The Ensign Group Annual Report 2014

FY2014 Annual Report · The Ensign Group

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2 0 1 4 A n n u a l R e p o rt

Dear Fellow Shareholder:

We are pleased to report that 2014 was another record year for The Ensign Group, Inc. We are
proud to report that we saw improvements across our same store, transitioning and newly
acquired operations, all during a historic year in which we successfully completed a significant
spin-off of Care Trust REIT, Inc. and experienced one of our most active acquisition years in our
history.

These achievements were made possible by the local operational leadership teams and all of their
field-based and Service Center partners who remained relentless in their focus on clinical and
financial performance in their own operations while also supporting the transition of the newly
acquired operations in several markets. This extraordinary year has been another true test of our
flexibility, responsiveness and resilience and even though there were some pockets that need
improvement, overall the strength inherent in Ensign’s business model shone through,
demonstrating again the scalability of Ensign’s unique approach to growth.

Total revenue for 2014 was $1.03 billion, an increase of 13.6% over the prior year. Consolidated
adjusted EBITDA was $159.4.0 million, a 6.7% increase over fiscal 2013. The company
generated net cash from operations of $84.9 million for the year and had cash and cash
equivalents of $50.4 million at year end. With these successes, our Board of Directors was able
to raise Ensign’s quarterly cash dividend by 7.1%, to $0.075 per share. Ensign has been a
dividend-paying company since 2002 and has consistently increased its dividend every year
since.

On our current operating front, we see many positive developments and opportunities on the
horizon. We continue to experience significant improvements in compliance and quality of care
across the organization, and as we always remind you, compliance and quality outcomes are
precursors to outstanding financial performance. Our commitment to clinical improvement and
quality care is stronger than ever, and we continue to bring better people, new technologies and
innovative systems to bear in pursuing this goal.

Beginning in the fourth quarter of 2014, we realigned our operating segments to include a
transitional, skilled and assisted living services segment, a home health and hospice segment and
an all other category to include our urgent care clinics and mobile x-ray and diagnostic company.
We are anxious to share more detail on the performance of these operations and believe that this
increased visibility will demonstrate the expanding influence these service offerings are having
on our entire organization.

We continue to recruit, hire, train and reward some of the finest leaders and caregivers found
anywhere in the healthcare industry today. Our footprint continued to grow this year as we
acquired eighteen new skilled nursing and assisted living facilities, three home health agencies,
four hospice agencies, and opened or acquired seven new urgent care clinics. We expect to
continue a pattern of disciplined growth through the acquisition of real estate and or by entering
into long-term leases. We will also continue to drive organic growth inherent in the company’s
expanding portfolio, as local leaders continue to focus on business fundamentals and as our newer
operations start to mature.

Finally, in celebrating 2014 we wish to salute the facility CEOs and COOs, the caregivers and all
of our other partners. The extraordinary leadership and quality care they provide to their
residents and communities are the hallmarks of our organization and have been, and will continue
to be, the bedrock of our success. Through them, and with your continuing support, we believe
we can achieve our core goal of creating a world-class service organization that can reach
unheard-of levels of quality care, and set a new standard for the post-acute care industry.

Sincerely,

Christopher R. Christensen, President and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-K

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

For the fiscal year ended December 31, 2014

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

For the transition period from to .

Commission file number: 001-33757

THE ENSIGN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)

33-0861263
(I.R.S. Employer
Identification No.)

27101 Puerta Real, Suite 450
Mission Viejo, CA 92691
(Address of Principal Executive Offices and Zip Code)
(949) 487-9500
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
_____________________________

Title of Each Class
Common Stock, par value $0.001 per share

Name of Each Exchange on Which Registered
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Yes
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

Yes

Act.

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be

contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.

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

Large accelerated filer

Accelerated filer

Non-accelerated filer
(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant, computed by reference to the

closing price as of the last business day of the registrant's most recently completed second fiscal quarter, June 30, 2014, was approximately
$623,416,000.

As of February 5, 2015, 22,616,050 shares of the registrant’s common stock were outstanding.

Part III of this Form 10-K incorporates information by reference from the Registrant's definitive proxy statement for the Registrant's

2015 Annual Meeting of Stockholders to be filed within 120 days after the close of the fiscal year covered by this annual report.

DOCUMENTS INCORPORATED BY REFERENCE:

THE ENSIGN GROUP, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

PART I.

Business

Risk Factors
Unresolved Staff Comments
Properties

Legal Proceedings

Mine Safety Disclosures

PART II.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

PART III.

Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services

Item 1.

Item 1A.

Item 1B.

Item 2.

Item 3.

Item 4.

Item 5.

Item 6.

Item 7.

Item 7A.

Item 8.

Item 9.
Item 9A.

Item 9B.

Item 10.

Item 11.

Item 12.
Item 13.

Item 14.

Item 15.

Exhibits, Financial Statements and Schedules

PART IV.

Signatures
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101

97
97

103

115
118

119

120

121

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements, which include, but are not limited to our expected
future financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital expenditures,
competitive positions, growth opportunities and plans and objectives of management. Forward-looking statements can often be
identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,”
“should,” “would,” “could,” “potential,” “continue,” “ongoing,” similar expressions, and variations or negatives of these words.
These statements are subject to the safe harbors created under the Securities Act of 1933 (Security Act) and the Securities Exchange
Act of 1934 (Exchange Act). These statements are not guarantees of future performance and are subject to risks, uncertainties
and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed
in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” in Part I,
Item 1A of this Annual Report on Form 10-K. Accordingly, you should not rely upon forward-looking statements as predictions
of future events. These forward-looking statements speak only as of the date of this Annual Report, and are based on our current
expectations, estimates and projections about our industry and business, management's beliefs, and certain assumptions made by
us, all of which are subject to change. We undertake no obligation to revise or update publicly any forward-looking statement for
any reason, except as otherwise required by law.

As used in this Annual Report on Form 10-K, the words, "Ensign," Company," “we,” “our” and “us” refer to The Ensign
Group, Inc. and its consolidated subsidiaries. All of our affiliated facilities, operating subsidiaries, the Service Center (defined
below) and our wholly-owned captive insurance subsidiary (the Captive) are operated by separate, wholly-owned, independent
subsidiaries that have their own management, employees and assets. The use of “we”, “us”, “our” and similar terms in this Annual
Report is not meant to imply that any of our affiliated facilities, operating subsidiaries, the Service Center or the Captive are
operated by the same entity.

The Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. In addition, certain
of our wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide centralized accounting,
payroll, human resources, information technology, legal, risk management and other centralized services to the other operating
subsidiaries through contractual relationships with such subsidiaries. In addition, our wholly-owned captive insurance subsidiary,
which we refer to as the Captive, provides some claims-made coverage to our operating subsidiaries for general and professional
liability, as well as for certain workers' compensation insurance liabilities.

We were incorporated in 1999 in Delaware. The Service Center address is 27101 Puerta Real, Suite 450, Mission Viejo, CA
92691, and our telephone number is (949) 487-9500. Our corporate website is located at www.ensigngroup.net. The information
contained in, or that can be accessed through, our website does not constitute a part of this Annual Report.

EnsignTM is our United States trademark. All other trademarks and trade names appearing in this annual report are the property

of their respective owners.

Item 1.

Business

Company Overview

PART I.

We, through our operating subsidiaries, are a provider of skilled nursing, rehabilitative care services, home health, home
care, hospice care, assisted living and urgent care services. As of December 31, 2014, we operated 136 facilities, twelve home
health and eleven hospice operations, one home care business, one transitional care management company, fourteen urgent care
centers and a mobile x-ray and diagnostic company, located in Arizona, California, Colorado, Idaho, Iowa, Oregon, Nebraska,
Nevada, Texas, Utah, Washington and Wisconsin. Our operating subsidiaries, each of which strives to be the operation of choice
in the community it serves, provide a broad spectrum of healthcare services, including skilled nursing, assisted living, home health
and hospice, mobile ancillary, and urgent care services.

Our organizational structure is centered upon local leadership. We believe our organizational structure, which empowers
leaders and staff at the local level, is unique within the healthcare services industry. Each of our operations is led by highly dedicated
individuals who are responsible for key operational decisions at their operations. Leaders and staff are trained and motivated to
pursue superior clinical outcomes, high patient and family satisfaction, operating efficiencies and financial performance at their
operations.

We encourage and empower our leaders and staff to make their operation the “operation of choice” in the community it
serves. This means that our leaders and staff are generally authorized to discern and address the unique needs and priorities of
healthcare professionals, customers and other stakeholders in the local community or market, and then work to create a superior
service offering for and reputation in that particular community or market. We believe that our localized approach encourages
prospective customers and referral sources to choose or recommend the operation. In addition, our leaders are enabled and motivated
to share real-time operating data and otherwise benchmark clinical and operational performance against their peers in order to
improve clinical care, enhance patient satisfaction and augment operational efficiencies, promoting the sharing of best practices.

We view healthcare services primarily as a local business, influenced by personal relationships and community reputation.
We believe our success is largely dependent upon our ability to build strong relationships with key stakeholders from the local
healthcare community, based upon a solid foundation of reliably superior care. Accordingly, our brand strategy is focused on
encouraging the leaders and staff of each operation to focus on clinical excellence, and promote their operation independently
within their local community.

Much of our historical growth can be attributed to our expertise in acquiring real estate or leasing both under-performing
and performing post-acute care operations and transforming them into market leaders in clinical quality, staff competency, employee
loyalty and financial performance. We plan to continue to grow our revenue and earnings by:

• continuing to grow our talent base and develop future leaders;

•

increasing the overall percentage or “mix” of higher-acuity patients;

•

focusing on organic growth and internal operating efficiencies;

• continuing to acquire additional operations in existing and new markets;

• expanding and renovating our existing operations;

• constructing new facilities in existing and new markets, and

• strategically investing in and integrating other post-acute care healthcare businesses.

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Company History

Our company was formed in 1999 with the goal of establishing a new level of quality care within the skilled nursing industry.
The name “Ensign” is synonymous with a “flag” or a “standard,” and refers to our goal of setting the standard by which all others
in our industry are measured. We believe that through our efforts and leadership, we can foster a new level of patient care and
professional competence at our operating subsidiaries, and set a new industry standard for quality skilled nursing and rehabilitative
care services.

We organize our operating subsidiaries into portfolio companies, which we believe has enabled us to maintain a local, field-
driven organizational structure and attract additional qualified leadership talent, and to identify, acquire, and improve operations
at a generally faster rate. Each of our portfolio companies has its own president. These presidents, who are experienced and proven
leaders that are generally taken from the ranks of operational CEOs, serve as leadership resources within their own portfolio
companies, and have the primary responsibility for recruiting qualified talent, finding potential acquisition targets, and identifying
other internal and external growth opportunities. We believe this organizational structure has improved the quality of our recruiting
and will continue to facilitate successful acquisitions.

On June 1, 2014, we completed the separation of our healthcare business and our real estate business into two separate and
independent publicly traded companies through the distribution of all of the outstanding shares of common stock of CareTrust
REIT, Inc. (CareTrust) to Ensign stockholders on a pro rata basis (the Spin-Off). Our stockholders received one share of CareTrust
common stock for each share of our common stock held at the close of business on May 22, 2014, the record date for the Spin-
Off. Prior to the Spin-Off, we transferred 97 skilled nursing, assisted and independent living facilities to CareTrust. We continue
to operate 94 of these facilities under multiple, long-term, triple-net leases with CareTrust.

Beginning in the fourth quarter of 2014, we realigned our operating segments to more closely correlate with our service
offerings, which coincide with the way that we measure performance and allocate resources. We have two reportable operating
segments: (1) transitional, skilled and assisted living services (TSA services), which includes the operation of skilled nursing
facilities and assisted living facilities and is the largest portion of our business; and (2) home health and hospice services, which
includes our home health, home care and hospice businesses. Our Chief Executive Officer, who is our chief operating decision
maker, or CODM, reviews financial information at the operating segment level.

