2016, we assumed the operations of ten centers in Mississippi and 12 centers in Alabama, respectively, which is further discussed in Note 10 to the interim consolidated financial statements. The completion of this acquisition brings the Company's operations to 76 nursing centers with 8,453 skilled nursings beds. These acquired facilities are expected to contribute in excess of $185 million in annual revenues.

As part of our strategic efforts, we also periodically perform thorough analyses on our existing centers in order to determine whether continuing operations within certain markets or regions is in line with the short-term and long-term strategy of the business. 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. In addition in 2014, the Company disposed of an owned building and two leased facilities in West Virginia. As a result of these transactions, we no longer operate within the states of Arkansas or West Virginia. In May 2016, we ceased operations at our Avon, Ohio, facility, thus terminating our lease with Avon Ohio, LLC. This transaction was not reported as a discontinued operation as described in Note 9 to the interim consolidated financial statements.

Basis of Financial Statements

Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, 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 2015 Annual Report on Form 10-K.

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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 payors 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 September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
Medicaid	$	49,083	50.4	%	$	48,958	49.9	%	$	144,628	49.7	%	$	140,008	48.3	%
Medicare	26,468		27.2		27,413		27.9		80,887		27.8		84,987		29.3
Managed Care	6,710		6.9		6,743		6.9		20,642		7.1		20,230		7.0
Private Pay and other	15,052		15.5		14,991		15.3		44,906		15.4		44,393		15.4
Total	$	97,313	100.0	%	$	98,105	100.0	%	$	291,063	100.0	%	$	289,618	100.0	%

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Medicaid	3,129	68.1	%	3,143	67.6	%	3,073	68.2	%	3,088	66.9	%
Medicare	525	11.4		553	11.9		526	11.7		583	12.6
Managed Care	159	3.5		171	3.7		161	3.6		174	3.8
Private Pay and other	779	17.0		784	16.8		748	16.5		769	16.7
Total	4,592	100.0	%	4,651	100.0	%	4,508	100.0	%	4,614	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. From time to time, the Company, like others in the healthcare industry, may be involved in regulatory actions of this type.

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

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to Medicare beneficiaries. The final rule also excludes services furnished in SNFs from the definition of primary care services for purposes of the Shared Savings Program. The final rule could impact our revenue in the future.

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

In March 2010, significant legislation concerning health care and health insurance was passed, including the “Patient Protection and Affordable Care Act,” (“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 in a variety of ways. Some aspects of these new laws have been implemented while others will be phased in over the next several years. This Legislation significantly changes the future responsibility of employers with respect to providing health care coverage to employees in the United States.

We also expect for this Legislation to continue to impact our Medicare and Medicaid reimbursement as well, though the exact timing and level of that impact is currently unknown. For example, 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. Additional provisions under the Legislation for skilled nursing facilities participating in Medicare and/or Medicaid, including but not limited to, new transparency, reporting, and certification requirements, will likely lead to an increase in the Company's administrative and other costs.

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 changes and reforms resulting from the Legislation, as well as other similar health care reforms, may be subject to further clarification and modification through promulgation of regulations, executive orders, and judicial review and could have a material adverse impact on our business, financial condition, and 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 Medicare, Medicaid, 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 and other changes to applicable coverage criteria to comply with reporting requirements and to ensure that proper payments are made to our operated nursing centers. It is generally recognized that all government-funded programs have been and will continue to be under cost containment pressures, but the extent to which these pressures will affect our future reimbursement is unknown.

Medicare

Effective October 1, 2011, Medicare rates were reduced by a nationwide average of 11.1%, the net effect of a reduction to restore overall payments to their intended levels on a prospective basis and the application of a 2.7% market basket increase and a negative 1.0% productivity adjustment required by the Affordable Care Act. The final Centers for Medicare and Medicaid Services (“CMS”) rule also adjusted 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 April 2015, congressional committees began deliberations on proposed legislation that would extend sequestration and increase the amount cut by $700 million. If the bill were to become law, it would result in a net effect of increasing the sequester in 2024 beyond the 2% in the BCA.

In July 2016, CMS issued its final rule outlining fiscal year 2017 Medicare payment rates and quality programs for skilled nursing facilities. The policies in the proposed rule continue to shift Medicare payments from volume to value. CMS projects that aggregate payments to skilled nursing facilities will increase by a net 2.4% for fiscal year 2017. This estimate increase reflected a 2.7%

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market basket increase, reduced by a 0.3% multi-factor productivity (MFP) adjustment required by the Patient Protection and Affordable Care Act (PPACA). This final rule also further defines the skilled nursing facilities Quality Reporting Program and clarifies the Value-Based Purchasing Program to establish performance standards, baseline and performance periods, performance scoring methodology and feedback reports. The Value-Based Purchasing Program final rule specifies the skilled nursing facility 30-day potentially preventable readmission measure, which assesses the facility-level risk standardized rate of unplanned, potentially preventable hospital readmissions for skilled nursing facility patients within 30 days of discharge from a prior admission to a hospital paid under the Inpatient Prospective Payment System, a critical access hospital, or a psychiatric hospital. There is also finalized additional policies related to the Value-Based Purchasing Program including: establishing performance standards; establishing baseline and performance periods; adopting a performance scoring methodology; and providing confidential feedback reports to the skilled nursing facilities.

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

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

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

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

MACRA 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% of beneficiary bad debt. This provision reduced bad debt reimbursement exposure for all providers to 65%. In addition to the provisions above, the legislation sets that for fiscal year 2018 (October 1, 2017 through September 30, 2018), all Medicare Part B providers will receive inflationary market basket increases no greater than 1%. This provision is expected to reduce Medicare payments to all post-acute providers by approximately $15.4 billion over the 2018-2025 period.

Medicaid

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

We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in 2015, along with increased Medicaid acuity in our acuity based states, were the primary contributor to our 1.5% increase in average rate per day for Medicaid patients in 2016 compared to 2015. Based on the rate changes received during the third quarter of 2015,

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we have experienced a favorable impact to our rate per day for Medicaid patients due to modest rate increases in many of the states within which we operate.

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

We 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 nine months ended September 30, 2016, we derived 27.2% and 50.4% 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.

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Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of September 30, 2016, summarized by the period in which payment is due, as follows (dollar amounts in thousands):

Contractual Obligations	Total		Less than 1  year		1 to 3 Years		3 to 5 Years		After 5 Years
Long-term debt obligations (1)	$	85,248	$	10,434	$	16,322	$	58,492	$	—
Settlement obligations (2)	2,286		2,286		—		—		—
Elimination of Preferred Stock Conversion feature (3)	1,374		687		687		—		—
Operating leases (4)	529,761		30,933		63,329		65,836		369,663
Required capital expenditures under operating leases (5)	1,692		186		372		372		762
Total	$	620,361	$	44,526	$	80,710	$	124,700	$	370,425

(1) Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our capital lease obligations. Our long-term debt obligations increased $10.6 million between December 31, 2015 and September 30, 2016, which is related to our Amended and Restated Credit agreements. See Note 4, "Long-Term Debt and Interest Rate Swap," to the interim consolidated financial statements included in this report for additional information.

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

(3) Payments to Omega Health Investors ("Omega"), from which we lease 35 nursing centers, for the elimination of the preferred stock conversion feature in connection with restructuring the preferred stock and master lease agreements. Monthly payments of approximately $57,000 will be made through the end of the initial lease period that ends in September 2018.

(4) Represents lease payments under our operating lease agreements. Assumes all renewal periods are enacted. Our operating lease obligations decreased $43.1 million between December 31, 2015 and September 30, 2016, which is related to our purchase of the Clinton and Hutchinson facilities, and termination of the lease for the Avon, Ohio facility.

(5) Includes annual expenditure requirements under operating leases.

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to two times their annual salary in the event of a termination without cause, a constructive discharge (as defined therein), or upon a change of control of the Company (as defined therein). The maximum contingent liability under these agreements is approximately $1,789,000 as of September 30, 2016. 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 September 30, 2016, the potential contingent liability for the repurchase of the equity grants is $421,000.

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Results of Operations

The following tables present the unaudited interim statements of operations and related data for the three and nine month periods ended September 30, 2016 and 2015:

(in thousands)	Three Months Ended September 30,
	2016			2015			Change			%
PATIENT REVENUES, net	$	97,313		$	98,105		$	(792	)	(0.8	)%
EXPENSES:
Operating	79,441			78,501			940			1.2	%
Lease and rent expense	6,865			7,198			(333		)	(4.6	)%
Professional liability	1,977			2,069			(92		)	(4.4	)%
General and administrative	7,420			6,378			1,042			16.3	%
Depreciation and amortization	1,992			1,887			105			5.6	%
Total expenses	97,695			96,033			1,662			1.7	%
OPERATING INCOME (LOSS)	(382		)	2,072			(2,454		)	(118.4	)%
OTHER INCOME (EXPENSE):
Equity in net income of unconsolidated affiliate	130			97			33			34.0	%
Interest expense, net	(1,201		)	(998		)	(203		)	(20.3	)%
	(1,071		)	(901		)	(170		)	(18.9	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(1,453		)	1,171			(2,624		)	(224.1	)%
BENEFIT (PROVISION) FOR INCOME TAXES	495			(502		)	997			198.6	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	(958	)	$	669		$	(1,627	)	(243.2	)%

(in thousands)	Nine Months Ended September 30,
	2016			2015			Change			%
PATIENT REVENUES, net	$	291,063		$	289,618		$	1,445		0.5	%
EXPENSES:
Operating	236,444			232,298			4,146			1.8	%
Lease and rent expense	20,971			21,529			(558		)	(2.6	)%
Professional liability	5,977			6,150			(173		)	(2.8	)%
General and administrative	21,035			18,770			2,265			12.1	%
Depreciation and amortization	6,055			5,629			426			7.6	%
Lease termination costs	2,008			—			2,008			100.0	%
Total expenses	292,490			284,376			8,114			2.9	%
OPERATING INCOME (LOSS)	(1,427		)	5,242			(6,669		)	(127.2	)%
OTHER INCOME (EXPENSE):
Equity in net income of unconsolidated affiliate	191			280			(89		)	(31.8	)%
Interest expense, net	(3,429		)	(2,997		)	(432		)	(14.4	)%
Debt retirement costs	(351		)	—			(351		)	(100.0	)%
	(3,589		)	(2,717		)	(872		)	(32.1	)%
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(5,016		)	2,525			(7,541		)	(298.7	)%
BENEFIT (PROVISION) FOR INCOME TAXES	1,834			(1,044		)	2,878			275.7	%
INCOME (LOSS) FROM CONTINUING OPERATIONS	$	(3,182	)	$	1,481		$	(4,663	)	(314.9	)%

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Percentage of Net Revenues	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
PATIENT REVENUES, net	100.0	%	100.0	%	100.0	%	100.0	%
EXPENSES:
Operating	81.6		80.0		81.2		80.2
Lease and rent expense	7.1		7.3		7.2		7.4
Professional liability	2.0		2.1		2.1		2.1
General and administrative	7.6		6.5		7.2		6.5
Depreciation and amortization	2.0		1.9		2.1		1.9
Lease termination costs	—		—		0.7		—
Total expenses	100.3		97.8		100.5		98.1
OPERATING INCOME (LOSS)	(0.3	)	2.2		(0.5	)	1.9
OTHER INCOME (EXPENSE):
Equity in net losses of unconsolidated affiliate	0.1		0.1		0.1		0.1
Interest expense, net	(1.2	)	(1.0	)	(1.2	)	(1.0	)
Debt retirement costs	—		—		(0.1	)	—
	(1.1	)	(0.9	)	(1.2	)	(0.9	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(1.4	)	1.3		(1.7	)	1.0
BENEFIT (PROVISION) FOR INCOME TAXES	0.5		(0.5	)	0.6		(0.4	)
INCOME (LOSS) FROM CONTINUING OPERATIONS	(0.9	)%	0.8	%	(1.1	)%	0.6	%

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Three Months Ended September 30, 2016 Compared With Three Months Ended September 30, 2015

Patient Revenues

Patient revenues were $97.3 millionand$98.1 millionfor the three months endedSeptember 30, 2016and2015, respectively, a decrease of $0.8 million. The following table summarizes the revenue fluctuations attributable to our portfolio growth (in thousands):

	Three Months Ended September 30,
	2016		2015		Change
Same-store revenue	$	93,041	$	95,307	$	(2,266	)
2015 acquisition revenue	4,272		2,798		1,474
Total revenue	$	97,313	$	98,105	$	(792	)

The overall decrease in revenues of $0.8 million is primarily driven by a decrease in our same-store centers. Declines in census related to Medicare, Medicaid and Managed Care payors resulted in decreased patient revenues by $1.7 million, $0.8 million and $0.5 million, respectively, or 7.6%, 1.8% and 8.0%, respectively. This was partially offset by an increase in Private and Medicaid payor rates, which generated additional revenues of $0.2 million and $0.3 million, respectively, or 2.6% and 0.7%, respectively.

The same-store revenue decrease was offset by incremental contributions from acquisition activity in 2015 of $1.5 million from our centers in Hutchinson, KS, Glasgow, KY, and Fulton, KY.

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

	Three Months Ended September 30,
	2016			2015
Skilled nursing occupancy	78.1		%	77.5		%
As a percent of total census:
Medicare census	11.4		%	11.9		%
Medicaid census	68.1		%	67.6		%
Managed Care census	3.5		%	3.7		%
As a percent of total revenues:
Medicare revenues	27.2		%	27.9		%
Medicaid revenues	50.4		%	49.9		%
Managed Care revenues	6.9		%	6.9		%
Average rate per day:
Medicare	$	455.69		$	452.48
Medicaid	$	169.51		$	168.12
Managed Care	$	388.25		$	382.52

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Operating Expense

Operating expense increased in the third quarter of 2016 to $79.4 million as compared to $78.5 million in the third quarter of 2015. The following table summarizes the expense increases attributable to our portfolio growth (in thousands):

	Three Months Ended September 30,
	2016		2015		Change
Same-store operating expense	$	76,067	$	76,081	$	(14	)
2015 acquisition expense	3,374		2,420		954
Total expense	$	79,441	$	78,501	$	940

Operating expense increased as a percentage of revenue at 81.6% for the third quarter of 2016 as compared to 80.0% for the third quarter of 2015. The increase is driven primarily by the $1.0 million increase in operating costs attributable to the nursing center operations acquired in 2015.

While the $0.9 million increase in operating expenses is attributable to the incremental operating expenses from the 2015 acquisitions, the same store nursing centers experienced a slight decrease in operating expenses during the third quarter of 2016 as compared to the third quarter of 2015. The health insurance premiums and wages increased for the same-store centers by $0.3 million and $0.4 million, respectively. Conversely, the same-store centers' nursing and ancillary costs decreased by $0.5 million and dietary costs decreased by $0.2 million in the third quarter of 2016 as compared to the third quarter of 2015.

Lease Expense

Lease expense decreased in the third quarter of 2016 to $6.9 million as compared to $7.2 million in the third quarter of 2015. The decrease in lease expense was primarily attributable to the purchase of Clinton and Hutchinson in February 2016, and termination of the Avon, Ohio lease in May 2016.

Professional Liability

Professional liability expense was $2.0 million and $2.1 million in the third quarters of 2016 and 2015, respectively. Our cash expenditures for professional liability costs of continuing operations were $1.2 million and $1.7 million for the third quarters of 2016 and 2015, 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 $7.4 million in the third quarter of 2016 as compared to $6.4 million in the third quarter of 2015, an increase of $1.0 million, and increased as a percentage of revenue from 6.5% in 2015 to 7.6% in 2016. The increase in general and administrative expense is primarily attributable to an increase in legal and consulting fees by $0.7 million and $0.2 million, respectively, in the third quarter of 2016 compared to the third quarter of 2015, related to acquisition expenses.

Depreciation and Amortization

Depreciation and amortization expense was approximately $2.0 million in the third quarter of 2016 as compared to $1.9 million in 2015. The increase in depreciation expense relates to fixed assets at the newly leased and acquired centers.