We also report an “all other” category that includes revenue from our urgent care centers and a mobile x-ray and diagnostic
company. Our urgent care centers and mobile x-ray and diagnostic businesses are neither significant individually nor in aggregate
and therefore do not constitute a reportable segment. Our reporting segments are business units that offer different services and
that are managed separately to provide greater visibility into those operations. The expansion of our home health and hospice
business led us to separate our home health and hospice businesses into distinct reportable segment in the fourth quarter of 2014.
Previously, we had a single reportable segment, healthcare services, which included providing skilled nursing, assisted living,
home health and hospice, urgent care and related ancillary services. We have presented 2013 and 2012 financial information in
this Annual Report on a comparative basis to conform with the current year segment presentation. For more information about
our operating segments, as well as financial information, see Part II Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Note 7, Business Segments of the Notes to Consolidated Financial Statements.

Transitional, Skilled and Assisted Living Services Segment

Skilled Nursing Operations

As of December 31, 2014, our skilled nursing companies provided skilled nursing care at 121 operations, having 12,560
operational beds, in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah, Wisconsin and Washington.
Through our skilled nursing operations, we provide short stay patients and long stay patients with a full range of medical, nursing,
rehabilitative, pharmacy and routine services, including daily dietary, social and recreational services. We generate our revenue
from Medicaid, private pay, managed care and Medicare payors. In the year ended December 31, 2014, approximately 42.5% and
28.9% of our skilled nursing revenue was derived from Medicaid and Medicare programs, respectively.

Assisted and Independent Living Operations

We complement our skilled nursing care business by providing assisted and independent living services at 32 operations, of
which 17 are located on the same site location as our skilled nursing care operations. As of December 31, 2014, we had 2,165
units. Our assisted living companies located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Texas, Utah and
Washington, provide residential accommodations, activities, meals, security, housekeeping and assistance in the activities of daily
living to seniors who are independent or who require some support, but not the level of nursing care provided in a skilled nursing
5

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operation. Our independent living units are non-licensed independent living apartments in which residents are independent and
require no support with the activities of daily living. We generate revenue at these units primarily from private pay sources, with
a small portion earned from Medicaid or other state-specific programs. During the year ended December 31, 2014, approximately
98.8% of our assisted and independent living revenue was derived from private pay sources.

Home Health and Hospice Services Segment

Home Health

As of December 31, 2014, we provided home health care services in California, Colorado, Idaho, Iowa, Oregon, Texas, Utah
and Washington. Our home health care services generally consist of providing some combination of the nursing, speech,
occupational and physical therapists, medical social workers and certified home health aide services. Home health care is often a
cost-effective solution for patients, and can also increase their quality of life and allow them to receive quality medical care in the
comfort and convenience of a familiar setting. We derive the majority of our home health revenue from Medicare and managed
care. During the year ended December 31, 2014, approximately 58.7% of our home health revenue were derived from Medicare.

Hospice

As of December 31, 2014, we provided hospice care services in Arizona, California, Colorado, Idaho, Texas, Utah and
Washington. Hospice services focus on the physical, spiritual and psychosocial needs of terminally ill individuals and their families,
and consists primarily of palliative and clinical care, education and counseling. We derive the majority of our hospice revenue
from Medicare reimbursement. During the year ended December 31, 2014, approximately 84.5% of our hospice revenue was
derived from Medicare.

Other

In addition, as of December 31, 2014, we operated 14 urgent care clinics and held 80% of the membership interest of a mobile
x-ray and diagnostic company. Our urgent care centers provide daily access to healthcare for minor injuries and illnesses, including
x-ray and lab services, all from convenient neighborhood locations with no appointments. Our diagnostic company is a leader in
providing mobile diagnostic services, including digital x-ray, ultrasound, electrocardiograms, ankle-brachial index, and phlebotomy
services to people in their homes or at long-term care facilities.

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Growth

We have an established track record of successful acquisitions. Much of our historical growth can be attributed to our expertise
in acquiring real estate or leasing both under-performing and performing post-acute care operations and transforming them into
market leaders in clinical quality, staff competency, employee loyalty and financial performance. With each acquisition, we apply
our core operating expertise to improve these operations, both clinically and financially. In years where pricing has been high, we
have focused on the integration and improvement of our existing operating subsidiaries while limiting our acquisitions to
strategically situated properties.

In the last few years, our acquisition activity accelerated, allowing us to add 35 facilities between January 1, 2012 and
December 31, 2014. From January 1, 2008 through December 31, 2014, we acquired 76 facilities, which added 7,884 operational
beds to our operating subsidiaries.

During the year ended December 31, 2014, we continued to expand our operations with the addition of fifteen stand-alone

skilled nursing operations, three assisted living operations, three home health agencies, four hospice agencies, one home care
business, one primary care group and one transitional care management company. We also opened seven urgent care centers
during 2014. The following table summarizes our growth through December 31, 2014:

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

December 31,

Cumulative number of skilled
nursing, assisted and independent
living operations

Cumulative number of operational
skilled nursing, assisted living and
independent living beds/units

Number of home health and hospice
agencies

Number of urgent care centers

102

108

119 (1)

136

(1)

5,585

6,667

7,105

7,324

8,948

9,539

11,702

12,198

13,204 (1) 14,725

(1)

—

(1) Included in 2013 operational beds/units are operational beds/units of the three independent living facilities we transferred to CareTrust as part of the Spin-Off. Prior to the Spin-Off,
the Company separated the healthcare operations from the independent living operations at two locations, resulting in two separate facilities and transferred the two separate facilities
and one stand-alone independent facilities to CareTrust. Included in 2013 number of operations includes the one stand-alone independent facility transferred to CareTrust as part of the
Spin-Off. 2014 operational beds/units and number of operations do not include the three independent living facilities.

New Market CEO and New Ventures Programs. In order to broaden our reach into new markets, and in an effort to provide
existing leaders in our company with the entrepreneurial opportunity and challenge of entering a new market and starting a new
business, we established our New Market CEO program in 2006. Supported by our Service Center and other resources, a New
Market CEO evaluates a target market, develops a comprehensive business plan, and relocates to the target market to find talent
and connect with other providers, regulators and the healthcare community in that market, with the goal of ultimately acquiring
facilities and establishing an operating platform for future growth. In addition, this program was expanded to broaden our reach
to other lines of business closely related to the skilled nursing industry through our New Ventures program. For example, we
entered into home health as part of this program. The New Ventures program encourages facility CEOs to evaluate service offerings
with the goal of establishing an operating platform in new markets. We believe that this program will not only continue to drive
growth, but will also provide a valuable training ground for our next generation of leaders, who will have experienced the challenges
of growing and operating a new business.

Real Estate Investment Trust (REIT) Spin-Off. On June 1, 2014, we completed the separation of our healthcare business and
our real estate business into two separate publicly traded companies through a tax-free distribution of all of the outstanding shares
of common stock of CareTrust REIT, Inc. (CareTrust) to our stockholders on a pro rata basis (the Spin-Off). Our stockholders
received one share of CareTrust common stock for each share of our common stock held at the close of business on May 22, 2014,
the record date for the Spin-Off. As a result of the Spin-Off, we lease back real property associated with 94 affiliated skilled
nursing, assisted living and independent living facilities from CareTrust on a triple-net basis (the Master Leases), under which we
are responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs.

Immediately before the Spin-Off, on May 30, 2014, while CareTrust was a wholly-owned subsidiary, CareTrust raised $260.0
million of debt financing (The Bond). CareTrust also entered into the Fifth Amended and Restated Loan Agreement, with General
Electric Capital Corporation (GECC), which consisted of an additional loan of $50.7 million to an aggregate principal amount of
$99.0 million (the Ten Project Note). The Ten Project Note and The Bond were assumed by CareTrust in connection with the
Separation and Distribution Agreement. CareTrust transferred $220.8 million to us, a portion of which we used to retire $208.6
million of long-term debt prior to maturity. The remaining portion was used to pay prepayment penalties and other third party
fees relating to the early retirement of outstanding debt. We also retained $8.2 million of the amount CareTrust transferred, which

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we used to pay regular quarterly dividend payments. See further details of the Spin-Off at Note 2, Spin-Off of Real Estate Assets
through a Real Estate Investment Trust of Notes to Consolidated Financial Statements.

As a result of the early retirement of long-term debt, we incurred losses of $5.8 million consisting of $4.1 million in repayment
penalties and the write-off of unamortized debt discount and deferred financing costs and $1.7 million of recognized loss due to
the discontinuance of cash flow hedge accounting for the related interest-rate swap. We also entered into a new credit facility
agreement (2014 Credit Facility) in an aggregate principal amount of $150.0 million with a lending consortium arranged by
SunTrust effective May 30, 2014. We have and continue to expect to use the 2014 Credit Facility for working capital purposes,
to fund acquisitions and for general corporate purposes. As of December 31, 2014, our subsidiaries had $65.0 million outstanding
on the 2014 Credit Facility. See further details at Note 18, Debt of Notes to Consolidated Financial Statements.

Acquisition History

The following table sets forth the location of our facilities and the number of operational beds located at our facilities as

of December 31, 2014:

Cumulative number of
skilled nursing and
assisted living
operations

Cumulative number of
operational skilled
nursing, assisted living
and independent living
beds/units

Total

136

4,806

2,446

3,146

1,360

587

739

477

304

366

356

138

14,725

In addition to the facility acquisitions above, in 2014, we acquired seven home health and hospice agencies. As of
December 31, 2014, we provided home health and hospice services through our 23 operating subsidiaries in Arizona, California,
Colorado, Idaho, Iowa, Oregon, Texas, Utah and Washington.

In the first quarter of 2014, we acquired a skilled nursing operation and a transitional care managing company in two states
for an aggregate purchase price of $9.1 million. The acquisition of the skilled nursing operation added 196 operational skilled
nursing beds to our operating subsidiaries. The acquisition of the transitional care managing company did not have an impact on
the number of beds operated by our operating subsidiaries.

In the second quarter of 2014, we acquired three skilled nursing operations, one assisted living operation, one home health
agency, one hospice agency and one primary care group in four states for an aggregate purchase price of $29.3 million. The
acquisitions of the three skilled nursing and one assisted living operations added 368 and 144 operational skilled nursing beds and
assisted living units, respectively, to our operating subsidiaries. The acquisitions of the home health and hospice agencies and
primary care group did not have an impact on the number of beds operated by our operating subsidiaries.

In addition, during the second quarter of 2014, we acquired the underlying assets of two skilled nursing operations in two
states, which we previously operated under a long-term lease agreement, for an aggregate purchase price of approximately $7.5
million. These acquisitions did not have an impact on our operational bed count. We also entered into long-term lease agreements
and assumed the operations of two skilled nursing facilities in two states. These transactions added 199 operational skilled nursing
beds to our operating subsidiaries. We did not acquire any material assets or assume any liabilities other than the tenant's post-
assumption rights and obligations under the leases.

During the third quarter of 2014, we acquired an assisted living operation, a hospice agency, a home health agency and a
hospice license in three states for an aggregate purchase price of $8.3 million. We assumed an existing HUD-insured loan as part
of the transaction. We also entered into a long-term lease agreement and assumed the operations of one skilled nursing facility in
one state. We did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and
obligations under the lease. The acquisition of the assisted living operation and the long-term lease of a skilled nursing operation
added 135 and 67 operational assisted living units and skilled nursing beds, respectively, to our operating subsidiaries. The
acquisitions of the home health and hospice agencies and hospice license did not have an impact on the number of beds operated
by our operating subsidiaries.

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million. The acquisitions of skilled nursing and assisted living operations added 623 and 66 operational skilled nursing beds and
assisted living units, respectively, to our operating subsidiaries. The acquisitions of the home health and hospice agencies and
private home care business did not have an impact on the number of beds operated by our operating subsidiaries.