Interest Expense, Net

Interest expense was $1.2 million in the third quarter of 2016 and $1.0 million in the third quarter of 2015, an increase of $0.2 million. The increase was primarily attributable to higher debt balances in 2016 as a result of higher outstanding borrowings on the revolving credit facility as a result of the purchase of Hutchinson and Clinton in the first quarter of 2016.

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

As a result of the above, continuing operations lost $1.5 million before income taxes for the third quarter of 2016 as compared to income of $1.2 million for the third quarter of 2015. The benefit for income taxes was $0.5 million for the third quarter of 2016, as compared to a provision of $0.5 million for the third quarter of 2015. The basic and diluted loss per common share from continuing operations were both $0.16 for the third quarter of 2016 as compared to both basic and diluted income per common share from continuing operations of $0.11 in the third quarter of 2015.

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Nine Months Ended September 30, 2016 Compared With Nine Months Ended September 30, 2015

Patient Revenues

Patient revenues were $291.1 million and $289.6 millionfor the nine months ended September 30, 2016 and 2015, respectively, an increase of $1.5 million. The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):

	Nine Months Ended September 30,
	2016		2015		Change
Same-store revenue	$	278,918	$	282,005	$	(3,087	)
2015 acquisition revenue	12,145		7,613		4,532
Total revenue	$	291,063	$	289,618	$	1,445

The overall increase in revenue of $1.5 million is attributable to increased revenue contributions from acquisition activity in 2015 of $4.5 million from our centers in Hutchinson, KS, Glasgow, KY, and Fulton, KY.

The same-store revenues decreased by $3.1 million in 2016 compared to the same period in 2015, primarily driven by a 8.7% and 4.6% decline in Medicare and Managed Care census, respectively, resulting in a decrease in revenue of $6.2 million and $0.8 million, respectively.

The decrease in same-store revenues was partially offset by an increase in the Medicaid and Private payor rates, resulting in an increase in revenue of $1.9 million and $0.7 million, respectively. Hospice census increased revenue by $0.9 million in 2016 compared to 2015, and the Company experienced an increase in Ancillary Services revenue by $0.5 million.

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

	Nine Months Ended September 30,
	2016			2015
Skilled nursing occupancy	77.2		%	77.1		%
As a percent of total census:
Medicare census	11.7		%	12.6		%
Medicaid census	68.2		%	66.9		%
Managed Care census	3.6		%	3.8		%
As a percent of total revenues:
Medicare revenues	27.8		%	29.3		%
Medicaid revenues	49.7		%	48.3		%
Managed Care revenues	7.1		%	7.0		%
Average rate per day:
Medicare	$	455.33		$	454.59
Medicaid	$	168.42		$	165.97
Managed Care	$	390.71		$	386.63

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Operating Expense

Operating expense increased in 2016 to $236.4 million as compared to $232.3 million in 2015. The following table summarizes the expense increases attributable to our portfolio growth (in thousands):

	Nine Months Ended September 30,
	2016		2015		Change
Same-store operating expense	$	226,782	$	225,939	$	843
2015 acquisition expense	9,662		6,359		3,303
Total expense	$	236,444	$	232,298	$	4,146

Operating expense increased as a percentage of revenue at 81.2% for 2016 as compared to 80.2% for 2015. The majority of the $4.1 million increase in operating expenses is attributable to the nursing center operations assumed in 2015, amounting to $3.3 million.

While the $3.3 million increase in operating expenses is attributable to the incremental operating expenses from the 2015 acquisitions, the same-store centers' health insurance premiums increased by $0.8 million. Bad debt and bad debt crossovers expense increased by $0.3 million and $0.3 million, respectively.

The increase in same-store operating expenses was partially offset by a $0.8 million decrease in nursing and ancillary costs in 2016 as compared to the same period in 2015.

Lease Expense

Lease expense decreased in 2016 to $21.0 million as compared to $21.5 million in 2015. The decrease in lease expense was primarily attributable to the purchase of Clinton and Hutchinson in February 2016, and termination of the Avon, Ohio lease in May 2016.

Professional Liability

Professional liability expense was $6.0 million in 2016 compared to $6.2 million in 2015, a decrease of $0.2 million. Our cash expenditures for professional liability costs of continuing operations were $2.8 million and $3.3 million for 2016 and 2015, 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 $21.0 million in 2016 as compared to $18.8 million in 2015, an increase of $2.2 million, and increased as a percentage of revenue from 6.5% in 2015 to 7.2% in 2016. The increase in general and administrative expense is primarily attributable to an increase in legal and consulting fees of $1.0 million and $0.4 million, respectively, in 2016 compared to 2015, related to regulatory and acquisition expenses. Additionally, salaries increased by $0.5 million in 2016 compared to 2015.

Depreciation and Amortization

Depreciation and amortization expense was approximately $6.1 million in 2016 as compared to $5.6 million in 2015. The increase in depreciation expense relates to fixed assets at the newly leased and acquired centers.

Lease Termination Costs

Lease termination costs were $2.0 million in 2016 due to the termination of the Avon, Ohio operating lease in May 2016.

Interest Expense, Net

Interest expense was $3.4 million in 2016 and $3.0 million in 2015, an increase of $0.4 million. The increase was primarily attributable to higher debt balances in 2016 as a result of higher outstanding borrowings on the revolving credit facility from the purchase of Hutchinson and Clinton during the first quarter of 2016.

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Debt retirement costs

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

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

As a result of the above, continuing operations lost $5.0 million before income taxes for 2016 as compared to income of $2.5 million in 2015. The benefit for income taxes was $1.8 million for the nine months ended September 30, 2016, as compared to a provision of $1.0 million for the nine months ended September 30, 2015. The basic and diluted loss per common share from continuing operations were both $0.51 for 2016 as compared to both basic and diluted income per common share from continuing operations of $0.24 in 2015.

Liquidity and Capital Resources

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 provided by operating activities of continuing operations totaled $5.9 million in the nine months ended September 30, 2016, compared to $6.7 million in the same period of 2015.

Our cash expenditures related to professional liability claims of continuing operations were $2.8 million and $3.3 million for nine months ended September 30, 2016 and 2015, respectively. 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 $9.9 million and $8.1 million in 2016 and 2015, respectively. The increase is primarily attributable to the asset purchases of Hutchinson and Clinton in February 2016.

Financing activities of continuing operations provided cash of $6.5 million in 2016 primarily due to draws on the Company's revolving credit facility and the new debt associated with the Company's refinance in February 2016. In 2015, financing activities of continuing operations provided cash of $6.2 million primarily due to draws to fund the acquisition of the Glasgow nursing center.

Dividends

On October 27, 2016, the Board of Directors declared a quarterly dividend of $0.055 per common share payable to shareholders of record as of December 31, 2016, to be paid on January 13, 2017. 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.

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 and Tennessee, as well as the Company’s formerly operated Arkansas and West Virginia facilities, 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 $0.5 million or $1.0 million per medical incident with a sublimit per center of $1.0 million and total annual aggregate policy limits of $5.0 million. All other centers within the Company’s portfolio are covered through various commercial insurance policies which provide coverage limits of $1.0 million per claim and have sublimits of $3.0 million per center, with varying aggregate policy limits and deductibles. 

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As of September 30, 2016, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred, but unreported claims of $19.9 million. Our calculation of this estimated liability is based on an assumption that the Company will not incur a severely adverse judgment with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.

Capital Resources

As of September 30, 2016, we had $70.8 million of outstanding long-term debt and capital lease obligations. The $70.8 million total includes $0.3 million in capital lease obligations and $9.0 million currently outstanding on the revolving credit facility. The balance of the long-term debt is comprised of $61.5 million owed on our mortgage loan, which includes $59.2 million on the term loan facility and $2.3 million on the acquisition loan facility.

On February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") which modified the terms of the Original Mortgage Loan and the Original Revolver Agreements dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to $100.0 million allocated between a $72.5 million Mortgage Loan ("Amended Mortgage Loan") and a $27.5 million Revolver ("Amended Revolver"). The Amended Mortgage Loan consists of a $60 million term loan facility and a $12.5 million acquisition loan facility. Loan acquisition costs associated with the Amended Mortgage Loan and the Amended Revolver were capitalized in the amount of $1.8 million and are being amortized over the five-year term of the agreements. Additionally, the Glasgow term loan balance was consolidated into the new Credit Agreement.

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72.5 million with a five-year maturity through February 26, 2021, and a $27.5 million Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities are based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30.0 million. As of September 30, 2016, the interest rate related to the Amended Mortgage Loan was 4.52%. The Amended Mortgage Loan is secured by seventeen 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 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

As of September 30, 2016, the Company had $9.0 million borrowings outstanding under the Amended Revolver compared to $12.9 million outstanding as of December 31, 2015. 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 the Amended Revolver are 3.00% of the amount outstanding. The Company has ten letters of credit with a total value of $7.9 million outstanding as of September 30, 2016. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $27.5 million, the balance available for borrowing under the Amended Revolver is $7.0 million at September 30, 2016.

On October 3, 2016, the Company executed an Amendment to the Amended and Restated Revolving Loan and Security Agreement, which modifies the terms of the Amended Revolver. The Amendment increases the Company's maximum revolving facility to $52,250,000; provided that the maximum revolving facility be reduced to $42,250,000 on August 1, 2017. The Amendment amends certain provisions to our financial covenants including the following: the minimum Adjusted EBITDA shall not be less than $8,500,000 for the quarter ending September 30, 2016; $9,500,000 for the quarter ending December 31, 2016; $10,000,000 for the quarter ending March 31, 2017; $11,500,000 for the quarter ending June 30, 2017; and $13,000,000 for the quarter ending September 30, 2017 and for each quarter thereafter. Refer to Note 10 to the interim consolidated financial statements for further discussion.

Our lending agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. We are in compliance with all such covenants at September 30, 2016.

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Our calculated compliance with financial covenants is presented below:

	Requirement	Level at September 30, 2016
Minimum fixed charge coverage ratio	1.00:1.00	1.04:1.00
Minimum adjusted EBITDA	$8.5 million	$8.7 million
EBITDAR (mortgaged centers)	$10.0 million	$13.8 million
Current ratio (as defined in agreement)	1.00:1.00	1.34:1.00

As part of the debt agreements entered into in February 2016, we amended our interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date and maturity date as the Amended Mortgage Loan, and carries an initial notional amount of $30.0 million. The interest rate swap agreement requires us to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.

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 $50.2 million at September 30, 2016 compared to $52.0 million at December 31, 2015, representing approximately 47 days and 45 days revenue in accounts receivable, respectively. The decrease in accounts receivable is due to an increase in Medicaid collections from the centers undergoing the change in ownership process.

The allowance for bad debt was $10.2 million at September 30, 2016 as compared to $8.2 million at December 31, 2015. 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 ten letters of credit outstanding with an aggregate value of approximately $7.9 million as of September 30, 2016, 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.

Forward-Looking Statements

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

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adopted federal health care reform or any future health care reform, any increases in the cost of borrowing under our credit agreements, our ability to extend or replace our current credit facility, our ability to comply with covenants contained in those credit agreements, the outcome of professional liability lawsuits and claims, our ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional liability expense, the impact of future licensing surveys, the outcome of proceedings alleging violations of state or Federal False Claims Acts, laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA and laws governing reimbursement from government payors, impacts associated with the implementation of our electronic medical records plan, the costs of investing in our business initiatives and development, our ability to control costs, changes to our valuation of deferred tax assets, changes in occupancy rates in our centers, changing economic and competitive conditions, changes in anticipated revenue and cost growth, changes in the anticipated results of operations, the effect of changes in accounting policies as well as others. Investors also should refer to the risks identified in this “Management's Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Part I. Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2015, 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 September 30, 2016, we had outstanding borrowings of approximately $70.5 million, $40.8 million of which was subject to variable interest rates. In connection with our February 2016 financing agreement, we entered into an interest rate swap with an initial notional amount of $30.0 million to mitigate the floating interest rate risk of a portion of such borrowing. In the event that interest rates were to change 1%, the impact on future pre-tax cash flows would be approximately $0.4 million 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 September 30, 2016. 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 September 30, 2016, 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 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, negligence, violations of false claims acts, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our facility. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of September 30, 2016, we are engaged in 62 professional liability lawsuits. Ten lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

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

In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the two facilities that were the subject of the original CID. In connection with this matter, between July 2013 and early February 2016, the Company has received three civil investigative demands (a form of subpoena) for documents and information relating to our practices and policies for rehabilitation, and other services, our preadmission evaluation forms ("PAEs") required by TennCare and our Pre-Admission Screening and Resident Reviews ("PASRRs"). We have responded to those requests. The DOJ has also

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issued CID’s for testimony from current and former employees of the Company. The DOJ’s civil investigation of the Company’s practices and policies for rehabilitation now covers all of the Company’s facilities, but thus far only documents from six of our facilities have been requested.

In June 2016, the Company received an authorized investigative demand (a form of subpoena) for documents in connection with a criminal investigation by the DOJ related to our practices with respect to PAEs and PASRRs, and the Company has provided documents responsive to this subpoena. The Company cannot predict the outcome of these investigations or any possible related proceedings, and the outcome could have a materially adverse effect on the Company, including the imposition of damages, criminal charges, fines, penalties and/or a corporate integrity agreement. The Company is committed to provide caring and professional services to its patients and residents in compliance with applicable laws and regulations.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Facility”). The complaint alleges that the defendants breached their statutory and contractual obligations to the patients of the Facility over the five-year period prior to the filing of the complaints. On June 4, 2015, the Supreme Court of Arkansas issued a ruling in a lawsuit against another provider that may impact this action. In that case, the Court ruled that a lawsuit against several facilities formerly operated by Golden Living could proceed as a class action. The lawsuit against the Company remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

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

ITEM 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.
November 3, 2016
	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

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Exhibit Number	Description of Exhibits
3.1	Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-76150 on Form S-1).
3.2	Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006).
3.3	Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-76150 on Form S-1).
3.4	Bylaw Amendment adopted November 5, 2007 (incorporated by reference to Exhibit 3.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2007).
3.5	Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company’s Form 8-A filed March 30, 1995).
3.6	Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2001).
3.7	Certificate of Ownership and Merger of Diversicare Healthcare Services, Inc. with and into Advocat Inc. (incorporated by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed March 14, 2013).
3.8	Amendment to Certificate of Incorporation dated June 9, 2016 (incorporated by reference to Exhibit 3.8 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).
4.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1).
10.1	First Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated August 3, 2016 (incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).
10.2	First Amendment to Second Amended and Restated Term Loan and Security Agreement dated August 3, 2016 (incorporated by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016).
10.3	Second Amendment to Third Amended and Restated Revolving Loan and Security Agreement dated October 3, 2016.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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EX-10.3

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

THIS CONSENT AND SECOND AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT (this “Amendment”) dated as of October 1, 2016, and effective as of October 3, 2016, 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 LEASING COMPANY III, LLC, and each of the limited liability companies identified on Appendix 1 attached hereto, 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 Third Amended and Restated Revolving Loan and Security Agreement dated as of February 26, 2016 (as the same has been, and may hereafter be, amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”; all capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement as amended by this Amendment); 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 Advocat Finance, Inc. (“AFI”) of Diversicare Leasing Company III, LLC, a Delaware limited liability company (“DLC III”) and a wholly-owned subsidiary of AFI;

(b)the formation by DLC III, of each of the limited liability companies identified on Appendix 1 hereto, each a wholly-owned subsidiary of DLC III; and

(c)the amendment and restatement of the Golden Living Lease on or about November 1, 2016, which amendment and restatement shall be in form and substance reasonably satisfactory to Administrative Agent, as so long as such Golden Living Lease is subject to the Golden Living Intercreditor Agreement (AL).

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 a 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 1.1(a) (Borrowers), Schedule 1.1(f) (Facilities, Locations, Real Property, Operators, Owners, Leases), 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.

4.Amendments to Loan Agreement. 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, Borrower, Administrative Agent and Lenders hereby amend the Loan Agreement as follows:

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

“Carthage Facility” means that certain skilled nursing and/or assisted living facility located in Carthage, Mississippi and operated by Diversicare of Carthage, LLC as identified on Schedule 1.1(f) attached hereto.

“Carthage Lease” means that certain Lease Agreement between Leake County Nursing Home, Ltd., as Lessor, and Diversicare of Carthage, LLC, as Lessee, with respect to the Carthage Facility, originally dated October 1, 1977, the leasehold interest of the lessee thereunder being assigned to and assumed by Diversicare of Carthage, LLC by assignment from Beverly Enterprises-Mississippi, Inc. dated as of October 1, 2016, as the same may be from time to time amended and restated in conformance with Section 9.16 hereof.

“Carthage Lease Documents” means, collectively, the Carthage Lease and 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 hereof.

“DLC III” means Diversicare Leasing Company III, a Delaware limited liability company and a wholly-owned subsidiary of Advocat Finance, Inc.

“DLC III (AL) Subsidiaries” means Diversicare of Arab, LLC, Diversicare of Boaz, LLC, Diversicare of Foley, LLC, Diversicare of Hueytown, LLC, Diversicare of Lanett, LLC, Diversicare of Bessemer, LLC, Diversicare of Montgomery, LLC, Diversicare of Oneonta, LLC, Diversicare of Oxford, LLC, Diversicare of Pell City, LLC, Diversicare of Riverchase, LLC, and Diversicare of Winfield, LLC, each a Delaware limited liability company and a wholly-owned subsidiary of DLC III.

“DLC III (MS) Subsidiaries” means Diversicare of Amory, LLC, Diversicare of Batesville, LLC, Diversicare of Brookhaven, LLC, Diversicare of Carthage, LLC, Diversicare of Eupora, LLC, Diversicare of Meridian, LLC, Diversicare of Ripley, LLC, Diversicare of Southaven, LLC, Diversicare of Tupelo, LLC, and Diversicare of Tylertown, LLC, each a Delaware limited liability company and a wholly-owned subsidiary of DLC III.

“DLC III Subsidiaries” means, collectively, the DLC III (MS) Subsidiaries and the DLC III (AL) Subsidiaries.

“Golden Living (AL) Facilities” means those certain skilled nursing and/or assisted living facilities identified on Schedule 1.1(f) attached hereto as the “Golden Living (AL) Facilities”, which are operated by DLC III (AL) Subsidiaries.

“Golden Living (AL) Lessors” means, collectively, GPH Arab, LLC, GPH Boaz, LLC, GPH Foley, LLC, GPH Hueytown, LLC, GPH Lanett, LLC, GPH Bessemer, LLC, GPH Montgomery, LLC, GPH Oneonta, LLC, GPH Oxford, LLC, GPH Pell City, LLC, GPH Riverchase, LLC, and GPH Winfield, LLC, as lessors under the Golden Living Lease.

“Golden Living (MS) Facilities” means those certain skilled nursing and/or assisted living facilities identified on Schedule 1.1(f) attached hereto as the “Golden Living (MS) Facilities”, which are operated by certain of the DLC III (MS) Subsidiaries.

“Golden Living (MS) Lessors” means, collectively, GPH Amory LLC, GPH Batesville LLC, GPH Brookhaven LLC, GPH Eupora LLC, GPH Ripley LLC, GPH Southaven LLC, GPH Tupelo LLC, and GPH Tylertown LLC, as lessors under the Golden Living Lease.

“Golden Living Facilities” means, collectively, the Golden Living (AL) Facilities and the Golden Living (MS) Facilities.

“Golden Living Intercreditor Agreement (AL)” means a Subordination and Intercreditor Agreement made by and among Administrative Agent (on behalf of itself and the Lenders), the DLC III (AL) Subsidiaries and the Golden Living (AL) Lessors in connection with the Golden Living Lease in form and substance reasonably satisfactory to Administrative Agent. For further clarity, the Golden Living Intercreditor Agreement (AL) may include an amended and restated Golden Living Intercreditor Agreement (MS) that includes certain of the DLC III (MS) Subsidiaries and the DLC III (AL) Subsidiaries, the Golden Living (AL) Lessors and the Golden Living (MS) Lessors.

“Golden Living Intercreditor Agreement (MS)” means that certain Subordination and Intercreditor Agreement made by and among Administrative Agent (on behalf of itself and the Lenders), certain of the DLC III (MS) Subsidiaries and the Golden Living (MS) Lessors executed as of October 1, 2016, in connection with the Golden Living Lease.

“Golden Living Lease” means that certain Master Lease executed by and among DLC III (MS) Subsidiaries and Golden Living (MS) Lessors with respect to the Golden Living (MS) Facilities, as the same may be amended and restated on or about November 1, 2016 to include the DLC III (AL) Subsidiaries and the Golden Living (AL) Lessors with respect to the Golden Living (AL) Facilities, as the same may be further amended or modified in conformity with Section 9.16 hereof.

“Golden Living Lease Documents” means, collectively, the Golden Living Lease and 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 hereof.

“Golden Living Lessor Security Interest” means, collectively, the security interests of (a) the applicable Golden Living (AL) Lessor under the Golden Living Lease in certain assets of the applicable Borrower, the rights pertaining to and priorities of which are as specified in the Golden Living Intercreditor Agreement (AL) and (b) the applicable Golden Living (MS) Lessor under the Golden Living Lease in certain assets of the applicable Borrower, the rights pertaining to and priorities of which are as specified in the Golden Living Intercreditor Agreement (MS).

“Meridian Facility” means that certain skilled nursing and/or assisted living facility located in Meridian, Mississippi and operated by Diversicare of Meridian as identified on Schedule 1.1(f) attached hereto.

“Meridian Lease” means that certain Lease Agreement between Broadmoor Nursing Home Ltd., as Lessor, and Diversicare of Meridian, LLC, as Lessee, with respect to the Meridian Facility, originally dated October 1, 1977, the leasehold interest of the lessee thereunder being assigned to and assumed by Diversicare of Meridian, LLC by assignment from Beverly Enterprises-Mississippi, Inc. dated as of October 1, 2016, and amended by First Amendment to Lease Agreement dated as of October 1, 2016, as the same may be from time to time amended and restated in conformance with Section 9.16 hereof.

“Meridian Lease Documents” means, collectively, the Meridian Lease and 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 hereof.

(b)The definition of “Change of Control” in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:

“Change of Control” means the occurrence of any one or more of the following events or conditions, except as the result of a merger or consolidation with, or merger into, a Borrower (and such Borrower is the surviving entity) or the dissolution of an inactive subsidiary as permitted in accordance with Section 9.3: (a) Guarantor shall at any time after the Closing Date have control and voting power over less than all of the issued and outstanding Stock of Diversicare Management Services Co., (b) Diversicare Management Services Co. shall at any time after the Closing Date have control and voting power over less than all of the issued and outstanding Stock of Advocat Finance, Inc., (c) Advocat Finance, Inc. shall at any time after the Closing Date have control and voting power over less than all of the issued and outstanding Stock of DLC, DLC II, DLC III, Diversicare Holding Company, LLC and Diversicare Property Co., LLC, (d) Diversicare Holding Company, LLC shall at any time after the Closing Date have control and voting power over less than all of the issued and outstanding Stock of Diversicare Kansas, LLC, Diversicare of Glasgow, LLC and Diversicare of Fulton, LLC, (e) Diversicare Kansas, LLC shall at any time after the Closing Date have control and voting power over less than all of the issued and outstanding Stock of the Kansas Opco Borrowers, (f) Diversicare Property Co., LLC shall at any time after the Closing Date have control and voting power over less than all of the issued and outstanding Stock of the Propco Borrowers, (g) DLC II shall at any time after the Closing Date have voting control over less than all of the issued and outstanding Stock of the DLC II Subsidiaries, (h) Diversicare Texas I, LLC shall at any time after the Closing Date have voting control over less than all of the issued and outstanding Stock of the OHI Entities (other than Diversicare Texas I, LLC), (i) Senior Care Florida Leasing, LLC shall at any time after the Closing Date have voting control over less than all of the issued and outstanding Stock of the Senior Care Subsidiaries, (j) DLC III shall at any time after July 1, 2016, have voting control over less than all of the issued and outstanding Stock of the DLC III Subsidiaries, (k) DLC shall at any time after the Closing Date have control and voting power, directly or indirectly, over less than all of the issued and outstanding Stock of any other Borrower not mentioned in (a) through (j) above or (l) Guarantor shall cease to directly or indirectly possess the right to elect (through contract, ownership of voting securities or otherwise) at all times a majority of the board of directors or managers (or similar governing body) of each Borrower and Pledgor and to direct the management policies and decisions of each Borrower and Pledgor.

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

“Commercial Leases” means the collective reference to all Leases other than (a) admission agreements or residency agreements or (b) any Lease for real property solely used for office space with a term not to exceed five (5) years and for 5,000 square feet or less.

(d)The definition of “Eligible Accounts” in Section 1.1 of the Loan Agreement is hereby amended by amending and restating subsection (2) at the end of subsection (h) thereof as follows:

(2)    notwithstanding the ninety (90) day periods prescribed by subsection (a) above, (i) solely for the nine (9) month period beginning November 1, 2016 through and including August 1, 2017 with respect to the Accounts of Borrower generated by the operations of the Golden Living (AL) Facilities, the Golden Living (MS) Facilities, the Carthage Facility and/or the Meridian Facility and (ii) solely for the six (6) month period beginning on the commencement date of operations by a Borrower with respect to the Accounts generated by the operations of a Facility or Facilities acquired or leased by such Borrower after the date of this Agreement (other than the Golden Living (AL) Facilities and the Golden Living (MS) Facilities, each a “New Facility”) through and including the date that is six (6) months after such commencement date, 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;

(e)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), (f), (o), (p), (q) and (r) in this Amendment.

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

“Indiana IGT Arrangement” means the Indiana Inter-Governmental Transfer Program entered into by a Borrower after the date of this Agreement for a Facility or Facilities located in the State of Indiana with respect to the Medicaid reimbursement for such Facility or Facilities, as permitted in accordance with Section 9.6 hereof.

(g)The definition of “Intercreditor Agreements” in Section 1.1 of the Loan Agreement is hereby modified by also inserting a reference to the Golden Living Intercreditor Agreement (AL) and the Golden Living Intercreditor Agreement (MS).

(h)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 Fifty-Two Million Two Hundred Fifty Thousand and No/100 Dollars ($52,250,000.00); provided, however, that the Maximum Revolving Facility shall be automatically and permanently reduced to Forty-Two Million Two Hundred Fifty Thousand and No/100 Dollars ($42,250,000.00) (with such reduction to be applied as indicated on Annex A attached hereto), on August 1, 2017 without any further action by Administrative Agent, any Lender or any Borrower.

(i)The definition of “OHI Entities” in Section 1.1 of the Loan Agreement is hereby amended by deleting the phrase “, and Sterling Health Care Management Inc., a Kentucky corp” contained therein.

(j)The definition of “Restricted Agreements” in Section 1.1 of the Loan Agreement shall hereafter be deemed to also include the Golden Living Lease Documents, Carthage Lease Documents and Meridian Lease Documents.

(k)The phrase “Subject only to the Omega Security Interests and the Aviv Lessor Security Interests (the priorities with respect to each of which shall be as set forth in the Omega Intercreditor Agreement),” contained in the first sentence of Section 6.1 of the Loan Agreement is hereby amended and restated in its entirety as follows:

Subject only to the Omega Security Interests and the Aviv Lessor Security Interests (the priorities with respect to each of which shall be as set forth in the Omega Intercreditor Agreement) and the Golden Living Lessor Security Interests (the priorities with respect to each of which shall be as set forth in the Golden Living Intercreditor Agreement (AL) and the Golden Living Intercreditor Agreement (MS), as applicable),

(l)Section 8.1(b) of the Loan Agreement is hereby amended and restated in its entirety as follows:

(b)    Borrowing Base Certificates. On or before the fifteenth (15th) day after the end of each calendar month, four (4) borrowing base certificates, one for each of (i) the OHI Entities and DLC (exclusive of the Martin, Tennessee Facility operated by DLC), (ii) the DLC III (AL) Subsidiaries and the DLC III (MS) Subsidiaries (other than Diversicare of Carthage, LLC and Diversicare of Meridian, LLC), (iii) all Borrowers other than the OHI Entities, DLC (but inclusive of the Martin, Tennessee Facility operated by DLC), the DLC III (AL) Subsidiaries and the DLC III (MS) Subsidiaries (other than Diversicare of Carthage, LLC and Diversicare of Meridian, LLC), and (iv) for all Borrowers on a consolidated basis, each signed on behalf of such Borrower (as applicable) by a Duly Authorized Officer, each of which must be in form, scope and substance reasonably satisfactory to Administrative Agent and the Required Lenders.

(m)Section 9.1(viii) of the Loan Agreement is hereby amended and restated in its entirety as follows:

(viii) Liens in favor of (1) the Aviv Lessor, Omega and the Omega Senior Lessor, subject in all cases to the provisions of the Omega Intercreditor Agreement, (2) the Golden Living (AL) Lessors, subject to the provisions of the Golden Living Intercreditor Agreement (AL), and (3) the Golden Living (MS) Lessors, subject to the provisions of the Golden Living Intercreditor Agreement (MS);

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

(a)    The Borrower shall not make any payment, directly or indirectly, to (x) the Aviv Lessor or Omega (or any Affiliate or Subsidiary thereof) in contravention of the Omega Intercreditor Agreement or (y) to the Golden Living (AL) Lessors or the Golden Living (MS) Lessors (or any Affiliate or Subsidiary thereof) in contravention of the Golden Living Intercreditor Agreement (AL) or the Golden Living Intercreditor Agreement (MS), as applicable.

(o)Section 9.12(b) of the Loan Agreement is hereby amended and restated in its entirety as follows:

(b)    Minimum Adjusted EBITDA. The Parent and Borrowers, taken as a whole, shall not permit their Adjusted EBITDA to be less than (i) $8,500,000 for the Fiscal Quarter ending September 30, 2016, (ii) $9,500,000 for the Fiscal Quarter ending December 31, 2016, (iii) $10,000,000 for the Fiscal Quarter ending March 31, 2017, (iv) $11,500,000 for the Fiscal Quarter ending June 30, 2017, and (v) $13,000,000 for the Fiscal Quarter ending September 30, 2017 and for each Fiscal Quarter thereafter, each measured on the last day of the applicable Fiscal Quarter on a trailing twelve (12) month basis.

(p)The first sentence of Section 12.22 of the Loan Agreement is hereby amended and restated in its entirety as follows:

Borrower shall not disclose the contents of this Agreement and the other Financing Agreements to any third party (including, without limitation, any financial institution or intermediary), unless required by applicable Laws or by any subpoena, judicial order or similar legal process, without Administrative Agent’s prior written consent, other than to Borrower’s officers, lawyers and other professional advisors on a need-to-know basis, Omega, the Aviv Lessor, the Golden Living (AL) Lessors, the Golden Living (MS) Lessors and in connection with any filings required to be made under any applicable federal or state securities laws or regulations (“Securities Laws”).

(q)Annex A (Lenders, Pro Rata Shares/Dollar Allocations, and Notice Information) to the Loan Agreement is hereby amended and restated and replaced with Annex A Attached hereto.

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 and the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith, including those identified in Sections 7(c), (d), (e), (f), (o), (p), (q) and (r)).