Subsequent to the fourth quarter of 2014, we acquired five skilled nursing operations, two assisted living operations, two
independent living operations, one home health agency and two urgent care clinics in three states for an aggregate purchase price
of $38.6 million. The acquisition of the skilled nursing operations and assisted and independent living operations added 419 and
286 operational skilled nursing beds and assisted and independent living units, respectively, to our operating subsidiaries. The
acquisitions of the home health agency and urgent care centers did not have an impact on the number of beds operated by our
operating subsidiaries.

See further discussion of facility acquisitions in Note 8, Acquisitions in Notes to Consolidated Financial Statements.

Quality of Care Measures

In December 2008, the Centers for Medicare and Medicaid Services (CMS) introduced the Five-Star Quality Rating System
to help consumers, their families and caregivers compare nursing homes more easily. The Five-Star Quality Rating System gives
each nursing home a rating of between one and five stars in various categories. In cases of acquisitions, the previous operator's
clinical ratings are included in our overall Five-Star Quality Rating. The prior operator's results will impact our rating until we
have sufficient clinical measurements subsequent to the acquisition date. Generally we acquire facilities with a 1 or 2-Star rating.
We believe compliance and quality outcomes are precursors to outstanding financial performance. The table below summarizes
the improvements we have made in these quality measures since 2010:

Cumulative number of facilities

4 and 5-Star Quality Rated facilities

As of December 31,

2010

2011

2012

2013

2014

102

108

119

136

Percentage of 4 and 5-Star Quality Rated facilities

25.6%

37.3%

41.7%

50.4%

56.6%

Industry Trends

The skilled nursing industry has evolved to meet the growing demand for post-acute and custodial healthcare services
generated by an aging population, increasing life expectancies and the trend toward shifting of patient care to lower cost settings.
The skilled nursing industry has evolved in recent years, which we believe has led to a number of favorable improvements in the
industry, as described below:

•

Shift of Patient Care to Lower Cost Alternatives. The growth of the senior population in the United States continues to
increase healthcare costs, often faster than the available funding from government-sponsored healthcare programs. In
response, federal and state governments have adopted cost-containment measures that encourage the treatment of patients
in more cost-effective settings such as skilled nursing facilities, for which the staffing requirements and associated costs
are often significantly lower than acute care hospitals, inpatient rehabilitation facilities and other post-acute care settings.
As a result, skilled nursing facilities are generally serving a larger population of higher-acuity patients than in the past.

Significant Acquisition and Consolidation Opportunities. The skilled nursing industry is large and highly fragmented,
characterized predominantly by numerous local and regional providers. We believe this fragmentation provides significant
acquisition and consolidation opportunities for us.

Improving Supply and Demand Balance. The number of skilled nursing facilities has declined modestly over the past
several years. We expect that the supply and demand balance in the skilled nursing industry will continue to improve due
to the shift of patient care to lower cost settings, an aging population and increasing life expectancies.

Increased Demand Driven by Aging Populations and Increased Life Expectancy. As life expectancy continues to increase
in the United States and seniors account for a higher percentage of the total U.S. population, we believe the overall demand
for skilled nursing services will increase. At present, the primary market demographic for skilled nursing services is
primarily individuals age 75 and older. According to the 2010 U.S. Census, there were over 40 million people in the
United States in 2010 that are over 65 years old. The 2010 U.S. Census estimates this group is one of the fastest growing
segments of the United States population and is expected to more than double between 2000 and 2030.

• Accountable Care Organizations and Reimbursement Reform. A significant goal of federal health care reform is to
transform the delivery of health care by changing reimbursement for health care services to hold providers accountable

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for the cost and quality of care provided. Medicare and many commercial third party payors are implementing Accountable
Care Organization (ACO) models in which groups of providers share in the benefit and risk of providing care to an
assigned group of individuals. Other reimbursement methodology reforms include value-based purchasing, in which a
portion of provider reimbursement is redistributed based on relative performance on designated economic, clinical quality,
and patient satisfaction metrics. In addition, CMS is implementing demonstration programs to bundle acute care and
post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These
reimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial
health plans. On January 26, 2015, CMS announced its goal to have 30% of Medicare payments for quality and value
through alternative payment models such as ACOs or bundled payments by 2016 and up to 50% by the end of 2018.
Providers who respond successfully to these trends and are able to deliver quality care at lower cost are likely to benefit
financially.

We believe the skilled nursing industry has been and will continue to be impacted by several other trends. The use of long-
term care insurance is increasing among seniors as a means of planning for the costs of skilled nursing services. In addition, as a
result of increased mobility in society, reduction of average family size, and the increased number of two-wage earner couples,
more seniors are looking for alternatives outside the family for their care.

Effects of Changing Prices

Medicare reimbursement rates and procedures are subject to change from time to time, which could materially impact our
revenue. Medicare reimburses our skilled nursing operations under a prospective payment system (PPS) for certain inpatient
covered services. Under the PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of
treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group (RUG) category
that is based upon each patient’s acuity level. As of October 1, 2010, the RUG categories were expanded from 53 to 66 with the
introduction of minimum data set (MDS) 3.0. Should future changes in skilled nursing facility payments reduce rates or increase
the standards for reaching certain reimbursement levels, our Medicare revenues could be reduced and/or our costs to provide those
services could increase, with a corresponding adverse impact on our financial condition or results of operations.

CMS Rulings. On July 31, 2014, CMS issued its final rule outlining fiscal year 2015 Medicare payment rates for skilled
nursing facilities. CMS estimates that aggregate payments to skilled nursing facilities will increase by $750 million, or 2.0% for
fiscal year 2015, relative to payments in 2014. The estimated increase reflects a 2.5% market basket increase, reduced by the 0.5%
multi-factor productivity (MFP) adjustment required by the Patient Protection and Affordable Care Act (PPACA).

On July 31, 2013, CMS issued its final rule outlining fiscal year 2014 Medicare payment rates for skilled nursing facilities.
CMS estimated that aggregate payments to skilled nursing facilities would increase by $470 million, or 1.3% for fiscal year 2014,
relative to payments in 2013. This estimated increase reflected a 2.3% market basket increase, reduced by the 0.5% forecast error
correction and further reduced by the 0.5% MFP as required by PPACA. The forecast error correction is applied when the difference
between the actual and projected market basket percentage change for the most recent available fiscal year exceeds the 0.5%
threshold. In its 2014 report to congress, the Medicare Payment Advisory Commission recommended eliminating the market
basket update and reducing payments through the SNF prospective payments system.

On July 27, 2012, CMS announced a final rule updating Medicare skilled nursing facility PPS payments in fiscal year 2013.
The update, a 1.8% or $670 million increase, reflected a 2.5% market basket increase, reduced by a 0.7% MFP adjustment mandated
by the PPACA. This increase was offset by the 2% sequestration reduction, which became effective April 1, 2013.

On October 30, 2014, CMS announced payment changes to the Medicare home health prospective payment system (HH
PPS) for calendar year 2015. Under this rule, CMS projects that Medicare payments to home health agencies in calendar year
2015 will be reduced by 0.3%, or $60 million. The decrease reflects the effects of the 2.1% home health payment update percentage
and the rebasing adjustments to the national, standardized 60-day episode payment rate, the national per-visit payment rates, and
the non-routine medical supplies (NRS) conversion factor. CMS is also finalizing three changes to the face-to-face encounter
requirements under the Affordable Care Act. These changes include: a) eliminating the narrative requirement currently in regulation,
b) establishing that if each home health agency (HHA) claim is denied, the corresponding physician claim for certifying/re-
certifying patient eligibility for Medicare-covered home health services is considered non-covered as well because there is no
longer a corresponding claim for Medicare-covered home health services and c) clarifying that a face-to-face encounter is required
for certifications, rather than initial episodes; and that a certification (versus a re-certification) is generally considered to be any
time a new start of care assessment is completed to initiate care. This rule also established a minimum submission threshold for
the number of OASIS assessments that each HHA must submit under the Home Health Quality Reporting Program and the Home
Health Conditions of Participant for speech language pathologist personnel.

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On November 22, 2013, CMS issued its final ruling regarding Medicare payment rates for home health agencies effective
January 1, 2014. As required by the PPACA, this rule included rebasing adjustments, with a four-year phase-in, to the national,
standardized 60-day episode payment rates; the national per-visit rates; and the NRS conversion factor. Under the ruling, CMS
projected that Medicare payments to home health agencies in calendar year 2014 would be reduced by 1.05%, or $200 million,
reflecting the combined effects of the 2.3% increase in the home health national payment update percentage; offset by a 2.7%
decrease due to rebasing adjustments to the national, standardized 60-day episode payment rate, mandated by the Affordable Care
Act; and a 0.6% decrease due to the effects of Home Health Prospective Payment Systems Grouper refinements. This final rule
also updated the home health wage index for calendar year 2014. The ruling also established home health quality reporting
requirements for 2014 payment and subsequent years to specify that Medicaid responsibilities for home health surveys be explicitly
recognized in the State Medicaid Plan, which is similar to the current regulations for surveys of skilled nursing facilities and
intermediate care facilities for individuals with intellectual disabilities.

In November 2012, CMS issued final regulations regarding Medicare payment rates for home health agencies effective
January 1, 2013. These final regulations implemented a net market basket increase of 1.3% consisting of a 2.3% market basket
inflation increase, less a 1.0% adjustment mandated by the PPACA. In addition, CMS implemented a 1.3% reduction in case mix.
CMS projected the impact of these changes would result in a less than 0.1% decrease in payments to home health agencies.

On August 1, 2014, CMS issued its final rule outlining fiscal year 2015 Medicare payment rates and the wage index for
hospices serving Medicare beneficiaries. Under the final rule, hospices will see an estimated 1.4% increase in their payments for
fiscal year 2015. The hospice payment increase would be the net result of a hospice payment update to the hospice per diem rates
of 2.1% (a “hospital market basket” increase of 2.9% minus 0.8% for reductions required by law) and a 0.7% decrease in payments
to hospices due to updated wage data and the sixth year of CMS’ seven-year phase-out of its wage index budget neutrality adjustment
factor (BNAF). The final rule also states that CMS will begin national implementation of the CAHPS Hospice Survey starting
January 1, 2015. In the final rule, CMS requires providers to complete their hospice cap determination within 150 days after the
cap period and remit any overpayments. If a hospice does not complete its cap determination in a timely fashion, its Medicare
payments would be suspended until the cap determination is complete and received by the contractor. This is similar to the current
practice for all other provider types that file cost reports with Medicare.

On August 2, 2013, CMS issued its final rule that updated fiscal year 2014 Medicare payment rates and the wage index for
hospices serving Medicare beneficiaries. Hospices were projected to see an estimated 1.0% increase in their payments for fiscal
year 2014. The hospice payment increase was the net result of a hospice payment update percentage of 1.7% (a 2.5% hospital
market basket increase minus a 0.8% reduction mandated by law), offset by a 0.7% decrease in payments to hospices due to updated
wage data and the fifth year of the CMS's seven-year phase-out of its wage index budget neutrality adjustment factor (BNAF). As
finalized in this rule, CMS planned to update the hospice per diem rates for fiscal year 2014 and subsequent years through the
annual hospice rule or notice, rather than solely through a Change Request, as has been done in prior years. The fiscal year 2014
hospice payment rates and wage index became effective on October 1, 2013.

In July 2012, CMS issued its final rule for hospice services for its 2013 fiscal year. These final regulations implemented a
net market basket increase of 1.6% consisting of a 2.6% market basket inflation increase, less offsets to the standard payment
conversion factor mandated by the PPACA of 0.7% to account for the effect of a productivity adjustment, and 0.3% as required
by statute. CMS projected the impact of these changes would result in a 0.9% increase in payments to hospice providers.