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

(a)Each of the representations and warranties of each Borrower (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 1.1(a) (as revised pursuant to Section 3 hereof);

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

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

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

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

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 and Lenders;

(c)receipt by Administrative Agent of duly executed signature pages to (collectively, the “Note Modifications”) the modifications to promissory notes dated as of the date hereof by Borrower in favor of each Lender;

(d)Administrative Agent shall have received a duly executed Reaffirmation of Second Amended and Restated Guaranty in the form attached hereto;

(e)receipt by Administrative Agent of duly executed signature pages to the First Amendment to Second Amended and Restated Pledge Agreement dated as of the date hereof, among AFI, DLC III and Administrative Agent (the “First AFI Pledge Amendment”);

(f)receipt by Administrative Agent of duly executed signature pages to the Pledge Agreement dated as of the date hereof, among DLC III, the DLC III Subsidiaries and Administrative Agent (the “DLC III Pledge Agreement”)

(g)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;

(h)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;

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

(j)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 States of Alabama and Mississippi, as applicable (as of a recent date);

(k)receipt by Administrative Agent of an opinion of Bass Berry & Sims, PLC, the legal counsel to Borrower and Guarantor, in form and substance reasonably satisfactory to Administrative Agent;

(l)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);

(m)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;

(n)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;

(o)receipt of a duly executed Fourth Amendment to the Blocked Account Agreement, in form and substance reasonably acceptable to Administrative Agent;

(p)receipt by Administrative Agent of duly executed signature pages to the Golden Living Intercreditor Agreement (AL) from Golden Living (AL) Lessors and the DLC III (AL) Subsidiaries;

(q)receipt by Administrative Agent of duly executed signature pages to the Golden Living Intercreditor Agreement (MS) from Golden Living (MS) Lessors and the DLC III (MS) Subsidiaries;

(r)receipt by Administrative Agent of duly executed signature pages to that certain fee letter dated as of September 30, 2016, by Borrower in favor of Administrative Agent, and receipt by Administrative Agent in immediately available funds of all fees payable thereunder;

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

(t)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;

(u)receipt by Administrative Agent of a true, correct and complete copy of the Golden Living Lease Documents solely with respect to the Golden Living (MS) Facilities, the Carthage Lease Documents and the Meridian Lease Documents available as of the date hereof, and each certified by a Duly Authorized Officer of New Borrower;

(v)receipt by Administrative Agent of a duly signed and completed perfection certificate with respect to New Borrower;

(w)UCC Amendment Statement naming AFI as debtor and Administrative Agent as secured party with respect to the equity of DLC III pledged pursuant to the First AFI Pledge Amendment shall have been filed in all jurisdictions that Administrative Agent deems necessary or advisable (including the Delaware Secretary of State);

(x)UCC Financing Statement naming DLC III as debtor and Administrative Agent as secured party with respect to the equity of each of the limited liability companies identified on Appendix 1 hereto pledged pursuant to the DLC III Pledge Agreement shall have been filed in all jurisdictions that Administrative Agent deems necessary or advisable (including the Delaware Secretary of State);

(y)receipt by Administrative Agent of copies of resolutions of the governing body of AFI authorizing the execution, delivery and performance by AFI of the First AFI Pledge Amendment, certified by a Duly Authorized Officer of AFI;

(z)receipt by Administrative Agent of copies of resolutions of the governing body of DLC III authorizing the execution, delivery and performance by DLC III of the DLC III Pledge Agreement, certified by a Duly Authorized Officer of DLC III;

(aa)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;

(bb)receipt by Administrative Agent of copies of the supplemented Schedule 1.1(a) (Borrowers), Schedule 1.1(f) (Facilities, Locations, Real Property, Operators, Owners, Leases), Schedule 7.8 (Names), Schedule 7.12 (Organizational Chart), Schedule 7.33 (Capitalization) and Schedule 7.36 (Commercial Leases) of the Loan Agreement;

(cc)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; and

(dd)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; Additional Agreements and Covenants; Etc.

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

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

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

(d)    In no event shall Administrative Agent’s execution and delivery of this Amendment establish a course of dealing among Administrative Agent, any Borrower, pledgor or Guarantor or any other obligor, or in any other way obligate Administrative Agent to hereafter provide any amendments or modifications or, if at any time applicable, consents or waivers with respect to the Loan Agreement or any other Financing Agreement. The terms and provisions of this Amendment shall be limited precisely as written and shall not be deemed (x) to be a consent to any amendment or modification of any other term or condition of the Loan Agreement or of any of the Financing Agreements (except as expressly provided herein or in any of the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith, including those identified in Sections 7(c), (d), (e), (f), (o), (p), (q) and (r)); 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 any of the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith, including those identified in Sections 7(c), (d), (e), (f), (o), (p), (q) and (r)), 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 true, correct and complete copies of the applicable Licenses for the Golden Living (AL) Facilities, the Golden Living (MS) Facilities, the Carthage Facility and the Meridian Facility for New Borrower promptly upon receipt.

(g)    Borrower shall deliver to Administrative Agent when available true, correct and complete copies of the Golden Living Lease Documents relating to the Golden Living (AL) Facilities promptly upon effectiveness of the same.

(h)    Each Lender hereby authorizes Administrative Agent to execute the Golden Living Intercreditor Agreement (AL) and the Golden Living Intercreditor Agreement (MS) on behalf of each Lender.

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

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

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

10.Supplementation of Schedule 1.1(c) to Term Loan Agreement. Certain of the Borrowers party hereto are also Affiliated Term Loan Borrowers under the Term Loan Agreement. Each of the Administrative Agent and Lenders party hereto are also the Administrative Agent and Lenders (each as defined in the Term Loan Agreement) under the Term Loan Agreement. Such parties hereby supplement Schedule 1.1(c) to the Term Loan Agreement with the information contained on the Supplement to Schedule 1.1(c) to the Second Amended and Restated Term Loan and Security Agreement attached hereto.

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

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

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 or any of the other instruments, agreements, certificates and documents required to be executed and delivered in connection herewith, including those identified in Sections 7(c), (d), (e), (f), (o), (p), (q) and (r).

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 that would require the application of any other laws.

[Signature Page Follows]

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

BORROWER: ORIGINAL BORROWER: ADVOCAT FINANCE, INC. DIVERSICARE MANAGEMENT SERVICES CO. DIVERSICARE LEASING CORP. STERLING HEALTH CARE MANAGEMENT, INC. DIVERSICARE TEXAS I, LLC DIVERSICARE HOLDING COMPANY, LLC DIVERSICARE KANSAS, LLC DIVERSICARE LEASING COMPANY II, LLC DIVERSICARE PROPERTY CO., LLC
By:	/s/ James R. McKnight, Jr.
Name:		James R. McKnight, Jr.
Its:		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

Signature Page to Consent and Second Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

SENIOR CARE FLORIDA LEASING, LLC DIVERSICARE AFTON OAKS, LLC DIVERSICARE BRIARCLIFF, LLC DIVERSICARE CHISOLM, LLC DIVERSICARE HARTFORD, LLC DIVERSICARE HILLCREST, LLC DIVERSICARE LAMPASAS, LLC DIVERSICARE PINEDALE, LLC DIVERSICARE WINDSOR HOUSE, LLC DIVERSICARE YORKTOWN, LLC DIVERSICARE ROSE TERRACE, LLC DIVERSICARE THERAPY SERVICES, LLC DIVERSICARE CLINTON, LLC DIVERSICARE HIGHLANDS, LLC
BY:	DIVERSICARE LEASING CORP., its sole member
	By:	/s/ James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		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 OF CHANUTE, LLC DIVERSICARE OF COUNCIL GROVE, LLC DIVERSICARE OF HAYSVILLE, LLC DIVERSICARE OF SEDGWICK, LLC DIVERSICARE OF HUTCHINSON, LLC DIVERSICARE OF LARNED, LLC
BY:	DIVERSICARE KANSAS, LLC its sole member
	By:	/s/ James R. McKnight, Jr.
	Name:		James R. McKnight, Jr.
	Its:		Executive Vice President & 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

DIVERSICARE OF BIG SPRINGS, LLC

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
DIVERSICARE OF GREENVILLE, LLC

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

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

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

DIVERSICARE AFTON OAKS PROPERTY, LLC

DIVERSICARE BRIARCLIFF PROPERTY, LLC

DIVERSICARE CHANUTE PROPERTY, LLC

DIVERSICARE CHISOLM PROPERTY, LLC

DIVERSICARE COUNCIL GROVE PROPERTY, LLC

DIVERSICARE HAYSVILLE PROPERTY, LLC

DIVERSICARE HARTFORD PROPERTY, LLC

DIVERSICARE HILLCREST PROPERTY, LLC

DIVERSICARE HUTCHINSON PROPERTY, LLC

DIVERSICARE LAMPASAS PROPERTY, LLC

DIVERSICARE LARNED PROPERTY, LLC

DIVERSICARE SEDGWICK PROPERTY, LLC

DIVERSICARE WINDSOR HOUSE PROPERTY, LLC

DIVERSICARE YORKTOWN PROPERTY, LLC

DIVERSICARE GLASGOW PROPERTY, LLC

DIVERSICARE CLINTON PROPERTY, LLC

DIVERSICARE FULTON PROPERTY, LLC

By: DIVERSICARE PROPERTY CO., LLC, its sole member

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

Name: James R. McKnight, Jr.

Its: Executive Vice President & Chief

Financial Officer

DIVERSICARE OF GLASGOW, LLC

DIVERSICARE OF FULTON, LLC

By: DIVERSICARE HOLDING COMPANY, LLC, its sole member

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

Name: James R. McKnight, Jr.

Its: Executive Vice President & Chief

Financial Officer

NEW BORROWER:

DIVERSICARE LEASING COMPANY III, LLC

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

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

DIVERSICARE OF ARAB, LLC

DIVERSICARE OF BOAZ, LLC

DIVERSICARE OF FOLEY, LLC

DIVERSICARE OF HUEYTOWN, LLC

DIVERSICARE OF LANETT, LLC

DIVERSICARE OF BESSEMER, LLC

DIVERSICARE OF MONTGOMERY, LLC

DIVERSICARE OF ONEONTA, LLC

DIVERSICARE OF OXFORD, LLC

DIVERSICARE OF PELL CITY, LLC

DIVERSICARE OF RIVERCHASE, LLC

DIVERSICARE OF WINFIELD, LLC

DIVERSICARE OF AMORY, LLC

DIVERSICARE OF BATESVILLE, LLC

DIVERSICARE OF BROOKHAVEN, LLC

DIVERSICARE OF CARTHAGE, LLC

DIVERSICARE OF EUPORA, LLC

DIVERSICARE OF MERIDIAN, LLC

DIVERSICARE OF RIPLEY, LLC

DIVERSICARE OF SOUTHAVEN, LLC

DIVERSICARE OF TUPELO, LLC

DIVERSICARE OF TYLERTOWN, LLC

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

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

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

Acknowledged and Agreed: DIVERSICARE HEALTHCARE SERVICES, 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 BANK N.A.
By: /s/ Edward Shuster__________
Name:	Edward Shuster
Its:	Director

LENDER: OPUS BANK, a California commercial bank
By: /s/ Bryan Nance___________
Name:	Bryan Nance
Its:	VP, Portfolio Manager Healthcare Banking

LENDER: FRANKLIN SYNERGY BANK
By: /s/ Lisa Fletcher____________
Name:	Lisa Fletcher
Its:	Senior Vice President

REAFFIRMATION OF SECOND AMENDED AND RESTATED GUARANTY

Dated as of: October 3, 2016

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 Second Amended and Restated Guaranty dated as of February 26, 2016 made in favor of Administrative Agent (as amended or modified, “Guaranty”), remains in full force and effect and is hereby ratified and confirmed in all respects, including with regard to the Third Amended and Restated Revolving Loan and Security Agreement dated as of February 26, 2016, as amended by the foregoing Consent and Second Amendment to Third Amended and Restated Revolving Loan and Security Agreement (“Amendment”), and each reference to the term “Borrower” in the Guaranty shall also include New Borrower (as defined in the Amendment) and each reference to the “Loan Agreement” shall refer to the Loan Agreement as amended by the Amendment; (ii) represents and warrants to Administrative Agent, which representations and warranties shall survive the execution and delivery hereof, that Guarantor’s representations and warranties contained in the Guaranty are true and correct as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations expressly related solely to an earlier date, in which case such representations were true and correct on and as of such earlier date (and except for the representations in Section 10(b) thereof which were true and correct on and as of the date when made); (iii) agrees and acknowledges that such ratification and confirmation is not a condition to the continued effectiveness of the Amendment or the Guaranty; and (iv) agrees that neither such ratification and confirmation, nor Administrative Agent’s solicitation of such ratification and confirmation, constitutes a course of dealing giving rise to any obligation or condition requiring a similar or any other ratification or confirmation from the undersigned with respect to subsequent amendments or modifications, if any, to the Loan Agreement, as amended by the Amendment or any other Financing Agreement (as defined in the Loan Agreement, as amended by the Amendment). The execution, delivery and effectiveness of this instrument shall not operate as a waiver of any right, power or remedy of Administrative Agent under or pursuant to the Guaranty. Guarantor acknowledges and agrees that Guarantor has received and reviewed a fully-executed copy of the Amendment (and any other instrument, document or agreement executed or delivered in connection therewith) and understands the contents thereof. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes. This instrument shall be governed by and construed and enforced in accordance with the internal laws of the State of Illinois, without regard to conflict of law principles that would require the application of any other laws.

[Signature Page Follows]

DIVERSICARE HEALTHCARE SERVICES, INC.

By: /s/ Kelly J. Gill            

Name:    Kelly J. Gill

Its:    President and Chief Executive Officer

APPENDIX 1

Subsidiaries of Diversicare Leasing Company III, LLC

1.	Diversicare of Arab, LLC
2.	Diversicare of Boaz, LLC
3.	Diversicare of Foley, LLC
4.	Diversicare of Hueytown, LLC
5.	Diversicare of Lanett, LLC
6.	Diversicare of Bessemer, LLC
7.	Diversicare of Montgomery, LLC
8.	Diversicare of Oneonta, LLC
9.	Diversicare of Oxford, LLC
10.	Diversicare of Pell City, LLC
11.	Diversicare of Riverchase, LLC
12.	Diversicare of Winfield, LLC
13.	Diversicare of Amory, LLC
14.	Diversicare of Batesville, LLC
15.	Diversicare of Brookhaven, LLC
16.	Diversicare of Carthage, LLC
17.	Diversicare of Eupora, LLC
18.	Diversicare of Meridian, LLC
19.	Diversicare of Ripley, LLC
20.	Diversicare of Southaven, LLC
21.	Diversicare of Tupelo, LLC
22.	Diversicare of Tylertown, LLC

SCHEDULE 1.1(a)
to Third Amended and Restated Revolving Loan and Security Agreement
(Second Amendment)

BORROWERS

	Name	State of Incorporation or Formation	Principal Place of Business and Chief Executive Office	Organizational Number
1.	Diversicare Leasing Company III, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6080735
2.	Diversicare of Arab, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084416
3.	Diversicare of Boaz, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084424
4.	Diversicare of Foley, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084437
5.	Diversicare of Hueytown, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084440
6.	Diversicare of Lanett, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084441
7.	Diversicare of Bessemer, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084422
8.	Diversicare of Montgomery, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084445
9.	Diversicare of Oneonta, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084447
10.	Diversicare of Oxford, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084453
11.	Diversicare of Pell City, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084456
12.	Diversicare of Riverchase, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084464
13.	Diversicare of Winfield, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084498
14.	Diversicare of Amory, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084418
15.	Diversicare of Batesville, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084421
16.	Diversicare of Brookhaven, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6080735
17.	Diversicare of Carthage, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084416
18.	Diversicare of Eupora, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084424
19.	Diversicare of Meridian, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084437
20.	Diversicare of Ripley, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084440
21.	Diversicare of Southaven, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084441
22.	Diversicare of Tupelo, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084422
23.	Diversicare of Tylertown, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027	6084445

SCHEDULE 1.1(f)

to Third Amended and Restated Revolving Loan and Security Agreement
(Second Amendment)

FACILITIES; LOCATIONS; REAL PROPERTY; OPERATORS; OWNERS; LEASES

	Facility Name	Real Property / Location Address	Owner / Lessor	Operator / Lessee	Lease Expiration Date and Options to Extend (if applicable)
Golden Living (AL) Facilities
1.	Diversicare of Arab	235 Third Street, Southeast, Arab, Alabama 35016	GPH Arab LLC	Diversicare of Arab, LLC	October 31, 2026; two 5-year renewals
2.	Diversicare of Boaz	600 Corley Avenue, Boaz, Alabama 35957	GPH Boaz LLC	Diversicare of Boaz, LLC	October 31, 2026; two 5-year renewals
3.	Diversicare of Foley	1701 North Alston, Foley, Alabama 36535	GPH Foley LLC	Diversicare of Foley, LLC	October 31, 2026; two 5-year renewals
4.	Diversicare of Hueytown	190 Brooklane Drive, Hueytown, Alabama 35023	GPH Hueytown LLC	Diversicare of Hueytown, LLC	October 31, 2026; two 5-year renewals
5.	Diversicare of Lanett	702 South 13th Street, Lanett, Alabama 36863	GPH Lanett LLC	Diversicare of Lanett, LLC	October 31, 2026; two 5-year renewals
6.	Diversicare of Bessemer	820 Golf Course Road, Bessemer, Alabama 35023	GPH Bessemer LLC	Diversicare of Bessemer, LLC	October 31, 2026; two 5-year renewals
7.	Diversicare of Montgomery	2020 North Country Club Drive, Montgomery, Alabama 36106	GPH Montgomery LLC	Diversicare of Montgomery, LLC	October 31, 2026; two 5-year renewals
8.	Diversicare of Oneonta	215 Valley Road, Oneonta, Alabama 35121	GPH Oneonta LLC	Diversicare of Oneonta, LLC	October 31, 2026; two 5-year renewals
9.	Diversicare of Oxford	1130 South Hale Street, Oxford, Alabama 36203	GPH Oxford LLC	Diversicare of Oxford, LLC	October 31, 2026; two 5-year renewals
10.	Diversicare of Pell City	510 Wolf Creek Road North, Pell City, Alabama 35125	Beverly Enterprises-Alabama, Inc.	Diversicare of Pell City, LLC	October 31, 2026; two 5-year renewals
11.	Diversicare of Riverchase	2500 Riverhaven Drive, Birmingham, Alabama 35244	GPH Birmingham LLC	Diversicare of Riverchase, LLC	October 31, 2026; two 5-year renewals
12.	Diversicare of Winfield	144 County Highway 14, Winfield, Alabama 35594	GPH Winfield LLC	Diversicare of Winfield, LLC	October 31, 2026; two 5-year renewals
Golden Living (MS) Facilities
13.	Diversicare of Amory	1215 Earl Frye Drive, Amory, Mississippi 38821	GPH Amory LLC	Diversicare of Amory, LLC	October 31, 2026; two 5-year renewals
14.	Diversicare of Batesville	154 Woodland Road, Batesville, Mississippi 38606	GPH Batesville LLC	Diversicare of Batesville, LLC	October 31, 2026; two 5-year renewals
15.	Diversicare of Brookhaven	519 Brookman Drive, Brookhaven, Mississippi 39601	GPH Brookhaven LLC	Diversicare of Brookhaven, LLC	October 31, 2026; two 5-year renewals
16.	Diversicare of Eupora	156 E. Walnut Avenue, Eupora, Mississippi 39744	GPH Eupora LLC	Diversicare of Eupora, LLC	October 31, 2026; two 5-year renewals
17.	Diversicare of Ripley	101 Cunningham Drive, Ripley Mississippi 38663	GPH Ripley LLC	Diversicare of Ripley, LLC	October 31, 2026; two 5-year renewals
18.	Diversicare of Southaven	1730 Dorchester Drive, Southaven, Mississippi 38671	GPH Southaven LLC	Diversicare of Southaven, LLC	October 31, 2026; two 5-year renewals
19.	Diversicare of Tupelo	2273 South Eason Boulevard, Tupelo, Mississippi 38804	GPH Tupelo LLC	Diversicare of Tupelo, LLC	October 31, 2026; two 5-year renewals
20.	Diversicare of Tylertown	200 Medical Circle, Tylertown, Mississippi 39667	GPH Tylertown LLC	Diversicare of Tylertown, LLC	October 31, 2026; two 5-year renewals
Other (MS) Facilities
21.	Diversicare of Carthage	1101 E. Franklin Street, Carthage, Mississippi 39051	Leake County Nursing Home, Ltd.	Diversicare of Carthage, LLC	September 30, 2018
22.	Diversicare of Meridian	4728 Hwy 39 North, Meridian Mississippi 39301	Broadmoor Nursing Home, Ltd.	Diversicare of Meridian, LLC	September 30, 2026; two 5-year renewals

SCHEDULE 7.8

to Third Amended and Restated Revolving Loan and Security Agreement
(Second Amendment)

OTHER NAMES

Alabama:

Diversicare of Arab, LLC will do business in the state of Alabama as Diversicare of Arab.

Diversicare of Bessemer, LLC will do business in the state of Alabama as Diversicare of Bessemer.

Diversicare of Boaz, LLC will do business in the state of Alabama as Diversicare of Boaz.

Diversicare of Foley, LLC will do business in the state of Alabama as Diversicare of Foley.

Diversicare of Hueytown, LLC will do business in the state of Alabama as Baron House of Hueytown.

Diversicare of Lanett, LLC will do business in the state of Alabama as Diversicare of Lanett.

Diversicare of Montgomery, LLC will do business in the state of Alabama as Diversicare of Montgomery.

Diversicare of Oneonta, LLC will do business in the state of Alabama as Diversicare of Oneonta.

Diversicare of Oxford, LLC will do business in the state of Alabama as Diversicare of Oxford.

Diversicare of Pell City, LLC will do business in the state of Alabama as Diversicare of Pell City.

Diversicare of Riverchase, LLC will do business in the state of Alabama as Diversicare of Riverchase.

Diversicare of Winfield, LLC will do business in the state of Alabama as Diversicare of Winfield.

Mississippi:

Diversicare of Amory, LLC will do business in the state of Mississippi as Diversicare of Amory.

Diversicare of Batesville, LLC will do business in the state of Mississippi as Diversicare of Batesville.

Diversicare of Brookhaven, LLC will do business in the state of Mississippi as Diversicare of Brookhaven.

Diversicare of Carthage, LLC will do business in the state of Mississippi as Diversicare of Carthage.

Diversicare of Eupora, LLC will do business in the state of Mississippi as Diversicare of Eupora.

Diversicare of Meridian, LLC will do business in the state of Mississippi as Diversicare of Meridian.

Diversicare of Ripley, LLC will do business in the state of Mississippi as Diversicare of Ripley.

Diversicare of Southaven, LLC will do business in the state of Mississippi as Diversicare of Southaven.

Diversicare of Tupelo, LLC will do business in the state of Mississippi as Diversicare of Tupelo.

Diversicare of Tylertown, LLC will do business in the state of Mississippi as Diversicare of Tylertown.

SCHEDULE 7.12

to Third Amended and Restated Revolving Loan and Security Agreement
(Second Amendment)

ORGANIZATIONAL CHART

See attached.

SCHEDULE 7.33

to Third Amended and Restated Revolving Loan and Security Agreement
(Second Amendment)

CAPITALIZATION

Borrower	Number of Authorized Stock/LLC Interests	Holder of Equity Securities	Ownership Percentage
Diversicare Leasing Company III, LLC	N/A	Advocat Finance, Inc.	100%
Diversicare of Arab, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Boaz, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Foley, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Hueytown, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Lanett, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Bessemer, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Montgomery, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Oneonta, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Oxford, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Pell City, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Riverchase, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Winfield, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Amory, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Batesville, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Brookhaven, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Carthage, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Eupora, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Meridian, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Ripley, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Southaven, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Tupelo, LLC	N/A	Diversicare Leasing Company III, LLC	100%
Diversicare of Tylertown, LLC	N/A	Diversicare Leasing Company III, LLC	100%

SCHEDULE 7.36

to Third Amended and Restated Revolving Loan and Security Agreement
(Second Amendment)

COMMERCIAL LEASES

1. Master Lease Agreement dated as of October 1, 2016 by and between, collectively, the Golden Living (MS) Lessors listed and identified on Schedule 1.1 (f) as Owner/Lessor, each as Lessor, and the DLC III (MS) Subsidiaries listed and identified as Operator/ Lessee, each as Lessee, with respect to each of the Facilities listed and identified on Schedule 1.1 (f) as the Golden Living ( MS) Facilities and located at the Mississippi addresses shown thereon, set opposite their respective names. Upon the closing on or about November 1, 2016 of the transactions for the lease by the DLC III ( AL) Subsidiaries of the Facilities listed and identified on Schedule 1.1(f) as the Golden Living (AL) Facilities and located at the addresses in Alabama shown thereon, the Golden Living (AL) Lessors listed and identified the Owner/Lessor on Schedule 1.1 (f), each as Lessor, and the DLC III (AL) Subsidiaries listed and identified on as Operator/Lessee on Schedule 1.1 (f), each as Lessee, will be joined, collectively, to the Master Lease Agreement by an amendment and restatement of the Master lease Agreement (the “Amended and Restated Lease”), to include, collectively, each of the Golden Living (AL) Facilities listed on Schedule 1.1 (f) set opposite their respective names as of the demised premises under the Master Lease Agreement. The expiration date of the initial term of the Amended and Restated Lease shall be the date that is ten (10) years after the commencement of the Amended and Restated Lease.

2. Lease Agreement between Broadmoor Nursing Home Ltd., as Lessor, and Diversicare of Meridian, LLC, as Lessee, with respect to the Meridian Facility located in Meridian, Mississippi as listed and identified on Schedule 1.1.(f), originally dated October 1, 1977, the leasehold interest of the current lessee thereunder being assigned to and assumed by Diversicare of Meridian, LLC by Assignment and Assumption Agreement by and between Beverly Enterprises-Mississippi, Inc., as Assignor, and Diversicare of Meridian, LLC, as Assignee, dated as of October 1, 2016, such Lease Agreement being amended by First Amendment to Lease Agreement dated as of October 1, 2016, by and between Lessor and Diversicare of Meridian, LLC, as Lessee. The expiration date of the current term of this lease is September 30, 2026.

3. Lease Agreement between Leake County Nursing Home Ltd., as Lessor, and Diversicare of Carthage, LLC, as Lessee, with respect to the Carthage Facility located in Carthage, Mississippi as listed and identified on Schedule 1.1.(f), originally dated October 1, 1977, the leasehold interest of the current lessee thereunder being assigned to and assumed by Diversicare of Carthage, LLC by Assignment and Assumption Agreement by and between Beverly Enterprises-Mississippi, Inc., as Assignor, and Diversicare of Carthage, LLC, as Assignee, dated as of October 1, 2016, such Lease Agreement being amended by First Amendment to Lease Agreement dated as of October 1, 2016, by and between Lessor and Diversicare of Carthage, LLC, as Lessee. The expiration date of the current term of this lease is September 30, 2018.

4. Commercial Sublease effective as of the 1^st day of October, by and between GGNSC Administrative Services, LLC, DBA Golden Living, as Tenant, and Diversicare of Tupelo, LLC, as Subtenant, for the sublet to Subtenant of approximately 2227 sq. ft. of commercial office space in Spanish Village complex located at 144 South Thomas Street, Suite 204-205, Tupelo, Mississippi 38801, for purposes of an employee training center, which premises Tenant leases pursuant to a lease agreement with Hancock Family LLC, as Landlord, dated the 27^th day of April, 1998, and amended through the Eighth Amendment, dated the 21^st day of August, 2014, the current expiration date of the term of this sublease is December 31, 2016.

ANNEX A

(LENDERS, PRO RATA SHARES/DOLLAR ALLOCATIONS, AND NOTICE INFORMATION)

Lender	Contact Information	Pro Rata Shares
The PrivateBank and Trust Company	120 South LaSalle Street Chicago, IL 60603 Attn.: Adam D. Panos Managing Director Tel.: (312) 564-1278 Fax: (312) 683-0446 Initial Dollar Allocation (through July 31, 2017): $19,250,000.00 Adjusted Dollar Allocation (from and after August 1, 2017) $15,565,789.47	36.84210526%
CIT Bank N.A.	11 West 42nd Street New York, NY 10036 Attn.: Edward Shuster Director Tel.: (212) 771-9303 Initial Dollar Allocation (through July 31, 2017): $11,000,000.00 Adjusted Dollar Allocation (from and after August 1, 2017) $8,894,736.84	21.05263158%
Bankers Trust Company	453 7th Street Des Moines, IA 50304-0897 Attn.: Jon M. Doll Vice President Tel.: (515) 245-2837 Fax: (515) 245-5216 Initial Dollar Allocation (through July 31, 2017): $8,250,000.00 Adjusted Dollar Allocation (from and after August 1, 2017) $6,671,052.63	15.78947368%
BOKF, NA d/b/a Bank of Oklahoma	One Williams Center, 8th Floor Tulsa, OK 74172 Attn.: Ryan Kirk Vice President Tel.: (918) 588-6743 Fax: (918) 280-3368 Initial Dollar Allocation (through July 31, 2017): $2,750,000.00 Adjusted Dollar Allocation (from and after August 1, 2017) $2,223,684.21	5.26315789%

Opus Bank	19900 MacArthur Blvd. 12th Floor Irvine, CA 92612 Attn.: Bryan Nance VP, Portfolio Manager Healthcare Banking Tel.: (949) 251-8123 Fax: (949) 250-9988 Initial Dollar Allocation (through July 31, 2017): $5,500,000.00 Adjusted Dollar Allocation (from and after August 1, 2017) $4,447,368.42	10.52631579%
Franklin Synergy Bank	722 Columbia Ave. Franklin, TN 37064 Chicago, IL 60606 Attn.: Lisa Fletcher Senior Vice President Tel.: (615) 564-6374 Fax: (312) 564-7375 Initial Dollar Allocation (through July 31, 2017): $5,500,000.00 Adjusted Dollar Allocation (from and after August 1, 2017) $4,447,368.42	10.52631579%

SCHEDULE 1.1(c)
to Second Amended and Restated Term Loan and Security Agreement

AFFILIATED REVOLVING BORROWERS

	Name	State of Incorporation or Formation	Principal Place of Business and Chief Executive Office
1.	Diversicare Leasing Company III, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
2.	Diversicare of Arab, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
3.	Diversicare of Boaz, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
4.	Diversicare of Foley, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
5.	Diversicare of Hueytown, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
6.	Diversicare of Lanett, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
7.	Diversicare of Bessemer, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
8.	Diversicare of Montgomery, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
9.	Diversicare of Oneonta, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
10.	Diversicare of Oxford, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
11.	Diversicare of Pell City, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
12.	Diversicare of Riverchase, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
13.	Diversicare of Winfield, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
14.	Diversicare of Amory, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
15.	Diversicare of Batesville, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
16.	Diversicare of Brookhaven, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
17.	Diversicare of Carthage, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
18.	Diversicare of Eupora, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
19.	Diversicare of Meridian, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
20.	Diversicare of Ripley, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
21.	Diversicare of Southaven, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
22.	Diversicare of Tupelo, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027
23.	Diversicare of Tylertown, LLC	Delaware limited liability company	1621 Galleria Blvd., Brentwood, TN 37027

Signature Page to Consent and Second Amendment to
Third Amended and Restated Revolving Loan and Security Agreement

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: November 3, 2016

/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 R. 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: November 3, 2016

/s/ James R. McKnight, Jr.

James R. 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 MARCH 31, 2016

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 September 30, 2016 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 November 3, 2016.

/s/ Kelly J. Gill

Kelly J. Gill

Chief Executive Officer

/s/ James R. McKnight, Jr.

James R. McKnight, Jr.