On April 1, 2014, the President signed into law the Protecting Access to Medicare Act of 2014, which averted a 24% cut in
Medicare payments to physicians and other Part B providers until March 31, 2015. In addition, this law maintains the 0.5% update
for such services through December 31, 2014 and provides a 0.0% update to the 2015 Medicare Physician Fee Schedule (MPFS)
through March 31, 2015. Among other things, this law provides the framework for implementation of a value-based purchasing
program for skilled nursing facilities. Under this legislation HHS is required to develop by October 1, 2016 measures and
performance standards regarding preventable hospital readmissions from skilled nursing facilities. Beginning October 1, 2018,
HHS will withhold 2% of Medicare payments to all skilled nursing facilities and distribute this pool of payment to skilled nursing
facilities as incentive payments for preventing readmissions to hospitals.

On January 2, 2013 the President signed the American Taxpayer Relief Act of 2012 into law. This statute creates a Commission
on Long Term Care, the goal of which is to develop a plan for the establishment, implementation, and financing of a comprehensive,
coordinated, and high-quality system that ensures the availability of long-term care services and supports for individuals in need
of such services and supports. Any implementation of recommendations from this commission may have an impact on coverage
and payment for our services.

Should future changes in PPS include further reduced rates or increased standards for reaching certain reimbursement levels,
our Medicare revenues derived from our affiliated skilled nursing facilities (including rehabilitation therapy services provided at

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our affiliated skilled nursing facilities) could be reduced, with a corresponding adverse impact on our financial condition or results
of operations.

On February 22, 2012, the President signed into law H.R. 3630, which among other things, delayed a cut in physician and
Part B services. In establishing the funding for the law, payments to nursing facilities for patients' unpaid Medicare A co-insurance
was reduced. The Deficit Reduction Act of 2005 had previously limited reimbursement of bad debt to 70% on privately responsibility
co-insurance. However, under H.R. 3630, this reimbursement will be reduced to 65%.

Further, prior to the introduction of H.R. 3630, we were reimbursed for 100% of bad debt related to dual-eligible Medicare
patients' co-insurance. H.R. 3630 will phase down the dual-eligible reimbursement over three years. Effective October 1, 2012,
Medicare dual-eligible co-insurance reimbursement decreased from 100% to 88%, with further rates reductions to 77% and 65%
as of October 1, 2013 and 2014, respectively. Any reductions in Medicare or Medicaid reimbursement could materially adversely
affect our profitability.

Medicare Part B Therapy Cap. Some of our rehabilitation therapy revenue is paid by the Medicare Part B program under a
fee schedule. Congress has established annual caps that limit the amounts that can be paid (including deductible and coinsurance
amounts) for rehabilitation therapy services rendered to any Medicare beneficiary under Medicare Part B. The Deficit Reduction
Act of 2005 (DRA) added Sec. 1833(g)(5) of the Social Security Act and directed CMS to develop a process that allows exceptions
for Medicare beneficiaries to therapy caps when continued therapy is deemed medically necessary.

The therapy cap exception has been reauthorized in a number of subsequent laws, most recently in the Protecting Access to
Medicare Act of 2014, which extends the cap and exception process through March 31, 2015. That statute implements a two-
tiered exception process, with an automatic exception process and a manual medical review exception process. The automatic
exception process applies for patients who reach a $1,920 threshold. The manual medical review exception process applies at the
$3,700 threshold. Every claim exceeding threshold after April 1, 2014 is subject to Manual Medical Review (MMR). The Texas
and California ‘Pre-Payment’ MMR has been discontinued at this point in time. All states continued to be subject to post payment
review when exceeding $3,700 Speech/Part time combined and $3,700 overtime alone. All threshold exceptions over $3,700 are
subject to review. It was expected that the MMR Pre-Payment Review would be reinstated in August 2014. However, due to the
continued delay in awarding new Recovery Auditor contracts, the CMS initiated contract modifications to the current Recovery
Auditor contracts to allow the Recovery Auditors to restart some reviews. Most reviews will be done on an automated basis, but
a limited number will be complex reviews of topics selected by CMS. While the RAC Contractors have begun to reinstate some
reviews, the Part B ‘Pre-Payment’ MMR Pause continues at this time.

The application of annual caps, or the discontinuation of exceptions to the annual caps, could have an adverse effect on our
rehabilitation therapy revenue. Additionally, the exceptions to these caps may not be extended beyond March 31, 2015, which
could also have an adverse effect on our revenue after that date.

In addition, the Multiple Procedure Payment Reduction (MPPR) was increased from a 25% to 50% reduction applied to
therapy by reducing payments for practice expense of the second and subsequent therapies when therapies are provided on the
same day. The implementation of MPPR includes: 1) facilities that provide Medicare Part B speech-language pathology,
occupational therapy, and physical therapy services and bill under the same provider number; and 2) providers in private practice,
including speech-language pathologists, who perform and bill for multiple services in a single day. The change from 25% of the
practice expense to a 50% reduction went into effect for Medicare Part B services provided on or after April 1, 2013.

Medicare Coverage Settlement Agreement. A proposed federal class action settlement was filed in federal district court on
October 16, 2012 that would end the Medicare coverage standard for skilled nursing, home health and outpatient therapy services
that a beneficiary's condition must be expected to improve. The settlement was approved on January 24, 2013, which tasked CMS
with revising its Medicare Benefit Manual and numerous other policies, guidelines and instructions to ensure that Medicare coverage
is available for skilled maintenance services in the home health, skilled nursing and outpatient settings. CMS must also develop
and implement a nationwide education campaign for all who make Medicare determinations to ensure that beneficiaries with
chronic conditions are not denied coverage for critical services because their underlying conditions will not improve. At the
conclusion of the CMS education campaign, the members of the class will have the opportunity for re-review of their claims, and
a two- or three-year monitoring period will commence. Implementation of the provisions of this settlement agreement could
favorably impact Medicare coverage reimbursement for our services.

Historically, adjustments to reimbursement under Medicare have had a significant effect on our revenue. For a discussion
of historic adjustments and recent changes to the Medicare program and related reimbursement rates, see Item 1A. Risk Factors -
Risks Related to Our Business and Industry - “Our revenue could be impacted by federal and state changes to reimbursement and
other aspects of Medicaid and Medicare,” “Our future revenue, financial condition and results of operations could be impacted by

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continued cost containment pressures on Medicaid spending,” “We may not be fully reimbursed for all services for which each
facility bills through consolidated billing, which could adversely affect our revenue, financial condition and results of operations”
and “Reforms to the U.S. healthcare system will impose new requirements upon us and may lower our reimbursements." The
federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare
and Medicaid. We are not able to predict the outcome of the legislative process. We also cannot predict the extent to which proposals
will be adopted or, if adopted and implemented, what effect, if any, such proposals and existing new legislation will have on us.
Efforts to impose reduced allowances, greater discounts and more stringent cost controls by government and other payors are
expected to continue and could adversely affect our business, financial condition and results of operations.

Payor Sources

We derive revenue primarily from the Medicaid and Medicare programs, private pay patients and managed care payors.
Medicaid typically covers patients that require standard room and board services, and provides reimbursement rates that are
generally lower than rates earned from other sources. We monitor our quality mix, which is the percentage of non-Medicaid revenue
from each of our facilities, to measure the level received from each payor across each of our business units. We intend to continue
to focus on enhancing our care offerings to accommodate more high acuity patients.

Medicaid. Medicaid is a state-administered program financed by state funds and matching federal funds. Medicaid programs
are administered by the states and their political subdivisions, and often go by state-specific names, such as Medi-Cal in California
and the Arizona Healthcare Cost Containment System in Arizona. Medicaid programs generally provide health benefits for
qualifying individuals, and may supplement Medicare benefits for financially needy persons aged 65 and older. Medicaid
reimbursement formulas are established by each state with the approval of the federal government in accordance with federal
guidelines. Seniors who enter skilled nursing facilities as private pay clients can become eligible for Medicaid once they have
substantially depleted their assets. Medicaid is the largest source of funding for nursing home facilities.

Medicare. Medicare is a federal program that provides healthcare benefits to individuals who are 65 years of age or older
or are disabled. To achieve and maintain Medicare certification, a skilled nursing facility must sign a Medicare provider agreement
and meet the CMS “Conditions of Participation” on an ongoing basis, as determined in periodic facility inspections or “surveys”
conducted primarily by the state licensing agency in the state where the facility is located. Medicare pays for inpatient skilled
nursing facility services under the prospective payment system. The prospective payment for each beneficiary is based upon the
medical condition of and care needed by the beneficiary. Medicare skilled nursing facility coverage is limited to 100 days per
episode of illness for those beneficiaries who require daily care following discharge from an acute care hospital.

Managed Care and Private Insurance. Managed care patients consist of individuals who are insured by a third-party entity,
typically a senior HMO plan, or who are Medicare beneficiaries who have assigned their Medicare benefits to a senior HMO plan.
Another type of insurance, long-term care insurance, is also becoming more widely available to consumers, but is not expected to
contribute significantly to industry revenues in the near term.

Private and Other Payors. Private and other payors consist primarily of individuals, family members or other third parties

who directly pay for the services we provide.

Billing and Reimbursement. Our revenue from government payors, including Medicare and state Medicaid agencies, is
subject to retroactive adjustments in the form of claimed overpayments and underpayments based on rate adjustments, audits or
asserted billing and reimbursement errors. We believe billing and reimbursement errors, disagreements, overpayments and
underpayments are common in our industry, and we are regularly engaged with government payors and their contractors in reviews,
audits and appeals of our claims for reimbursement due to the subjectivity inherent in the processes related to patient diagnosis
and care, recordkeeping, claims processing and other aspects of the patient service and reimbursement processes, and the errors
or disagreements those subjectivities can produce.

We take seriously our responsibility to act appropriately under applicable laws and regulations, including Medicare and
Medicaid billing and reimbursement laws and regulations. Accordingly, we employ accounting, reimbursement and compliance
specialists who train, mentor and assist our clerical, clinical and rehabilitation staffs in the preparation of claims and supporting
documentation, regularly monitor billing and reimbursement practices within our operating subsidiaries, and assist with the appeal
of overpayment and recoupment claims generated by governmental, Medicare contractors and other auditors and reviewers. In
addition, due to the potentially serious consequences that could arise from any impropriety in our billing and reimbursement
processes, we investigate allegations of impropriety or irregularity relative thereto, and sometimes do so with the aid of outside
auditors (other than our independent registered public accounting firm), attorneys and other professionals.

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Whether information about our billing and reimbursement processes is obtained from external sources or activities such as
Medicare and Medicaid audits or probe reviews, internal investigations, or our regular day-to-day monitoring and training activities,
we collect and utilize such information to improve our billing and reimbursement functions and the various processes related
thereto. While, like other operators in our industry, we experience billing and reimbursement errors, disagreements and other
effects of the inherent subjectivities in reimbursement processes on a regular basis, we believe that we are in substantial compliance
with applicable Medicare and Medicaid reimbursement requirements. We continually strive to improve the efficiency and accuracy
of all of our operational and business functions, including our billing and reimbursement processes.

The following table sets forth our total revenue by payor source generated by each of our reportable segments and our "all

other" category and as a percentage of total revenue for the periods indicated (dollars in thousands):

Medicaid
Medicare

Medicaid-skilled

Subtotal

Managed care

Private and other

Total revenue

Year Ended December 31, 2014
Home
Health and
Hospice
Services

All Other
—
$
—

Total
Revenue
$ 358,119
313,144

—

22,572 (1)

51,157

722,420

145,796

159,190

TSA
Services

352,874
274,723

51,157

678,754

138,215

133,349

5,245
38,421

—

43,666

7,581

3,269

Revenue
%
34.9%
30.5

5.0

70.4

14.2

15.4

950,318

54,516

22,572

$1,027,406

100.0%

(1) Private and other payors from our "all other" category includes revenue from urgent care centers and other ancillary businesses.