Executive Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Oct. 31, 2016
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	Sep. 30, 2016
Amendment Flag	false
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,360,495

XML

Interim Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
CURRENT ASSETS:
Cash and cash equivalents	$ 3,483	$ 4,585
Receivables, less allowance for doubtful accounts of $10,196 and $8,180, respectively	39,978	43,819
Other receivables	1,352	1,407
Prepaid expenses and other current assets	3,853	2,223
Income tax refundable	378	347
Current assets of discontinued operations	44	36
Deferred income taxes	7,405	7,999
Total current assets	56,493	60,416
PROPERTY AND EQUIPMENT, at cost	125,356	114,383
Less accumulated depreciation and amortization	(67,245)	(62,110)
Property and equipment, net	58,111	52,273
OTHER ASSETS:
Deferred income taxes	14,853	11,762
Deferred lease and other costs, net	196	382
Investment in unconsolidated affiliate	989	798
Other noncurrent assets	2,477	3,994
Acquired leasehold interest, net	7,171	7,459
Total other assets	25,686	24,395
Total assets	140,290	137,084
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations	6,888	6,603
Trade accounts payable	10,014	10,136
Current liabilities of discontinued operations	428	345
Accrued expenses:
Payroll and employee benefits	13,698	14,404
Self-insurance reserves, current portion	9,745	10,224
Other current liabilities	6,378	5,652
Total current liabilities	47,151	47,364
NONCURRENT LIABILITIES:
Long-term debt and capitalized lease obligations, less current portion and deferred financing costs	61,816	53,297
Self-insurance reserves, noncurrent portion	10,993	12,344
Other noncurrent liabilities	10,815	10,812
Total noncurrent liabilities	83,624	76,453
COMMITMENTS AND CONTINGENCIES
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, 6,592,000 and 6,513,000 shares issued, and 6,360,000 and 6,281,000 shares outstanding, respectively	66	65
Treasury stock at cost, 232,000 shares of common stock	(2,500)	(2,500)
Paid-in capital	21,667	21,142
Accumulated deficit	(9,348)	(5,053)
Accumulated other comprehensive loss	(370)	(387)
Total shareholders’ equity	9,515	13,267
Total liabilities and shareholder's equity	$ 140,290	$ 137,084

XML

Interim Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Allowance for doubtful accounts receivable	$ 10,196	$ 8,180
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)	6,592,000	6,513,000
Common stock, shares outstanding (shares)	6,360,000	6,281,000
Treasury stock, shares (shares)	232,000	232,000

XML

Interim Consolidated Statements of Operations - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Statement [Abstract]
PATIENT REVENUES, net	$ 97,313	$ 98,105	$ 291,063	$ 289,618
EXPENSES:
Operating	79,441	78,501	236,444	232,298
Lease and rent expense	6,865	7,198	20,971	21,529
Professional liability	1,977	2,069	5,977	6,150
General and administrative	7,420	6,378	21,035	18,770
Depreciation and amortization	1,992	1,887	6,055	5,629
Lease termination costs			2,008	0
Total expenses	97,695	96,033	292,490	284,376
OPERATING INCOME (LOSS)	(382)	2,072	(1,427)	5,242
OTHER EXPENSE:
Equity in net income of unconsolidated affiliate	130	97	191	280
Interest expense, net	(1,201)	(998)	(3,429)	(2,997)
Debt retirement costs			(351)	0
Total other expense	(1,071)	(901)	(3,589)	(2,717)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(1,453)	1,171	(5,016)	2,525
BENEFIT (PROVISION) FOR INCOME TAXES	495	(502)	1,834	(1,044)
INCOME (LOSS) FROM CONTINUING OPERATIONS	(958)	669	(3,182)	1,481
LOSS FROM DISCONTINUED OPERATIONS:
Discontinued operations	(17)	(238)	(54)	(800)
NET INCOME (LOSS)	$ (975)	$ 431	$ (3,236)	$ 681
Per common share – basic
Continuing operations (dollars per share)	$ (0.16)	$ 0.11	$ (0.51)	$ 0.24
Discontinued operations (dollars per share)	0.00	(0.04)	(0.01)	(0.13)
Net income (loss) per common share – basic (dollars per share)	(0.16)	0.07	(0.52)	0.11
Per common share – diluted
Continuing operations (dollars per share)	(0.16)	0.11	(0.51)	0.24
Discontinued operations (dollars per share)	0.00	(0.04)	(0.01)	(0.13)
Net income (loss) per common share – diluted (dollars per share)	(0.16)	0.07	(0.52)	0.11
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK (dollars per share)	$ 0.055	$ 0.055	$ 0.165	$ 0.165
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic (shares)	6,212	6,121	6,195	6,089
Diluted (shares)	6,212	6,331	6,195	6,310

XML

Interim Consolidated Statements of Operations (Unaudited) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Statement [Abstract]
Tax effect on operating income	$ 12	$ 237	$ 33	$ 628

XML

Interim Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Statement of Comprehensive Income [Abstract]
NET INCOME (LOSS)	$ (975)	$ 431	$ (3,236)	$ 681
OTHER COMPREHENSIVE INCOME:
Change in fair value of cash flow hedge, net of tax	364	151	398	382
Less: reclassification adjustment for amounts recognized in net income	(118)	(109)	(381)	(345)
Total other comprehensive income	246	42	17	37
COMPREHENSIVE INCOME (LOSS)	$ (729)	$ 473	$ (3,219)	$ 718

XML

Interim Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)	$ (3,236)	$ 681
Discontinued operations	(54)	(800)
Income (loss) from continuing operations	(3,182)	1,481
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization	6,055	5,629
Provision for doubtful accounts	5,785	5,425
Deferred income tax provision (benefit)	(2,329)	204
Provision for self-insured professional liability, net of cash payments	1,853	2,063
Stock-based compensation	721	924
Equity in net income of unconsolidated affiliate, net of investment	(191)	(281)
Debt retirement costs	351	0
Provision for leases in excess of cash payments	(1,640)	(1,203)
Lease termination costs, net of cash payments	1,958	0
Other	463	116
Changes in assets and liabilities affecting operating activities:
Receivables, net	(2,071)	(8,302)
Prepaid expenses and other assets	(1,620)	(507)
Trade accounts payable and accrued expenses	(226)	1,136
Net cash provided by continuing operations	5,927	6,685
Discontinued operations	(3,572)	(4,896)
Net cash provided by operating activities	2,355	1,789
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(11,596)	(3,624)
Acquisition of property and equipment through business combination	0	(7,000)
Change in restricted cash	1,658	2,490
Deposits and other deferred balances	0	(9)
Net cash used in continuing operations	(9,938)	(8,143)
Discontinued operations	0	0
Net cash used in investing activities	(9,938)	(8,143)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(70,883)	(14,002)
Proceeds from issuance of debt	80,855	21,941
Financing costs	(1,884)	(192)
Issuance and redemption of employee equity awards	(105)	(31)
Payment of common stock dividends	(1,025)	(1,008)
Payment for preferred stock restructuring	(477)	(462)
Net cash provided by financing activities	6,481	6,246
Discontinued operations	0	0
Net cash provided by financing activities	6,481	6,246
NET DECREASE IN CASH AND CASH EQUIVALENTS	(1,102)	(108)
CASH AND CASH EQUIVALENTS, beginning of period	4,585	3,818
CASH AND CASH EQUIVALENTS, end of period	3,483	3,710
SUPPLEMENTAL INFORMATION:
Cash payments of interest	2,906	2,711
Cash payments of income taxes	$ 521	$ 216

XML

Business

9 Months Ended

Sep. 30, 2016

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 nine 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. Additionally, 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, Missouri, Ohio, Tennessee, and Texas.

As of September 30, 2016, the Company’s continuing operations consist of 54 nursing centers with 5,879 licensed nursing beds. The Company owns 17 and leases 37 of its nursing centers. Our nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 496 licensed assisted and residential living beds.

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Consolidation and Basis of Presentation of Financial Statements

9 Months Ended

Sep. 30, 2016

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. 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 8 to the interim consolidated financial statements.

The interim consolidated financial statements for the three and nine month periods ended September 30, 2016 and 2015, 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 September 30, 2016, and the results of operations for the three and nine month periods ended September 30, 2016 and 2015, and cash flows for the nine month periods ended September 30, 2016 and 2015. The Company’s balance sheet information at December 31, 2015, was derived from its audited consolidated financial statements as of December 31, 2015.

The results of operations for the periods ended September 30, 2016 and 2015 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, 2015.

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Recent Accounting Guidance

9 Months Ended

Sep. 30, 2016

Accounting Policies [Abstract]

RECENT ACCOUNTING GUIDANCE

RECENT ACCOUNTING GUIDANCE

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which 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.  In March 2016, the FASB issued an update to ASU No. 2014-09 in the form of ASU No. 2016-08, which amended the principal-versus-agent implementation guidance and illustrations in the new revenue guidance. The update clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued another update to the new revenue standard in the form of ASU No. 2016-10, which amends the guidance on identifying performance obligations and the implementation guidance on licensing. In May 2016, ASU No. 2016-12 was issued, which amends the new revenue recognition guidance on transition, collectibility, noncash consideration and the presentation of taxes. The new revenue standard (including updates) will be effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The Company will adopt the requirements of this standard effective January 1, 2018, and are currently evaluating the impact of the adoption on our financial condition and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs(Topic 835), which amends and simplifies the presentation of debt issuance costs. The main provisions of the standard require that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, and amortization of the debt issuance costs must be reported as interest expense. The Company adopted ASU No. 2015-03 as of January 1, 2016. The new standard was applied on a retroactive basis and the Company has complied with the applicable disclosures for a change in accounting principle. The adoption of this guidance has not had a material impact on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on the Company's balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. Upon adoption, the Company anticipates reclassifying deferred income taxes of approximately $7,405,000 from current to non-current assets.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is currently assessing the impact of this new accounting pronouncement on the Company's results of operations, financial position, and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of accounting for shared-based payment transactions, including the income tax consequences and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact of this new accounting pronouncement on the Company's results of operations, financial position, and cash flows.

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

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Long-Term Debt and Interest Rate Swap

9 Months Ended

Sep. 30, 2016

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 February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") which modified the terms of the Original Mortgage Loan and the Original Revolver Agreements dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to $100,000,000 allocated between a $72,500,000 Mortgage Loan ("Amended Mortgage Loan") and a $27,500,000 Revolver ("Amended Revolver"). The Amended Mortgage Loan consists of a $60,000,000 term loan facility and a $12,500,000 acquisition loan facility. Loan acquisition costs associated with the Amended Mortgage Loan and the Amended Revolver were capitalized in the amount of $1,812,000 and are being amortized over the five-year term of the agreements. Additionally, the Glasgow term loan balance was consolidated into the new Credit Agreement.

Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72,500,000 with a five-year maturity through February 26, 2021, and a $27,500,000 Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities are based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000,000. As of September 30, 2016, the interest rate related to the Amended Mortgage Loan was 4.52%. The Amended Mortgage Loan is secured by seventeen 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 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. The Amended Mortgage Loan balance was $61,484,000 as of September 30, 2016, consisting of $59,195,000 on the term loan facility and $2,289,000 on the acquisition loan facility.

As of September 30, 2016, the Company had $9,000,000 borrowings outstanding under the Amended Revolver compared to $12,900,000 outstanding as of December 31, 2015. The outstanding borrowings on the revolver primarily compensate for accumulated Medicaid and Medicare receivables at recently acquired facilities as these facilities proceed through the change in ownership process with CMS. Annual fees for letters of credit issued under the Amended Revolver are 3.00% of the amount outstanding. The Company has ten letters of credit with a total value of $7,868,000 outstanding as of September 30, 2016. Considering the balance of eligible accounts receivable, the letters 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 Amended Revolver was $6,981,000 at September 30, 2016.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. As of September 30, 2016, the Company was compliant with the amended covenants as described in Note 10 to the interim consolidated financial statements.

Interest Rate Swap Transaction

As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company 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. In conjunction with the Amendment to the Credit Agreement, the Company amended the terms of its interest rate swap on February 26, 2016. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the initial notional amount of $30,000,000 at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amount.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis, and at September 30, 2016, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $957,000 at September 30, 2016. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The liability related to the interest rate swap included in accumulated other comprehensive loss at September 30, 2016 is $593,000, 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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Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Health Care Organizations [Abstract]

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

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 and Tennessee, as well as the Company’s formerly operated Arkansas and West Virginia 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 seven 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 self-insured retention levels per claim and 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 $19,878,000 as of September 30, 2016. 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 this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the frequency and cost of the Company's past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its estimates of the Company's ultimate professional liability cost for current periods.

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

As of September 30, 2016, the Company is engaged in 62 professional liability lawsuits. Ten lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be set for trial or hearing. The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $2,779,000 and $3,306,000 for the nine months ended September 30, 2016 and 2015, 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.

Civil Investigative Demand ("CID")

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

In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the two facilities that were the subject of the original CID. In connection with this matter, between July 2013 and early February 2016, the Company has received three civil investigative demands (a form of subpoena) for documents and information relating to our practices and policies for rehabilitation, and other services, our preadmission evaluation forms ("PAEs") required by TennCare and our Pre-Admission Screening and Resident Reviews ("PASRRs"). We have responded to those requests. The DOJ has also issued CID's for testimony from current and former employees of the Company. The DOJ’s civil investigation of the Company's practices and policies for rehabilitation now covers all of the Company’s facilities, but thus far only documents from six of our facilities have been requested.

In June 2016, the Company received an authorized investigative demand (a form of subpoena) for documents in connection with a criminal investigation by the DOJ related to our practices with respect to PAEs and PASRRs, and the Company has provided documents responsive to this subpoena. The Company cannot predict the outcome of these investigations or any possible related proceedings, and the outcome could have a materially adverse effect on the Company, including the imposition of damages, criminal charges, fines, penalties and/or a corporate integrity agreement. The Company is committed to provide caring and professional services to its patients and residents in compliance with applicable laws and regulations.

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, 2007 until June 30, 2008, the Company is completely self-insured for workers' compensation exposure. From July 1, 2008 through September 30, 2016, 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 $193,000 at September 30, 2016. The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,224,000 as of September 30, 2016. 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 September 30, 2016, 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 $666,000 at September 30, 2016. The differences between actual settlements and reserves are included in expense in the period finalized.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2016

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. In June 2016, our shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common stock authorized under the Plan from 150,000 shares to 350,000 shares. No grants can be made under the Stock Purchase Plan after April 25, 2028.

In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”), followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation rights, stock options and other share and cash based awards. 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 the nine months ended September 30, 2016 and 2015, the Compensation Committee of the Board of Directors approved grants totaling approximately 83,000 and 74,000 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. Summarized activity of the equity compensation plans is presented below:

			Weighted
	Options/		Average
	SOSARs		Exercise Price
Outstanding, December 31, 2015	232,000		$	6.97
Granted	—		—
Exercised	(1,000	)	3.91
Expired or cancelled	—		—
Outstanding, September 30, 2016	231,000		$	6.98
Exercisable, September 30, 2016	222,000		$	6.83

			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2015	141,000		$	9.07
Granted	83,000		8.87
Dividend Equivalents	3,000		8.87
Vested	(68,000	)	7.85
Cancelled	(7,000	)	9.80
Outstanding, September 30, 2016	152,000		$	9.47

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, 2015	62,000		$	9.58
Granted	17,000		8.87
Dividend Equivalents	1,000		8.86
Vested	(27,000	)	6.13
Cancelled	—		—
Outstanding, September 30, 2016	53,000		$	11.10

Prior to 2015, 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 related to SOSARs and stock options 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 2016 and 2015, previously granted SOSARs and Options remain outstanding as of September 30, 2016. The following table summarizes information regarding stock options and SOSAR grants outstanding as of September 30, 2016:

	Weighted
	Average			Intrinsic			Intrinsic
Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$10.21 to $11.59	$	10.88	61,000	$	—	52,000	$	—
$2.37 to $6.21	$	5.55	170,000	$	754,000	170,000	$	754,000
			231,000			222,000

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 $721,000 and $924,000 in the nine month periods ended September 30, 2016 and 2015, respectively.