Medicaid
Medicare

Medicaid-skilled

Subtotal

Managed care

Private and other

TSA
Services

320,580
264,223

36,085

620,888

112,669

119,722

3,223
28,694

—

31,917

5,499

2,346

Year Ended December 31, 2013
Home
Health and
Hospice
Services

All Other
—
$
—

Total
Revenue
$ 323,803
292,917

—

11,515 (1)

36,085

652,805

118,168

133,583

Total revenue

$
(1) Private and other payors from our "all other" category includes revenue from urgent care centers and other ancillary businesses.

853,279

11,515

39,762

$ 904,556

Medicaid
Medicare
Medicaid-skilled

Subtotal

Managed care
Private and other

TSA
Services

301,051
261,745
25,418
588,214
102,737
108,702

Year Ended December 31, 2012
Home
Health and
Hospice
Services

995
16,833
—
17,828
3,531
1,927

All Other
—
$
—
—
—
—
216 (1)

Total
Revenue
$ 302,046
278,578
25,418
606,042
106,268

110,845

13.5

Total revenue

$
(1) Private and other payors from our "all other" category includes revenue from urgent care centers and other ancillary businesses.

799,653

23,286

216

$ 823,155

100.0%

Revenue
%
35.8%
32.4

4.0

72.2%

13.1

14.7

100.0%

Revenue
%
36.7%
33.8
3.1
73.6
12.9

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Payor Sources as a Percentage of Skilled Nursing Services. We use both our skilled mix and quality mix as measures of the
quality of reimbursements we receive at our skilled nursing operations over various periods. The following table sets forth our
percentage of skilled nursing patient days by payor source:

Year Ended December 31,
2013

2012

2014

Percentage of Skilled Nursing Days:
Medicare
Managed care
Other skilled

Skilled mix

Private and other payors

Quality mix

Medicaid
Total skilled nursing

Reimbursement for Specific Services

14.2%
9.7
3.7
27.6
13.1
40.7
59.3
100.0%

14.8%
8.9
2.7
26.4
13.7
40.1
59.9
100.0%

15.3%
9.0
1.6
25.9
13.2
39.1
60.9
100.0%

Reimbursement for Skilled Nursing Services. Skilled nursing facility revenue is primarily derived from Medicaid, private
pay, managed care and Medicare payors. Our skilled nursing operations provide Medicaid-covered services to eligible individuals
consisting of nursing care, room and board and social services. In addition, states may, at their option, cover other services such
as physical, occupational and speech therapies.

Reimbursement for Rehabilitation Therapy Services. Rehabilitation therapy revenue is primarily received from private pay,
managed care and Medicare for services provided at skilled nursing operations and assisted living operations. The payments are
based on negotiated patient per diem rates or a negotiated fee schedule based on the type of service rendered.

Reimbursement for Assisted Living Services. Assisted living facility revenue is primarily derived from private pay patients
at rates we establish based upon the services we provide and market conditions in the area of operation. In addition, Medicaid or
other state-specific programs in some states where we operate supplement payments for board and care services provided in assisted
living facilities.

Reimbursement for Hospice Services. Hospice revenues are primarily derived from Medicare. We receive one of four
predetermined daily or hourly rates based on the level of care we furnish to the beneficiary. These rates are subject to annual
adjustments based on inflation and geographic wage considerations.

We are subject to two limitations on Medicare payments for hospice services. First, if inpatient days of care provided to
patients at a hospice exceed 20% of the total days of hospice care provided for an annual period beginning on November 1st, then
payment for days in excess of this limit are paid at the routine home care rate.

Second, overall payments made by Medicare to us on a per hospice program basis are also subject to a cap amount calculated
by the Medicare fiscal intermediary at the end of the hospice cap period. The Medicare revenue paid to a hospice program from
November 1 to October 31 may not exceed the annual aggregate cap amounts. For cap years ending on or after October 31, 2012,
and all subsequent cap years, the hospice aggregate cap is calculated using the proportional method. Under the proportional
method, the hospice shall include in its number of Medicare beneficiaries only that fraction which represents the portion of a
patient's total days of care in all hospices and all years that were spent in that hospice in that cap year, using the best data available
at the time of the calculation. The whole and fractional shares of Medicare beneficiaries' time in a given cap year are then summed
to compute the total number of Medicare beneficiaries served by that hospice in that cap year. The hospice's total Medicare
beneficiaries in a given cap year is multiplied by the Medicare per beneficiary cap amount, resulting in that hospice's aggregate
cap, which is the allowable amount of total Medicare payments that hospice can receive for that cap year. If a hospice exceeds its
aggregate cap, then the hospice must repay the excess back to Medicare. The Medicare cap amount is reduced proportionately
for patients who transferred in and out of our hospice services.

Reimbursement for Home Health Services. We derive substantially all of the revenue from our home health business from
Medicare and managed care sources. Our home health care services generally consist of providing some combination of the services
of registered nurses, speech, occupational and physical therapists, medical social workers and certified home health aides. Home

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health care is often a cost-effective solution for patients, and can also increase their quality of life and allow them to receive quality
medical care in the comfort and convenience of a familiar setting.

Competition

The skilled nursing industry is highly competitive, and we expect that the industry will become increasingly competitive in
the future. The industry is highly fragmented and characterized by numerous local and regional providers, in addition to large
national providers that have achieved geographic diversity and economies of scale. We also compete with inpatient rehabilitation
facilities and long-term acute care hospitals. Competitiveness may vary significantly from location to location, depending upon
factors such as the number of competing facilities, availability of services, expertise of staff, and the physical appearance and
amenities of each location. We believe that the primary competitive factors in the skilled nursing industry are:

•

ability to attract and to retain qualified management and caregivers;

reputation and commitment to quality;

attractiveness and location of facilities;

the expertise and commitment of the facility management team and employees; and

community value, including amenities and ancillary services.

We seek to compete effectively in each market by establishing a reputation within the local community as the “operation of
choice.” This means that the operation leaders are generally free to discern and address the unique needs and priorities of healthcare
professionals, customers and other stakeholders in the local community or market, and then create a superior service offering and
reputation for that particular community or market that is calculated to encourage prospective customers and referral sources to
choose or recommend the operation.

Increased competition could limit our ability to attract and retain patients, maintain or increase rates or to expand our business.
Some of our competitors have greater financial and other resources than we have, may have greater brand recognition and may
be more established in their respective communities than we are. Competing companies may also offer newer facilities or different
programs or services than we offer, and may therefore attract individuals who are currently patients of our facilities, potential
patients of our facilities, or who are otherwise receiving our healthcare services. Other competitors may have lower expenses or
other competitive advantages than us and, therefore, provide services at lower prices than we offer.

There are few barriers to entry in the home health and hospice business in jurisdictions that do not require certificates of
need or permits of approval. Our primary competition in these jurisdictions comes from local privately and publicly-owned and
hospital-owned health care providers. We compete based on the availability of personnel, the quality of services, expertise of
visiting staff, and, in certain instances, on the price of our services. In addition, we compete with a number of non-profit organizations
that finance acquisitions and capital expenditures on a tax-exempt basis and charity-funded programs that may have strong ties to
their local medical communities and receive charitable contributions that are unavailable to us.

Our other services, such as assisted living facilities and other ancillary services, also compete with local, regional, and national
companies. The primary competitive factors in these businesses are similar to those for our skilled nursing facilities and include
reputation, cost of services, quality of clinical services, responsiveness to patient/resident needs, location and the ability to provide
support in other areas such as third-party reimbursement, information management and patient recordkeeping.

Our Competitive Strengths

We believe that we are well positioned to benefit from the ongoing changes within our industry. We believe that our ability

to acquire, integrate and improve our facilities is a direct result of the following key competitive strengths:

Experienced and Dedicated Employees. We believe that our operating subsidiaries' employees are among the best in their
respective industry. We believe each of our operating subsidiaries is led by an experienced and caring leadership team, including
dedicated front-line care staff, who participates daily in the clinical and operational improvement of their individual operations.
We have been successful in attracting, training, incentivizing and retaining a core group of outstanding business and clinical leaders
to lead our operating subsidiaries. These leaders operate as separate local businesses. With broad local control, these talented

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leaders and their care staffs are able to quickly meet the needs of their patients and residents, employees and local communities,
without waiting for permission to act or being bound to a “one-size-fits-all” corporate strategy.

Unique Incentive Programs. We believe that our employee compensation programs are unique within the industry. Employee
stock options and performance bonuses, based on achieving target clinical quality, cultural, compliance and financial benchmarks,
represent a significant component of total compensation for our operational leaders. We believe that these compensation programs
assist us in encouraging our leaders and key employees to act with a shared ownership mentality. Furthermore, our leaders are
motivated to help local operations within a defined “cluster,” which is a group of geographically-proximate operations that share
clinical best practices, real-time financial data and other resources and information.

Staff and Leadership Development. We have a company-wide commitment to ongoing education, training and professional
development. Accordingly, our operational leaders participate in regular training. Most participate in training sessions at Ensign
University, our in-house educational system. Other training opportunities are generally offered on a monthly basis. Training and
educational topics include leadership development, our values, updates on Medicaid and Medicare billing requirements, updates
on new regulations or legislation, emerging healthcare service alternatives and other relevant clinical, business and industry specific
coursework. Additionally, we encourage and provide ongoing education classes for our clinical staff to maintain licensing and
increase the breadth of their knowledge and expertise. We believe that our commitment to, and substantial investment in, ongoing
education will further strengthen the quality of our operational leaders and staff, and the quality of the care they provide to our
patients and residents.

Innovative Service Center Approach. We do not maintain a corporate headquarters; rather, we operate a Service Center to
support the efforts of each operation. Our Service Center is a dedicated service organization that acts as a resource and provides
centralized information technology, human resources, accounting, payroll, legal, risk management, educational and other
centralized services, so that local leaders can focus on delivering top-quality care and efficient business operations. Our Service
Center approach allows individual operations to function with the strength, synergies and economies of scale found in larger
organizations, but without what we believe are the disadvantages of a top-down management structure or corporate hierarchy. We
believe our Service Center approach is unique within the industry, and allows us to preserve the “one-facility-at-a-time” focus and
culture that has contributed to our success.

Proven Track Record of Successful Acquisitions. We have established a disciplined acquisition strategy that is focused on
selectively acquiring operations within our target markets. Our acquisition strategy is highly operations driven. Prospective leaders
are included in the decision making process and compensated as these acquired operations reach pre-established clinical quality
and financial benchmarks, helping to ensure that we only undertake acquisitions that key leaders believe can become clinically
sound and contribute to our financial performance.

As of December 31, 2014, we have acquired 136 facilities with 14,725 operational beds, including 1,901 assisted living beds
and 264 independent living units, through both long-term leases and purchases. We believe our experience in acquiring these
facilities and our demonstrated success in significantly improving their operations enables us to consider a broad range of acquisition
targets. In addition, we believe we have developed expertise in transitioning newly-acquired facilities to our unique organizational
culture and operating systems, which enables us to acquire facilities with limited disruption to patients, residents and facility
operating staff, while significantly improving quality of care. We also intend to consider the construction of new facilities as we
determine that market conditions justify the cost of new construction in some of our markets.

Reputation for Quality Care. We believe that we have achieved a reputation for high-quality and cost-effective care and
services to our patients and residents within the communities we serve. We believe that our reputation for quality, coupled with
the integrated services that we offer, allows us to attract patients that require more intensive and medically complex care and
generally result in higher reimbursement rates than lower acuity patients.

Community Focused Approach. We view our services primarily as a local, community-based business. Our local leadership-
centered management culture enables each operation's nursing and support staff and leaders to meet the unique needs of their
patients and local communities. We believe that our commitment to this “one-operation-at-a-time” philosophy helps to ensure that
each operation, its patients, their family members and the community will receive the individualized attention they need. By serving
our patients, their families, the community and our fellow healthcare professionals, we strive to make each individual facility the
operation of choice in its local community.

We further believe that when choosing a healthcare provider, consumers usually choose a person or people they know and
trust, rather than a corporation or business. Therefore, rather than pursuing a traditional organization-wide branding strategy, we

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actively seek to develop the facility brand at the local level, serving and marketing one-on-one to caregivers, our patients, their
families, the community and our fellow healthcare professionals in the local market.

Investment in Information Technology. We utilize information technology that enables our facility leaders to access, and to
share with their peers, both clinical and financial performance data in real time. Armed with relevant and current information, our
operation leaders and their management teams are able to share best practices and the latest information, adjust to challenges and
opportunities on a timely basis, improve quality of care, mitigate risk and improve both clinical outcomes and financial performance.
We have also invested in specialized healthcare technology systems to assist our nursing and support staff. We have installed
automated software and touch-screen interface systems in each facility to enable our clinical staff to more efficiently monitor and
deliver patient care and record patient information. We believe these systems have improved the quality of our medical and billing
records, while improving the productivity of our staff.

Our Growth Strategy

We believe that the following strategies are primarily responsible for our growth to date, and will continue to drive the growth

of our business:

Grow Talent Base and Develop Future Leaders. Our primary growth strategy is to expand our talent base and develop future
leaders. A key component of our organizational culture is our belief that strong local leadership is a primary key to the success of
each operation. While we believe that significant acquisition opportunities exist, we have generally followed a disciplined approach
to growth that permits us to acquire an operation only when we believe, among other things, that we will have qualified leadership
for that operation. To develop these leaders, we have a rigorous “CEO-in-Training Program” that attracts proven business leaders
from various industries and backgrounds, and provides them the knowledge and hands-on training they need to successfully lead
one of our operating subsidiaries. We generally have between five and 20 prospective administrators progressing through the
various stages of this training program, which is generally much more rigorous, hands-on and intensive than the minimum
1,000 hours of training mandated by the licensing requirements of most states where we do business. Once administrators are
licensed and assigned to an operation, they continue to learn and develop in our facility Chief Executive Officer Program, which
facilitates the continued development of these talented business leaders into outstanding facility CEOs, through regular peer review,
our Ensign University and on-the-job training.

In addition, our Chief Operating Officer Program recruits and trains highly-qualified Directors of Nursing to lead the clinical
programs in our skilled nursing facilities. Working together with their facility CEO and/or administrator, other key facility leaders
and front-line staff, these experienced nurses manage delivery of care and other clinical personnel and programs to optimize both
clinical outcomes and employee and patient satisfaction.

Increase Mix of High Acuity Patients. Many skilled nursing facilities are serving an increasingly larger population of patients
who require a high level of skilled nursing and rehabilitative care, whom we refer to as high acuity patients, as a result of government
and other payors seeking lower-cost alternatives to traditional acute-care hospitals. We generally receive higher reimbursement
rates for providing care for these medically complex patients. In addition, many of these patients require therapy and other
rehabilitative services, which we are able to provide as part of our integrated service offerings. Where therapy services are medically
necessary and prescribed by a patient's physician or other appropriate healthcare professional, we generally receive additional
revenue in connection with the provision of those services. By making these integrated services available to such patients, and
maintaining established clinical standards in the delivery of those services, we are able to increase our overall revenues. We believe
that we can continue to attract high acuity patients and therapy patients to our facilities by maintaining and enhancing our reputation
for quality care and continuing our community focused approach.

Focus on Organic Growth and Internal Operating Efficiencies. We plan to continue to grow organically by focusing on
increasing patient occupancy within our existing facilities. Although some of the facilities we have acquired were in good physical
and operating condition, the majority have been clinically and financially troubled, with some facilities having had occupancy
rates as low as 30% at the time of acquisition. Additionally, we believe that incremental operating margins on the last 20% of our
beds are significantly higher than on the first 80%, offering opportunities to improve financial performance within our existing
facilities. Our overall occupancy is impacted significantly by the number of facilities acquired and the operational occupancy on
the acquisition date. Therefore, consolidated occupancy will vary significantly based on these factors. Our average occupancy
rates for the years ended December 31, 2014, 2013 and 2012 were 78.0%, 77.5% and 79.0%, respectively.

We also believe we can generate organic growth by improving operating efficiencies and the quality of care at the patient
level. By focusing on staff development, clinical systems and the efficient delivery of quality patient care, we believe we are able
to deliver higher quality care at lower costs than many of our competitors.

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We also have achieved incremental occupancy and revenue growth by creating or expanding outpatient therapy programs
in existing facilities. Physical, occupational and speech therapy services account for a significant portion of revenue in most of
our skilled nursing facilities. By expanding therapy programs to provide outpatient services in many markets, we are able to
increase revenue while spreading the fixed costs of maintaining these programs over a larger patient base. Outpatient therapy has
also proven to be an effective marketing tool, raising the visibility of our facilities in their local communities and enhancing the
reputation of our facilities with short-stay rehabilitation patients.

Add New Operations and Expand Existing Operations. A key element of our growth strategy includes the acquisition of
new and existing facilities from third parties, the expansion and upgrade of current operations, and the construction of new facilities.
In the near term, we plan to take advantage of the fragmented skilled nursing industry by acquiring operations within select
geographic markets and may consider the construction of new facilities or by partnering with a construction company to build
out new facilities. In addition, we have targeted facilities that we believed were performing and operations that were
underperforming, and where we believed we could improve service delivery, occupancy rates and cash flow. With experienced
leaders in place at the community level, and demonstrated success in significantly improving operating conditions at acquired
facilities, we believe that we are well positioned for continued growth. While the integration of underperforming facilities generally
has a negative short-term effect on overall operating margins, these facilities are typically accretive to earnings within 12 to
18 months following their acquisition. For the 90 facilities that we acquired from 2001 through 2014, the aggregate EBITDAR
(defined below) as a percentage of revenue improved from 11.3% during the first full three months of operations to 14.1% during
the thirteenth through fifteenth months of operations.

Constructing New Facilities in Existing and New markets. Another key element to our growth strategy includes constructing
new skilled nursing and assisted living facilities in new and existing markets. We plan to target geographies that we believe to be
under served or where the demand exists for new high-end healthcare facilities that will offer a wide array of hospitality-oriented
amenities, activities and services. In addition, lowering the average age of our facilities will allow us to manage the cost of
renovating and maintaining our facilities. In the near term, we have entered into several build-to-suit leases with Mainstreet
Property Group in the states of Texas, Kansas and Colorado and expect to open our first newly-constructed operations in the second
quarter of 2015. We also expect to work together with Mainstreet to select additional locations in the future. In addition, we also
have plans underway to construct some small replacement facilities and are looking to develop additional relationships with other
developers.

Strategically Investing In and Integrating Other Post-Acute Care Healthcare Businesses. Another important element to our
growth strategy includes acquiring new and existing home health, hospice and other post-acute care healthcare businesses. Since
2010, we have steadily expanded our home health and hospice businesses through the acquisition of smaller third-party providers.
Our strategy is to provide a more seamless experience to manage the transition of care throughout the post-acute continuum. Our
objective is to simultaneously improve patient outcomes and reduce costs to payers, ACOs and hospital systems. We believe that
the same principles that have guided our skilled nursing and assisted living operations are transferable to these businesses, including
reliance on experienced local leaders at the community level to focus on integrating these operations into the continuum of care
services we provide. Between 2010 and February 2015, we have acquired eleven hospice agencies, thirteen home health agencies,
one home care business and one transitional care management company, and we are well positioned for continued growth in these
and other healthcare businesses.

Labor

The operation of our skilled nursing and assisted living facilities, home health and hospice operations and urgent care centers
requires a large number of highly skilled healthcare professionals and support staff. At December 31, 2014, we had approximately
13,229 full-time equivalent employees who were employed by our Service Center and our operating subsidiaries. For the year
ended December 31, 2014, approximately 60.0% of our total expenses were payroll related. Periodically, market forces, which
vary by region, require that we increase wages in excess of general inflation or in excess of increases in reimbursement rates we
receive. We believe that we staff appropriately, focusing primarily on the acuity level and day-to-day needs of our patients and
residents. In most of the states where we operate, our skilled nursing facilities are subject to state mandated minimum staffing
ratios, so our ability to reduce costs by decreasing staff, notwithstanding decreases in acuity or need, is limited and subject to
government audits and penalties in some states. We seek to manage our labor costs by improving staff retention, improving operating
efficiencies, maintaining competitive wage rates and benefits and reducing reliance on overtime compensation and temporary
nursing agency services.

The healthcare industry as a whole has been experiencing shortages of qualified professional clinical staff. We believe that

our ability to attract and retain qualified professional clinical staff stems from our ability to offer attractive wage and benefits

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packages, a high level of employee training, an empowered culture that provides incentives for individual efforts and a quality
work environment.

Government Regulation

The regulatory environment within the skilled nursing industry continues to intensify in the amount and type of laws and
regulations affecting it. In addition to this changing regulatory environment, federal, state and local officials are increasingly
focusing their efforts on the enforcement of these laws. In order to operate our businesses we must comply with federal, state and
local laws relating to licensure, delivery and adequacy of medical care, distribution of pharmaceuticals, equipment, personnel,
operating policies, fire prevention, rate-setting, billing and reimbursement, building codes and environmental protection.
Additionally, we must also adhere to anti-kickback laws, physician referral laws, and safety and health standards set by the
Occupational Safety and Health Administration (OSHA). Changes in the law or new interpretations of existing laws may have an
adverse impact on our methods and costs of doing business.

Our operating subsidiaries are also subject to various regulations and licensing requirements promulgated by state and local
health and social service agencies and other regulatory authorities. Requirements vary from state to state and these requirements
can affect, among other things, personnel education and training, patient and personnel records, services, staffing levels, monitoring
of patient wellness, patient furnishings, housekeeping services, dietary requirements, emergency plans and procedures, certification
and licensing of staff prior to beginning employment, and patient rights. These laws and regulations could limit our ability to
expand into new markets and to expand our services and facilities in existing markets.

State Regulations. On March 24, 2011, the governor of California signed Assembly Bill 97 (AB 97), the budget trailer bill
on health, into law. AB 97 outlines significant cuts to state health and human services programs. Specifically, the law reduced
provider payments by 10% for physicians, pharmacies, clinics, medical transportation, certain hospitals, home health, and nursing
facilities. AB X1 19 Long Term Care was subsequently approved by the governor on June 28, 2011. Federal approval was
obtained on October 27, 2011. AB X1 19 limited the 10% payment reduction to skilled-nursing providers to 14 months for the
services provided on June 1, 2011 through July 31, 2012. The 10% reduction in provider payments was repaid by December 31,
2012.

Federal Health Care Reform. On October 6, 2014, the President signed into law the Improving Medicare Post-Acute Care
Transformation Act of 2014. This legislation requires post-acute care providers, such as skilled nursing facilities, hospices, and
home health providers, to report standardized patient assessment data, data on quality measures, and data on resource use and other
measures, and directs HHS to provide feedback reports to providers and arrange for public reporting of provider performance on
the reported data. Post-acute care providers that do not report such data will have their Medicare payments reduced.

CMS also recently announced two proposed post-acute care provider initiatives. First, CMS proposes to expand and
strengthen the Five Star Quality Rating System for nursing homes to improve consumer information about quality measures at
individual nursing homes. In addition, CMS announced proposals to adopt new standards that home health agencies must comply
with in order to participate in the Medicare program, including the strengthening of patient rights and communication requirements
that focus on patient well-being.

On August 2, 2011, the President signed into law the Budget Control Act of 2011 (Budget Control Act), which raised the
debt ceiling and put into effect a series of actions for deficit reduction. The Budget Control Act created a Congressional Joint Select
Committee on Deficit Reduction (the Committee) that was tasked with proposing additional deficit reduction of at least $1.5 trillion
over ten years. As the Committee was unable to achieve its targeted savings, this regulation triggered automatic reductions in
discretionary and mandatory spending, or budget sequestration, starting in 2013, including reductions of not more than 2% to
payments to Medicare providers. The Budget Control Act also requires Congress to vote on an amendment to the Constitution that
would require a balanced budget.