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Earnings (Loss) Per Common Share

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

EARNINGS (LOSS) PER COMMON SHARE

EARNINGS (LOSS) PER COMMON SHARE

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss)
Income (loss) from continuing operations	$	(958	)	$	669		(3,182		)	1,481
Loss from discontinued operations, net of income taxes	(17		)	(238		)	(54		)	(800		)
Net income (loss)	$	(975	)	$	431		$	(3,236	)	$	681

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	(0.16	)	$	0.11		$	(0.51	)	$	0.24
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.13		)
Net income (loss) per common share – basic	$	(0.16	)	$	0.07		$	(0.52	)	$	0.11
Per common share – diluted
Income (loss) from continuing operations	$	(0.16	)	$	0.11		$	(0.51	)	$	0.24
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.13		)
Net income (loss) per common share – diluted	$	(0.16	)	$	0.07		$	(0.52	)	$	0.11
Weighted Average Common Shares Outstanding:
Basic	6,212			6,121			6,195			6,089
Diluted	6,212			6,331			6,195			6,310

The effects of 231,000 and 16,000 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share in the nine months ended September 30, 2016 and 2015, respectively, because these securities would have been anti-dilutive.

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Equity Method Investment

9 Months Ended

Sep. 30, 2016

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%. 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 September 30, 2016, was $989,000 as compared to $798,000 at December 31, 2015. 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 income of unconsolidated affiliate for the quarter ended September 30, 2016, was $130,000 as compared to $97,000 for the quarter ended September 30, 2015. For the nine-month period ended September 30, 2016, the equity in the net income of unconsolidated affiliate was $191,000 compared to $280,000 for the nine-month period ended September 30, 2015.

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Business Developments and Other Significant Transactions

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

BUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS

BUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS

2016 Acquisitions

On August 15, 2016, the Company entered into an Operation Transfer Agreement with Golden Living to assume the operations of 22 facilities in Alabama and Mississippi, which became effective in the fourth quarter of 2016. Refer to Note 10 of the interim consolidated financial statements for further discussion on the Company's acquisition of these facilities.

On February 26, 2016, the Company exercised its purchase options to acquire the real estate assets for Diversicare of Hutchinson in Hutchinson, Kansas and Clinton Place in Clinton, Kentucky for $4,250,000 and $3,300,000, respectively. The Company has operated these facilities since February 2015 and April 2012, respectively. Hutchinson is an 85-bed skilled nursing facility, and Clinton is an 88-bed skilled nursing facility. As a result of the consummation of the Agreements, the Company allocated the purchase price and acquisition costs between the assets acquired. 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 assets acquired is as follows:

	Hutchinson		Clinton Place
Purchase Price	$	4,250,000	$	3,300,000
Acquisition Costs	43,000		34,000
	$	4,293,000	$	3,334,000
Allocation:
Buildings	3,443,000		2,898,000
Land	365,000		267,000
Furniture, Fixtures and Equipment	485,000		169,000
	$	4,293,000	$	3,334,000

2015 Acquisitions

On February 1, 2015, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Barren County Health Care Center, Inc. to acquire certain land, improvements, furniture, fixtures and equipment, personal property and intangible property, together comprising a 94-bed skilled nursing center in Glasgow, Kentucky, for an aggregate purchase price of $7,000,000.

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

	February 1, 2015
Purchase Price	$	7,000,000
Land	672,000
Buildings	5,778,000
Furniture, Fixtures, and Equipment	550,000
	$	7,000,000

On November 1, 2015, the Company entered into an Asset Purchase Agreement with Haws Fulton Investors, LLC to acquire certain land, improvements, furniture, fixtures and equipment, personal property and intangible property, together comprising a 60-bed skilled nursing center in Fulton, Kentucky, for an aggregate purchase price of $3,900,000.

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

	November 1, 2015
Purchase Price	$	3,900,000
Land	300,000
Buildings	3,338,000
Furniture, Fixtures, and Equipment	262,000
	$	3,900,000

2016 Lease Termination

On May 31, 2016, the Company entered into an Agreement with Avon Ohio, LLC to amend the original lease agreement, thus terminating the Company's right of possession of the facility. As a result, the Company incurred lease termination costs of $2,008,000 in the second quarter of 2016. Under the amended agreement, the Company is required to pay $300,000 per year through the term of the original lease agreement, July 31, 2024. For accounting purposes, this transaction was not reported as a discontinued operation, which is in accordance with the modified authoritative guidance for reporting discontinued operations, effective January 1, 2015. A disposal is now required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on the Company's operations and financial results.

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Subsequent Events

9 Months Ended

Sep. 30, 2016

Subsequent Events [Abstract]

Subsequent Events

SUBSEQUENT EVENTS

Golden Living

On October 1, 2016, the Company entered into a Master Lease Agreement (the "Lease") with Golden Living (the "Lessor") to directly lease eight facilities located in Mississippi from the Lessor, which resulted in the following business acquisitions: (i) a 152-bed skilled nursing facility known as Golden Living Center - Amory; (ii) a 130-bed skilled nursing facility known as Golden Living Center - Batesville; (iii) a 58-bed skilled nursing facility known as Golden Living Center - Brook Manor; (iv) a 119-bed skilled nursing facility known as Golden Living Center - Eupora; (v) a 140-bed skilled nursing facility known as Golden Living Center - Ripley; (vi) a 140-bed skilled nursing facility known as Golden Living Center - Southaven; (vii) a 120-bed skilled nursing facility known as Golden Living Center - Eason Blvd; (viii) a 60-bed skilled nursing facility known as Golden Living Center - Tylertown. The Lease has an initial term of ten years. The Company also assumed the individual leases of a 120-bed facility known as Broadmoor Nursing Home, with an initial lease term often years, and a 99-bed skilled nursing facility known as Leake County Nursing Home, with a lease term of two years.

On November, 1 2016, the Company amended and restated the Lease ("Amended Lease") with the Lessor to directly lease an additional twelve facilities located in Alabama from the Lessor, which resulted in the following business acquisitions: (i) a 87-bed skilled nursing facility known as Golden Living Center - Arab; (ii) a 180-bed skilled nursing facility known as Golden Living Center - Meadowood; (iii) a 132-bed skilled nursing facility known as Golden Living Center - Riverchase; (iv) a 100-bed skilled nursing facility known as Golden Living Center - Boaz; (v) a 154-bed skilled nursing facility known as Golden Living Center - Foley; (vi) a 50-bed skilled nursing facility known as Golden Living Center - Hueytown; (vii) a 85-bed skilled nursing facility known as Golden Living Center - Lanett; (viii) a 138-bed skilled nursing facility known as Golden Living Center - Montgomery; (ix) a 120-bed skilled nursing facility known as Golden Living Center - Oneonta; (x) a 173-bed skilled nursing facility known as Golden Living Center - Oxford; (xi) a 94-bed skilled nursing facility known as Golden Living Center - Pell City; (xii) a 123-bed skilled nursing facility known as Golden Living Center - Winfield. The Amended Lease has an initial term of ten years.

The completion of this acquisition brings the Company's operations to 76 nursing centers with 8,453 skilled nursings beds. They are expected to be accretive to earnings early in the Company's tenure as the operator of the Facilities.

Debt Modification

On October 3, 2016, the Company executed an Amendment to the Amended and Restated Revolving Loan and Security Agreement (the "Amended Revolver") with a syndicate of financial institutions and banks, including The PrivateBank and Trust Company, the administering agent, which modifies the terms of the Amended and Restated Revolving Loan and Security Agreement (the "Original Revolver"), dated February 26, 2016. The Amended Revolver increases the Company's maximum revolving facility to $52,250,000; provided that the maximum revolving facility be reduced to $42,250,000 on August 1, 2017.

The Amended Revolver amends certain provisions to our financial covenants including the following: the minimum Adjusted EBITDA shall not be less than $8,500,000 for the quarter ending September 30, 2016; $9,500,000 for the quarter ending December 31, 2016; $10,000,000 for the quarter ending March 31, 2017; $11,500,000 for the quarter ending June 30, 2017; and $13,000,000 for the quarter ending September 30, 2017 and for each quarter thereafter.

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Consolidation and Basis of Presentation of Financial Statements (Policies)

9 Months Ended

Sep. 30, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Consolidation

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. 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 8 to the interim consolidated financial statements.

Basis of Accounting

The interim consolidated financial statements for the three and nine month periods ended September 30, 2016 and 2015, 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 September 30, 2016, and the results of operations for the three and nine month periods ended September 30, 2016 and 2015, and cash flows for the nine month periods ended September 30, 2016 and 2015. The Company’s balance sheet information at December 31, 2015, was derived from its audited consolidated financial statements as of December 31, 2015.

The results of operations for the periods ended September 30, 2016 and 2015 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, 2015.

Recent Accounting Guidance

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), which 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.  In March 2016, the FASB issued an update to ASU No. 2014-09 in the form of ASU No. 2016-08, which amended the principal-versus-agent implementation guidance and illustrations in the new revenue guidance. The update clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued another update to the new revenue standard in the form of ASU No. 2016-10, which amends the guidance on identifying performance obligations and the implementation guidance on licensing. In May 2016, ASU No. 2016-12 was issued, which amends the new revenue recognition guidance on transition, collectibility, noncash consideration and the presentation of taxes. The new revenue standard (including updates) will be effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016. The Company will adopt the requirements of this standard effective January 1, 2018, and are currently evaluating the impact of the adoption on our financial condition and results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs(Topic 835), which amends and simplifies the presentation of debt issuance costs. The main provisions of the standard require that debt issuance costs related to a recognized liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, and amortization of the debt issuance costs must be reported as interest expense. The Company adopted ASU No. 2015-03 as of January 1, 2016. The new standard was applied on a retroactive basis and the Company has complied with the applicable disclosures for a change in accounting principle. The adoption of this guidance has not had a material impact on the Company's consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which changes how deferred taxes are classified on the Company's balance sheets and is effective for financial statements issued for annual periods beginning after December 15, 2016, with early adoption permitted. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as non-current. Upon adoption, the Company anticipates reclassifying deferred income taxes of approximately $7,405,000 from current to non-current assets.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires that a lessee of operating leases recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The lease liability will be equal to the present value of lease payments, with the right-of-use asset based upon the lease liability. The classification criteria for distinguishing between finance (or capital) leases and operating leases are substantially similar to the previous lease guidance. As such, operating leases will result in straight-line rent expense similar to current practice. For short-term leases (term of 12 months or less), a lessee is permitted to make an accounting election not to recognize lease assets and lease liabilities, which would generally result in lease expense being recognized on a straight-line basis over the lease term. The guidance is effective for annual and interim periods beginning after December 15, 2018, and will require application of the new guidance at the beginning of the earliest comparable period presented. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition. The adoption of this standard is expected to have a material impact on the Company’s financial position. The Company is currently assessing the impact of this new accounting pronouncement on the Company's results of operations, financial position, and cash flows.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of accounting for shared-based payment transactions, including the income tax consequences and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is currently assessing the impact of this new accounting pronouncement on the Company's results of operations, financial position, and cash flows.

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

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2016

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

Summarized activity of equity compensation plans

Summarized activity of the equity compensation plans is presented below:

			Weighted
	Options/		Average
	SOSARs		Exercise Price
Outstanding, December 31, 2015	232,000		$	6.97
Granted	—		—
Exercised	(1,000	)	3.91
Expired or cancelled	—		—
Outstanding, September 30, 2016	231,000		$	6.98
Exercisable, September 30, 2016	222,000		$	6.83

Schedule of summarized activity of Restricted Share Units

			Weighted
			Average
	Restricted		Grant Date
	Shares		Fair Value
Outstanding, December 31, 2015	141,000		$	9.07
Granted	83,000		8.87
Dividend Equivalents	3,000		8.87
Vested	(68,000	)	7.85
Cancelled	(7,000	)	9.80
Outstanding, September 30, 2016	152,000		$	9.47

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, 2015	62,000		$	9.58
Granted	17,000		8.87
Dividend Equivalents	1,000		8.86
Vested	(27,000	)	6.13
Cancelled	—		—
Outstanding, September 30, 2016	53,000		$	11.10

Schedule of summarized information regarding stock options and SOSAR grants outstanding

The following table summarizes information regarding stock options and SOSAR grants outstanding as of September 30, 2016:

	Weighted
	Average			Intrinsic			Intrinsic
Range of	Exercise		Grants	Value-Grants		Grants	Value-Grants
Exercise Prices	Prices		Outstanding	Outstanding		Exercisable	Exercisable
$10.21 to $11.59	$	10.88	61,000	$	—	52,000	$	—
$2.37 to $6.21	$	5.55	170,000	$	754,000	170,000	$	754,000
			231,000			222,000

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Earnings (Loss) Per Common Share (Tables)

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

Basic and diluted net income (loss) per common share

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss)
Income (loss) from continuing operations	$	(958	)	$	669		(3,182		)	1,481
Loss from discontinued operations, net of income taxes	(17		)	(238		)	(54		)	(800		)
Net income (loss)	$	(975	)	$	431		$	(3,236	)	$	681

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	(0.16	)	$	0.11		$	(0.51	)	$	0.24
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.13		)
Net income (loss) per common share – basic	$	(0.16	)	$	0.07		$	(0.52	)	$	0.11
Per common share – diluted
Income (loss) from continuing operations	$	(0.16	)	$	0.11		$	(0.51	)	$	0.24
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.13		)
Net income (loss) per common share – diluted	$	(0.16	)	$	0.07		$	(0.52	)	$	0.11
Weighted Average Common Shares Outstanding:
Basic	6,212			6,121			6,195			6,089
Diluted	6,212			6,331			6,195			6,310

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Business Development and Other Significant Transactions(Tables)

9 Months Ended

Sep. 30, 2016

Diversicare of Hutchinson, Kansas and Clinton Place, Kentucky

Business Acquisition [Line Items]

Schedule of allocation for net assets acquired

The allocation for the assets acquired is as follows:

	Hutchinson		Clinton Place
Purchase Price	$	4,250,000	$	3,300,000
Acquisition Costs	43,000		34,000
	$	4,293,000	$	3,334,000
Allocation:
Buildings	3,443,000		2,898,000
Land	365,000		267,000
Furniture, Fixtures and Equipment	485,000		169,000
	$	4,293,000	$	3,334,000

Skilled Nursing Center in Glasgow, Kentucky

Business Acquisition [Line Items]

Schedule of allocation for net assets acquired

The allocation for the net assets acquired is as follows:

	February 1, 2015
Purchase Price	$	7,000,000
Land	672,000
Buildings	5,778,000
Furniture, Fixtures, and Equipment	550,000
	$	7,000,000

Skilled Nursing Center in Fulton, Kentucky

Business Acquisition [Line Items]

Schedule of allocation for net assets acquired

The allocation for the net assets acquired is as follows:

	November 1, 2015
Purchase Price	$	3,900,000
Land	300,000
Buildings	3,338,000
Furniture, Fixtures, and Equipment	262,000
	$	3,900,000

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Business (Narrative) (Details)	Sep. 30, 2016 state center bed
Accounting Policies [Line Items]
Number of states in which entity operates | state	9
Number of nursing centers | center	54
Number of licensed nursing beds	5,879
Number of nursing center facilities owned | center	17
Number of nursing center facilities leased | center	37
Number of licensed assisted and residential living beds	496
Minimum
Accounting Policies [Line Items]
Number of licensed nursing beds per center	48
Maximum
Accounting Policies [Line Items]
Number of licensed nursing beds per center	320

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Consolidation and Basis of Presentation of Financial Statements (Narrative) (Details)	Sep. 30, 2016
Unnamed pharmacy joint venture
Schedule of Equity Method Investments [Line Items]
Percentage of owned joint venture Investment in nonconsolidated affiliate	50.00%

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Recent Accounting Guidance (Narrative) (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Accounting Policies [Abstract]
Reclassification of current deferred income tax assets	$ (7,405)	$ (7,999)