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (PPACA) or the Affordable
Care Act into law, which contained several sweeping changes to America’s health insurance system. Among other reforms contained
in PPACA, many Medicare providers received reductions in their market basket updates. Unlike for some other Medicare providers,
PPACA made no reduction to the market basket update for skilled nursing facilities in fiscal years 2010 or 2011. However, under
PPACA, the skilled nursing facility market basket update became subject to a full productivity adjustment beginning in fiscal year
2012. In addition, PPACA enacted several reforms with respect to skilled nursing facilities and hospice organizations, including
payment measures to realize significant savings of federal and state funds by deterring and prosecuting fraud and abuse in both
the Medicare and Medicaid programs.

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While many of the provisions of PPACA have not taken effect, or are subject to further refinement through the promulgation

of regulations, some key provisions of PPACA are:

• Enhanced CMPs. PPACA included expanded civil monetary penalty (CMP) provisions applicable to all Medicare and
Medicaid providers. PPACA provided for the imposition of CMPs of up to $50,000 and, in some cases, treble damages,
for actions relating to alleged false statements to the federal government.

• Nursing Home Transparency Requirements. In addition to expanded CMP provisions, PPACA imposed substantial and
onerous new transparency requirements for Medicare-participating nursing facilities. CMS has not yet promulgated final
regulations to implement these provisions.

• Face-to-Face Encounter Requirements. PPACA imposed new patient face-to-face encounter requirements on home health
agencies and hospices to establish a patient's ongoing eligibility for Medicare home health services or hospice services,
as applicable. To comply, a certifying physician or other designated health care professional must conduct and properly
document the face-to-face encounters with the Medicare beneficiary within a specified timeframe, and failure of the face-
to-face encounter to occur and be properly documented during the applicable timeframe could render the patient's care
ineligible for reimbursement under Medicare.

•

Suspension of Payments During Pending Fraud Investigations. PPACA also provided the federal government with
expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud. Section 6402 of
the PPACA provides that Medicare and Medicaid payments may be suspended pending a “credible investigation of fraud,”
unless the Secretary of Health and Human Services determined that good cause exists not to suspend payments. “Credible
investigation of fraud” is undefined, although the Secretary must consult with the Office of the Inspector General (OIG) in
determining whether a credible investigation of fraud exists. This suspension authority created a new mechanism for the
federal government to suspend both Medicare and Medicaid payments for allegations of fraud, independent of whether
a state exercised its authority to suspend Medicaid payments pending a fraud investigation. To the extent the Secretary
applied this suspension of payments provision to one or more of our affiliated facilities for allegations of fraud, such a
suspension could adversely affect our revenue, cash flow, financial condition and results of operations. OIG promulgated
regulations making these provisions effective as of March 25, 2011.

• Overpayment Reporting and Repayment; Expanded False Claims Act Liability. PPACA also enacted several important
changes that expand potential liability under the federal False Claims Act. PPACA provided that overpayments related
to services provided to both Medicare and Medicaid beneficiaries must be reported and returned to the applicable payor
within the later of sixty days of identification of the overpayment, or the date the corresponding cost report (if applicable)
is due.

•

Skilled Nursing Facility Value-Based Purchasing Program. PPACA required the U.S. Department of Health and Human
Services (HHS) to develop a plan to implement a value-based purchasing program for Medicare payments to skilled
nursing facilities. The value-based purchasing program would provide payment incentives for Medicare-participating
skilled nursing facilities to improve the quality of care provided to Medicare beneficiaries. Among the most relevant
factors in HHS' plans to implement value-based purchasing for skilled nursing facilities is the current Nursing Home
Value-Based Purchasing Demonstration Project, which concluded in December 2012. HHS provided Congress with an
outline of plans to implement a value-based purchasing program.

• Voluntary Pilot Program — Bundled Payments. To support the policies of making all providers responsible during an
episode of care and rewarding value over volume, HHS will establish, test and evaluate alternative payment methodologies
for Medicare services through a five-year, national, voluntary pilot program starting in 2013. This program will provide
incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire episode
of care centered around a hospitalization. HHS will develop qualifying provider payment methods that may include
bundled payments and bids from entities for episodes of care that begins three days prior to hospitalization and spans
30 to 90 days following discharge. Payments for items and services cannot result in spending more than would otherwise
be expended for such entities if the pilot program were not implemented. Payment arrangements among providers
participating in the bundled payment must navigate regulatory compliance under the Anti-kickback Law, the Stark Law
and the Civil Monetary Penalties Law and the related waivers. This pilot program may expand in 2016 if expansion would
reduce Medicare spending without also reducing quality of care.

• Accountable Care Organizations. PPACA authorized CMS to enter into contracts with ACOs, which are entities of
providers and suppliers organized to deliver services to Medicare beneficiaries and eligible to receive a share of any cost
savings the entity can achieve by delivering services to those beneficiaries at a cost below a set baseline and with sufficient

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quality of care. CMS recently finalized regulations to implement the ACO initiative. The widespread adoption of ACO
payment methodologies in the Medicare program, and in other programs and payors, could impact our operations and
reimbursement for our services.

On June 28, 2012 the United States Supreme Court ruled that the enactment of PPACA did not violate the Constitution of
the United States. This ruling permits the implementation of most of the provisions of PPACA to proceed. The provisions of
PPACA 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. However, the foregoing discussion is not intended to constitute, nor does it constitute,
an exhaustive review and discussion of PPACA. It is possible that these and other provisions of PPACA may be interpreted,
clarified, or applied to our affiliated facilities or operating subsidiaries in a way that could have a material adverse impact on the
results of operations.

Regulations Regarding Our Facilities. Governmental and other authorities periodically inspect our facilities to assess our
compliance with various standards. The intensified regulatory and enforcement environment continues to impact healthcare
providers, as these providers respond to periodic surveys and other inspections by governmental authorities and act on any
noncompliance identified in the inspection process. Unannounced surveys or inspections generally occur at least annually, and
also following a government agency's receipt of a complaint about a facility. We must pass these inspections to maintain our
licensure under state law, to obtain or maintain certification under the Medicare and Medicaid programs, to continue participation
in the Veterans Administration (VA) program at some facilities, and to comply with our provider contracts with managed care
clients at many facilities. From time to time, we, like others in the healthcare industry, may receive notices from federal and state
regulatory agencies alleging that we failed to comply with applicable standards. These notices may require us to take corrective
action, may impose civil monetary penalties for noncompliance, and may threaten or impose other operating restrictions on skilled
nursing facilities such as admission holds, provisional skilled nursing license or increased staffing requirements. If our facilities
fail to comply with these directives or otherwise fail to comply substantially with licensure and certification laws, rules and
regulations, we could lose our certification as a Medicare or Medicaid provider, or lose our state licenses to operate the facilities.

Regulations Protecting Against Fraud. Various complex federal and state laws exist which govern a wide array of referrals,
relationships and arrangements, and prohibit fraud by healthcare providers. Governmental agencies are devoting increasing attention
and resources to such anti-fraud efforts. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), and the Balanced
Budget Act of 1997 (BBA) expanded the penalties for healthcare fraud. Additionally, in connection with our involvement with
federal healthcare reimbursement programs, the government or those acting on its behalf may bring an action under the False
Claims Act (FCA), alleging that a healthcare provider has defrauded the government. These claimants may seek treble damages
for false claims and payment of additional civil monetary penalties. The FCA allows a private individual with knowledge of fraud
to bring a claim on behalf of the federal government and earn a percentage of the federal government's recovery. Due to these
“whistleblower” incentives, suits have become more frequent. Many states also have a false claim prohibition that mirrors or tracks
the federal FCA.

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes
to the federal False Claims Act (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following
changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even
if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an
obligation to pay money or property to the government. This includes the retention of any government overpayment. The government
can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it is knowingly
improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for
employees, but also contractors and agents. Thus, there is no need for an employment relationship in order to qualify for protection
against retaliation for whistleblowing.

On January 2, 2013 the President signed the American Taxpayer Relief Act of 2012 into law. This statute lengthened the
retrospective time period for which CMS can recover overpayments from health care providers, from three years following the
year in which payment was made, to five years following the year in which payment was made.

Regulations Regarding Financial Arrangements. We are also subject to federal and state laws that regulate financial
arrangement by healthcare providers, such as the federal and state anti-kickback laws, the Stark laws, and various state referral
laws. The federal anti-kickback laws and similar state laws make it unlawful for any person to pay, receive, offer, or solicit any
benefit, directly or indirectly, for the referral or recommendation for products or services which are eligible for payment under
federal healthcare programs, including Medicare and Medicaid. For the purposes of the anti-kickback law, a “federal healthcare
program” includes Medicare and Medicaid programs and any other plan or program that provides health benefits which are funded
directly, in whole or in part, by the United States government.

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The arrangements prohibited under these anti-kickback laws can involve nursing homes, hospitals, physicians and other
healthcare providers, plans, suppliers and non-healthcare providers. These laws have been interpreted very broadly to include a
number of practices and relationships between healthcare providers and sources of patient referral. The scope of prohibited payments
is very broad, including anything of value, whether offered directly or indirectly, in cash or in kind. Federal “safe harbor” regulations
describe certain arrangements that will not be deemed to constitute violations of the anti-kickback law. Arrangements that do not
comply with all of the strict requirements of a safe harbor are not necessarily illegal, but, due to the broad language of the statute,
failure to comply with a safe harbor may increase the potential that a government agency or whistleblower will seek to investigate
or challenge the arrangement. The safe harbors are narrow and do not cover a wide range of economic relationships.

Violations of the federal anti-kickback laws can result in criminal penalties of up to $25,000 and five years imprisonment.
Violations of the anti-kickback laws can also result in civil monetary penalties of up to $50,000 and an assessment of up to three
times the total amount of remuneration offered, paid, solicited, or received. Violation of the anti-kickback laws may also result in
an individual's or organization's exclusion from future participation in Medicare, Medicaid and other state and federal healthcare
programs. Exclusion of us or any of our key employees from the Medicare or Medicaid program could have a material adverse
impact on our operations and financial condition.

In addition to these regulations, we may face adverse consequences if we violate the federal Stark laws related to certain
Medicare physician referrals. The Stark laws prohibit a physician from referring Medicare patients for certain designated health
services where the physician has an ownership interest in or compensation arrangement with the provider of the services, with
limited exceptions. Also, any services furnished pursuant to a prohibited referral are not eligible for payment by the Medicare
programs, and the provider is prohibited from billing any third party for such services. The Stark laws provide for the imposition
of a civil monetary penalty of $15,000 per prohibited claim, and up to $100,000 for knowingly entering into certain prohibited
cross-referral schemes, and potential exclusion from Medicare for any person who presents or causes to be presented a bill or claim
the person knows or should know is submitted in violation of the Stark laws. Such designated health services include physical
therapy services; occupational therapy services; radiology services, including CT, MRI and ultrasound; durable medical equipment
and services; radiation therapy services and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics
and prosthetic devices and supplies; home health services; outpatient prescription drugs; inpatient and outpatient hospital services;
clinical laboratory services; and diagnostic and therapeutic nuclear medical services.

Regulations Regarding Patient Record Confidentiality. We are also subject to laws and regulations enacted to protect the
confidentiality of patient health information. For example, the U.S. Department of Health and Human Services has issued rules
pursuant to HIPAA, which relate to the privacy of certain patient information. These rules govern our use and disclosure of protected
health information. We have established policies and procedures to comply with HIPAA privacy and security requirements at these
facilities. We believe that we are in compliance with all current HIPAA laws and regulations.