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Long-Term Debt and Interest Rate Swap (Narrative) (Details)		9 Months Ended
	Feb. 26, 2016 USD ($) center	Sep. 30, 2016 USD ($) letter_of_credit	Dec. 31, 2015 USD ($)
Line of Credit Facility [Line Items]
Accumulated other comprehensive income (loss)		$ (370,000)	$ (387,000)
Interest rate swap | Designated as hedging instrument
Line of Credit Facility [Line Items]
Annual fixed rate percentage		5.79%
Interest rate swap | Designated as hedging instrument | Accumulated net gain (loss) from cash flow hedges attributable to parent
Line of Credit Facility [Line Items]
Accumulated other comprehensive income (loss)		$ (593,000)
Income tax benefit		364,000
Interest rate swap | Designated as hedging instrument | Other noncurrent liabilities | Level 2
Line of Credit Facility [Line Items]
Net liability based on interest rate swap valuation model		$ 957,000
Amended and restated credit agreement
Line of Credit Facility [Line Items]
Loan acquisition costs	$ 1,812,000
Credit agreement | Amended and restated credit agreement
Line of Credit Facility [Line Items]
Borrowing capacity	100,000,000
Mortgage loan | Amended and restated credit agreement
Line of Credit Facility [Line Items]
Borrowing capacity	$ 72,500,000
Term of agreements	5 years
Period of amortization		25 years
Debt interest rate at period end	5.79%	4.52%
Number of owned nursing centers to secure Amended Mortgage Loan | center	17
Amended mortgage loan balance		$ 61,484,000
Mortgage loan | Amended and restated credit agreement | Interest rate swap | Designated as hedging instrument
Line of Credit Facility [Line Items]
Notional amount of interest rate derivatives	$ 30,000,000
Term loan facility | Amended and restated credit agreement
Line of Credit Facility [Line Items]
Borrowing capacity	$ 60,000,000
Amended mortgage loan balance		59,195,000
Term loan facility | Amended and restated credit agreement | LIBOR
Line of Credit Facility [Line Items]
Interest rate percentage	4.00%
Acquisition loan facility | Amended and restated credit agreement
Line of Credit Facility [Line Items]
Borrowing capacity	$ 12,500,000
Amended mortgage loan balance		$ 2,289,000
Acquisition loan facility | Amended and restated credit agreement | LIBOR
Line of Credit Facility [Line Items]
Interest rate percentage	4.75%
Amended revolver | Amended and restated credit agreement
Line of Credit Facility [Line Items]
Borrowing capacity	$ 27,500,000
Term of agreements		5 years
Borrowings outstanding		$ 9,000,000	$ 12,900,000
Balance available for borrowing under revolving credit center		6,981,000
Amended revolver | Amended and restated credit agreement | LIBOR
Line of Credit Facility [Line Items]
Interest rate percentage	4.00%
Letter of credit | Amended and restated credit agreement
Line of Credit Facility [Line Items]
Borrowings outstanding		$ 7,868,000
Annual fees for letters of credit issued under Revolver (as a percentage)		3.00%
Number of letters of credit | letter_of_credit		10

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Commitments and Contingencies (Narrative) (Details)	9 Months Ended		32 Months Ended
	Sep. 30, 2016 USD ($) lawsuit facility policy	Sep. 30, 2015 USD ($)	Feb. 29, 2016 civil_investigative_demand	Oct. 31, 2014 facility
Malpractice Insurance [Line Items]
Number of professional liability lawsuits | lawsuit	62
Cash expenditures for self-insured professional liability costs	$ 2,779,000	$ 3,306,000
Other Insurance
Liability for workers compensation claims	193,000
Workers compensation insurance, non current receivable for excess premiums paid	1,224,000
Health insurance, maximum self-insured annual amount per individual	175,000
Liability for reported claims and estimates for incurred but unreported claims	$ 666,000
Scheduled for trial or arbitration over next 12 months
Malpractice Insurance [Line Items]
Number of professional liability lawsuits | lawsuit	10
Professional malpractice liability insurance
Malpractice Insurance [Line Items]
Liability for reported and estimated future claims	$ 19,878,000
Prefunded deductible policy
Malpractice Insurance [Line Items]
Insurance policy coverage limits per claim	500,000
Other Insurance
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
Malpractice Insurance Annual Sublimit Per Center	1,000,000
Aggregate policy limit	5,000,000
Unaffiliated Entities | Professional malpractice liability insurance
Malpractice Insurance [Line Items]
Insurance policy coverage limits per claim	1,000,000
Malpractice Insurance Annual Sublimit Per Center	$ 3,000,000
Number of types of professional liability insurance policies | policy	7
Unfavorable regulatory action | Potential violations of false claims act
Malpractice Insurance [Line Items]
Number of facilities | facility	6			2
Number of new claims filed | civil_investigative_demand			3

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Stock-Based Compensation (Narrative) (Details) - USD ($) $ in Thousands	9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015	Jun. 30, 2016	Jun. 29, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation	$ 721	$ 924
Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Grant of restricted common stock (shares)	83,000	74,000
Restricted Stock | First anniversary of grant date
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vest of restricted stock on each year	33.00%
Restricted Stock | Second anniversary of grant date
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vest of restricted stock on each year	33.00%
Restricted Stock | Third anniversary of grant date
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vest of restricted stock on each year	33.00%
Stock Options and Stock Appreciation Rights (SARs)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expiration period	10 years
SOSARs granted in period (shares)	0		0
Stock Options and Stock Appreciation Rights (SARs) | First anniversary of grant date
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vest of restricted stock on each year	33.00%
Stock Options and Stock Appreciation Rights (SARs) | Second anniversary of grant date
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vest of restricted stock on each year	33.00%
Stock Options and Stock Appreciation Rights (SARs) | Third anniversary of grant date
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vest of restricted stock on each year	33.00%
2005 Long Term Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares reserved for future issuance (shares)	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 (shares)				350,000	150,000
Percentage of quoted market price offering rate	85.00%
Restriction period	2 years
2010 Long Term Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares reserved for future issuance (shares)	380,000

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Share-Based Compensation (Share-based Compensation Arrangement by Share-based Payment Award, Awards, Vested and Expected to Vest, Outstanding and Exercisable) (Details) - Stock Options and Stock Appreciation Rights (SARs) shares in Thousands	9 Months Ended
	Sep. 30, 2016 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding, December 31, 2015 (shares) | shares	232
Granted (shares) | shares	0
Exercised (shares) | shares	(1)
Expired or cancelled (shares) | shares	0
Outstanding, June 30, 2016 (shares) | shares	231
Exercisable (shares) | shares	222
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Abstract]
Outstanding, December 31, 2015 (dollars per share) | $ / shares	$ 6.97
Granted (dollars per share) | $ / shares	0.00
Exercised (dollars per share) | $ / shares	3.91
Expired or cancelled (dollars per share) | $ / shares	0.00
Outstanding, March 31, 2016 (dollars per share) | $ / shares	6.98
Exercisable, weighted average exercise price (dollars per share) | $ / shares	$ 6.83

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Stock-Based Compensation (Restricted Stock and Restricted Stock Units Activity) (Details) shares in Thousands	9 Months Ended
	Sep. 30, 2016 $ / shares shares
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, 2015 (share) | shares	141
Granted (shares) | shares	83
Dividend equivalents (shares) | shares	3
Vested (shares) | shares	(68)
Cancelled (shares) | shares	(7)
Outstanding, March 31, 2016 (shares) | shares	152
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, 2015 (dollars per share) | $ / shares	$ 9.07
Granted (dollars per share) | $ / shares	8.87
Dividend equivalents (dollars per share) | $ / shares	8.87
Vested (dollars per share) | $ / shares	7.85
Cancelled (dollars per share) | $ / shares	9.80
Outstanding, March 31, 2016 (dollars per share) | $ / shares	$ 9.47
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, 2015 (share) | shares	62
Granted (shares) | shares	17
Dividend equivalents (shares) | shares	1
Vested (shares) | shares	(27)
Cancelled (shares) | shares	0
Outstanding, March 31, 2016 (shares) | shares	53
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, 2015 (dollars per share) | $ / shares	$ 9.58
Granted (dollars per share) | $ / shares	8.87
Dividend equivalents (dollars per share) | $ / shares	8.86
Vested (dollars per share) | $ / shares	6.13
Cancelled (dollars per share) | $ / shares	0.00
Outstanding, March 31, 2016 (dollars per share) | $ / shares	$ 11.10

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Stock-Based Compensation (Schedule of Awards Outstanding and Exercisable) (Details) - Stock Options and Stock Appreciation Rights (SARs) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted average exercise prices (dollars per share)	$ 6.98	$ 6.97
Grants outstanding (shares)	231
Grants exercisable (shares)	222
$10.21 to $11.59
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 10.21
Range of exercise prices, maximum (dollars per share)	11.59
Weighted average exercise prices (dollars per share)	$ 10.88
Grants outstanding (shares)	61
Intrinsic value - grants outstanding	$ 0
Grants exercisable (shares)	52
Intrinsic value - grants exercisable	$ 0
$2.37 to $6.21
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Range of exercise prices, minimum (dollars per share)	$ 2.37
Range of exercise prices, maximum (dollars per share)	6.21
Weighted average exercise prices (dollars per share)	$ 5.55
Grants outstanding (shares)	170
Intrinsic value - grants outstanding	$ 754
Grants exercisable (shares)	170
Intrinsic value - grants exercisable	$ 754

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Earnings (Loss) Per Common Share (Basic and Diluted Net Income (Loss) Per Common Share) (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Net income (loss)
Income (loss) from continuing operations	$ (958)	$ 669	$ (3,182)	$ 1,481
Loss from discontinued operations, net of income taxes	(17)	(238)	(54)	(800)
Net income (loss)	$ (975)	$ 431	$ (3,236)	$ 681
Per common share – basic
Income (loss) from continuing operations (dollars per share)	$ (0.16)	$ 0.11	$ (0.51)	$ 0.24
Loss from discontinued operations (dollars per share)	0.00	(0.04)	(0.01)	(0.13)
Net income (loss) per common share – basic (dollars per share)	(0.16)	0.07	(0.52)	0.11
Per common share – diluted
Not income (loss) from continuing operations (dollars per share)	(0.16)	0.11	(0.51)	0.24
Loss from discontinued operations (dollars per share)	0.00	(0.04)	(0.01)	(0.13)
Net income (loss) per common share – diluted (dollars per share)	$ (0.16)	$ 0.07	$ (0.52)	$ 0.11
Weighted Average Common Shares Outstanding:
Basic (shares)	6,212	6,121	6,195	6,089
Diluted (shares)	6,212	6,331	6,195	6,310

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Earnings (Loss) Per Common Share (Narrative) (Details) - shares shares in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Earnings Per Share [Abstract]
Antidilutive shares excluded from computation of diluted earnings per share (shares)	231	16

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Equity Method Investment (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Schedule of Equity Method Investments [Line Items]
Investment in unconsolidated affiliate	$ 989		$ 989		$ 798
Equity in net income of unconsolidated affiliate	$ 130	$ 97	$ 191	$ 280
Unnamed pharmacy joint venture
Schedule of Equity Method Investments [Line Items]
Percentage of owned joint venture Investment in nonconsolidated affiliate	50.00%		50.00%

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Business Development and Other Significant Transactions (Narrative) (Details)					3 Months Ended	9 Months Ended
	May 31, 2016 USD ($)	Feb. 26, 2016 USD ($) bed	Nov. 01, 2015 USD ($) bed	Feb. 01, 2015 USD ($) bed	Jun. 30, 2016 USD ($)	Sep. 30, 2016 USD ($) center bed	Sep. 30, 2015 USD ($)	Aug. 15, 2016 facility
Business Acquisition [Line Items]
Number of nursing centers | center						54
Number of licensed nursing beds | bed						5,879
Lease termination costs, net of cash payments					$ 2,008,000	$ 2,008,000	$ 0
Avon Ohio, LLC
Business Acquisition [Line Items]
Lease termination fee, future annual payment amount due under amendment	$ 300,000.0
Golden Living
Business Acquisition [Line Items]
Number of nursing centers | facility								22
Skilled Nursing Center in Glasgow, Kentucky | Barren County Health Care Center Inc
Business Acquisition [Line Items]
Number of licensed nursing beds | bed				94
Consideration transferred				$ 7,000,000
Skilled Nursing Center in Fulton, Kentucky | Haws Fulton Investors, LLC
Business Acquisition [Line Items]
Number of licensed nursing beds | bed			60
Consideration transferred			$ 3,900,000
Hutchinson, Kansas | Diversicare of Hutchinson
Business Acquisition [Line Items]
Purchase Price		$ 4,250,000
Number of licensed nursing beds | bed		85
Consideration transferred		$ 4,293,000
Clinton, Kentucky | Clinton Place
Business Acquisition [Line Items]
Purchase Price		$ 3,300,000
Number of licensed nursing beds | bed		88
Consideration transferred		$ 3,334,000

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Business Development and Other Significant Transactions (Schedule of Assets Acquired) (Details) - USD ($) $ in Thousands	Feb. 26, 2016	Nov. 01, 2015	Feb. 01, 2015
Diversicare of Hutchinson | Hutchinson, Kansas
Business Acquisition [Line Items]
Purchase Price	$ 4,250
Acquisition Costs	43
Consideration transferred	4,293
Buildings	3,443
Land	365
Furniture, Fixtures, and Equipment	485
Total purchase price	4,293
Clinton Place | Clinton, Kentucky
Business Acquisition [Line Items]
Purchase Price	3,300
Acquisition Costs	34
Consideration transferred	3,334
Buildings	2,898
Land	267
Furniture, Fixtures, and Equipment	169
Total purchase price	$ 3,334
Skilled Nursing Center in Glasgow, Kentucky | Barren County Health Care Center Inc
Business Acquisition [Line Items]
Consideration transferred			$ 7,000
Buildings			5,778
Land			672
Furniture, Fixtures, and Equipment			550
Total purchase price			$ 7,000
Skilled Nursing Center in Fulton, Kentucky | Haws Fulton Investors, LLC
Business Acquisition [Line Items]
Consideration transferred		$ 3,900
Buildings		3,338
Land		300
Furniture, Fixtures, and Equipment		262
Total purchase price		$ 3,900

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Subsequent Event (Details)			3 Months Ended
	Nov. 01, 2016 facility bed	Oct. 01, 2016 facility bed	Sep. 30, 2017 USD ($)	Jun. 30, 2017 USD ($)	Mar. 31, 2017 USD ($)	Dec. 31, 2016 USD ($)	Sep. 30, 2016 USD ($) center bed	Oct. 03, 2016 USD ($)	Aug. 15, 2016 facility
Subsequent Event [Line Items]
Number of licensed nursing beds							5,879
Number of nursing centers | center							54
Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	8,453
Number of nursing centers | facility	76
Amended Revolver | Revolving credit facility
Subsequent Event [Line Items]
Debt covenant, adjusted EBITDA, quarterly minimum | $							$ 8,500,000
Amended Revolver | Revolving credit facility | Subsequent Event
Subsequent Event [Line Items]
Borrowing capacity | $								$ 52,250,000
Terms of agreement, maximum outstanding borrowings | $								$ 42,250,000
Scenario, forecast | Amended Revolver | Revolving credit facility
Subsequent Event [Line Items]
Debt covenant, adjusted EBITDA, quarterly minimum | $			$ 13,000,000	$ 11,500,000	$ 10,000,000	$ 9,500,000
Broadmoor Manor | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		120
Lease, term of contract		10 years
Golden Living
Subsequent Event [Line Items]
Number of nursing centers | facility									22
Leake Country Nursing Home | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		99
Lease, term of contract		2 years
Armory, MS | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		152
Batesville, MS | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		130
Brook Manor, MS | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		58
Eupora, MS | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		119
Ripley, MS | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		140
Southaven, MS | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		140
Eason Blvd | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		120
Tylertown, MS | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds		60
Lease, term of contract		10 years
Arab, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	87
Meadowood, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	180
Riverchase, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	132
Boaz, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	100
Foley, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	154
Hueytown, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	50
Lanett, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	85
Montgomery, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	138
Oneonta, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	120
Oxford, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	173
Pell City, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	94
Winfield, AL | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of licensed nursing beds	123
Property subject to operating lease | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Number of facilities | facility	12	8
Amended Lease agreement | Golden Living | Subsequent Event
Subsequent Event [Line Items]
Lease, term of contract	10 years