Antitrust Laws. We are also subject to federal and state antitrust laws. Enforcement of the antitrust laws against healthcare
providers is common, and antitrust liability may arise in a wide variety of circumstances, including third party contracting, physician
relations, joint venture, merger, affiliation and acquisition activities. In some respects, the application of federal and state antitrust
laws to healthcare is still evolving, and enforcement activity by federal and state agencies appears to be increasing. At various
times, healthcare providers and insurance and managed care organizations may be subject to an investigation by a governmental
agency charged with the enforcement of antitrust laws, or may be subject to administrative or judicial action by a federal or state
agency or a private party. Violators of the antitrust laws could be subject to criminal and civil enforcement by federal and state
agencies, as well as by private litigants.

Environmental Matters

Our business is subject to a variety of federal, state and local environmental laws and regulations. As a healthcare provider,
we face regulatory requirements in areas of air and water quality control, medical and low-level radioactive waste management
and disposal, asbestos management, response to mold and lead-based paint in our facilities and employee safety.

As an owner or operator of our facilities, we also may be required to investigate and remediate hazardous substances that
are located on and/or under the property, including any such substances that may have migrated off, or may have been discharged
or transported from the property. Part of our operations involves the handling, use, storage, transportation, disposal and discharge
of medical, biological, infectious, toxic, flammable and other hazardous materials, wastes, pollutants or contaminants. In addition,
we are sometimes unable to determine with certainty whether prior uses of our facilities and properties or surrounding properties
may have produced continuing environmental contamination or noncompliance, particularly where the timing or cost of making
such determinations is not deemed cost-effective. These activities, as well as the possible presence of such materials in, on and
under our properties, may result in damage to individuals, property or the environment; may interrupt operations or increase costs;

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may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or
other governmental agency actions; and may not be covered by insurance.

We believe that we are in material compliance with applicable environmental and occupational health and safety requirements.
However, we cannot assure you that we will not encounter liabilities with respect to these regulations in the future, and such
liabilities may result in material adverse consequences to our operations or financial condition.

Available Information

We are subject to the reporting requirements under the Exchange Act. Consequently, we are required to file reports and
information with the Securities and Exchange Commission (SEC), including reports on the following forms: annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act.These reports and other information concerning our company may be
accessed through the SEC's website at http://www.sec.gov.

You may also find on our website at http://www.ensigngroup.net, electronic copies of our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act. Such filings are placed on our website as soon as reasonably possible after they are
filed with the SEC. All such filings are available free of charge. Information contained in our website is not deemed to be a part
of this Annual Report.

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Item 1A.

Risk Factors

Set forth below are certain risk factors that could harm our business, results of operations and financial condition. You
should carefully read the following risk factors, together with the financial statements, related notes and other information contained
in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that contain risks
and uncertainties. Please refer to the section entitled "Cautionary Note Regarding Forward-Looking Statements" on page 1 of
this Annual Report on Form 10-K in connection with your consideration of the risk factors and other important factors that may
affect future results described below.

Risks Related to Our Business and Industry

Our revenue could be impacted by federal and state changes to reimbursement and other aspects of Medicaid and Medicare.

We derived 39.9% and 39.8% of our revenue from the Medicaid program for the years ended December 31, 2014 and 2013,
respectively. We derived 30.5% and 32.4%, of our revenue from the Medicare program for the years ended December 31, 2014
and 2013, respectively. If reimbursement rates under these programs are reduced or fail to increase as quickly as our costs, or if
there are changes in the way these programs pay for services, our business and results of operations would be adversely affected.
The services for which we are currently reimbursed by Medicaid and Medicare may not continue to be reimbursed at adequate
levels or at all. Further limits on the scope of services being reimbursed, delays or reductions in reimbursement or changes in
other aspects of reimbursement could impact our revenue. For example, in the past, the enactment of the Deficit Reduction Act
of 2005 (DRA), the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991 and the Balanced Budget
Act of 1997 (BBA) caused changes in government reimbursement systems, which, in some cases, made obtaining reimbursements
more difficult and costly and lowered or restricted reimbursement rates for some of our patients.

The Medicaid and Medicare programs are subject to statutory and regulatory changes affecting base rates or basis of payment,
retroactive rate adjustments, annual caps that limit the amount that can be paid (including deductible and coinsurance amounts)
for rehabilitation therapy services rendered to Medicare beneficiaries, administrative or executive orders and government funding
restrictions, all of which may materially adversely affect the rates and frequency at which these programs reimburse us for our
services. For example, the Medicaid Integrity Contractor (MIC) program is increasing the scrutiny placed on Medicaid payments,
and could result in recoupments of alleged overpayments in an effort to rein in Medicaid spending. Recent budget proposals and
legislation at both the federal and state levels have called for cuts in reimbursement for health care providers participating in the
Medicare and Medicaid programs. Enactment and implementation of measures to reduce or delay reimbursement could result in
substantial reductions in our revenue and profitability. Payors may disallow our requests for reimbursement based on determinations
that certain costs are not reimbursable or reasonable because either adequate or additional documentation was not provided or
because certain services were not covered or considered reasonably necessary. Additionally, revenue from these payors can be
retroactively adjusted after a new examination during the claims settlement process or as a result of post-payment audits. New
legislation and regulatory proposals could impose further limitations on government payments to healthcare providers.

In addition, on October 1, 2010, the next generation of the Minimum Data Set (MDS) 3.0 was implemented, creating
significant changes in the methodology for calculating the resource utilization group (RUG) category under Medicare Part A, most
notably eliminating Section T. Because therapy does not necessarily begin upon admission, MDS 2.0 and the RUGS-III system
included a provision to capture therapy services that are scheduled to occur but have not yet been provided in order to calculate
a RUG level that better reflects the level of care the recipient would actually receive. This is eliminated with MDS 3.0, which
creates a new category of assessment called the Medicare Short Stay Assessment. This assessment provides for calculation of a
rehabilitation RUG for patients discharged on or before day eight who received less than five days of therapy.

On July 31, 2014, CMS issued its final rule outlining fiscal year 2015 Medicare payment rates for skilled nursing facilities.
CMS estimates that aggregate payments to skilled nursing facilities will increase by $750 million, or 2.0% for fiscal year 2015,
relative to payments in 2014. The estimated increase reflects a 2.5% market basket increase, reduced by the 0.5% multi-factor
productivity (MFP) adjustment required by the Patient Protection and Affordable Care Act (PPACA).

On July 31, 2013, CMS issued its final rule outlining fiscal year 2014 Medicare payment rates for skilled nursing facilities.
CMS estimated that aggregate payments to skilled nursing facilities would increase by $470 million, or 1.3% for fiscal year 2014,
relative to payments in 2013. This estimated increase reflects a 2.3% market basket increase, reduced by the 0.5% forecast error
correction and further reduced by the 0.5% MFP adjustment as required by PPACA. The forecast error correction is applied when
the difference between the actual and projected market basket percentage change for the most recent available fiscal year exceeds
the 0.5% threshold. For fiscal year 2012 (most recent available fiscal year), the projected market basket percentage change exceeded
the actual market basket percentage change by 0.51%.

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On July 27, 2012, CMS announced a final rule updating Medicare skilled nursing facility PPS payments in fiscal year 2013.
The update, a 1.8% or $670 million increase, reflected a 2.5% market basket increase, reduced by a 0.7% multi-factor productivity
(MFP) adjustment mandated by the Patient Protection and Affordable Care Act (PPACA). This increase will be offset by the 2%
sequestration reduction, discussed below, which became effective April 1, 2013.

On October 30, 2014, CMS announced payment changes to the Medicare home health prospective payment system (HH
PPS) for calendar year 2015. Under this rule, CMS projects that Medicare payments to home health agencies in calendar year
2015 will be reduced by 0.3%, or $60 million. The decrease reflects the effects of the 2.1% home health payment update percentage
and the rebasing adjustments to the national, standardized 60-day episode payment rate, the national per-visit payment rates, and
the non-routine medical supplies (NRS) conversion factor. CMS is also finalizing three changes to the face-to-face encounter
requirements under the Affordable Care Act. These changes include: a) eliminating the narrative requirement currently in
regulation, b) establishing that if a home health agency (HHA) claim is denied, the corresponding physician claim for certifying/
re-certifying patient eligibility for Medicare-covered home health services is considered non-covered as well because there is no
longer a corresponding claim for Medicare-covered home health services and c) clarifying that a face-to-face encounter is required
for certifications, rather than initial episodes; and that a certification (versus a re-certification) is generally considered to be any
time a new start of care assessment is completed to initiate care. This rule also established a minimum submission threshold for
the number of OASIS assessments that each HHA must submit under the Home Health Quality Reporting Program and the Home
Health Conditions of Participant for speech language pathologist personnel.

On November 22, 2013, CMS issued its final ruling regarding Medicare payment rates for home health agencies effective
January 1, 2014. As required by the PPACA, this rule included rebasing adjustments, with a four-year phase-in, to the national,
standardized 60-day episode payment rates; the national per-visit rates; and the NRS conversion factor. Under the ruling, CMS
projected that Medicare payments to home health agencies in calendar year 2014 would be reduced by 1.05%, or $200 million,
reflecting the combined effects of the 2.3% increase in the home health national payment update percentage; a 2.7% decrease due
to rebasing adjustments to the national, standardized 60-day episode payment rate, mandated by the Affordable Care Act; and a
0.6% decrease due to the effects of HH PPS Grouper refinements. This final rule also updated the home health wage index for
calendar year 2014. The ruling also established home health quality reporting requirements for 2014 payment and subsequent
years to specify that Medicaid responsibilities for home health surveys be explicitly recognized in the State Medicaid Plan, which
is similar to the current regulations for surveys of skilled nursing facilities and intermediate care facilities for individuals with
intellectual disabilities.

On August 2, 2013, CMS issued its final rule that updated fiscal year 2014 Medicare payment rates and the wage index for
hospices serving Medicare beneficiaries. Hospices were projected to see an estimated 1.0% ($160 million) increase in their
payments for fiscal year 2014. The hospice payment increase was the net result of a hospice payment update percentage of 1.7%
(a 2.5% hospital market basket increase minus a 0.8% reduction mandated by law), and a 0.7% decrease in payments to hospices
due to updated wage data and the fifth year of the CMS's seven-year phase-out of its wage index budget neutrality adjustment
factor (BNAF). As finalized in this rule, CMS will update the hospice per diem rates for fiscal year 2014 and subsequent years
through the annual hospice rule or notice, rather than solely through a Change Request, as has been done in prior years. The fiscal
year 2014 hospice payment rates and wage index became effective on October 1, 2013.

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conversion factor mandated by the PPACA of 0.7% to account for the effect of a productivity adjustment, and 0.3% as required
by statute. CMS projected the impact of these changes would result in a 0.9% increase in payments to hospice providers.

On January 2, 2013 the President signed the American Taxpayer Relief Act of 2012 into law. This statute delays significant
cuts in Medicare rates for physician services until December 31, 2013. The statute also created a Commission on Long Term Care,
the goal of which is to develop a plan for the establishment, implementation, and financing of a comprehensive, coordinated, and
high-quality system that ensures the availability of long-term care services and supports for individuals in need of such services
and supports. Any implementation of recommendations from this commission may have an impact on coverage and payment for
our services.

Should future changes in PPS, similar to those described above, include further reduced rates or increased standards for
reaching certain reimbursement levels, our Medicare revenues derived from our affiliated skilled nursing facilities (including
rehabilitation therapy services provided at our affiliated skilled nursing facilities) could be reduced, with a corresponding adverse
impact on our financial condition or results of operations.

On October 6, 2014, the President signed into law the Improving Medicare Post-Acute Care Transformation Act of 2014.
This legislation requires post-acute care providers, such as skilled nursing facilities, hospices, and home health providers, to report
standardized patient assessment data, data on quality measures, and data on resource use and other measures, and directs HHS to
provide feedback reports to providers and arrange for public reporting of provider performance on the reported data. Post-acute
care providers that do not report such data will have their Medicare payments reduced.

Further, prior to the introduction of H.R. 3630, we were reimbursed for 100% of bad debt related to dual-eligible Medicare
patients' co-insurance. H.R. 3630 will phase down the dual-eligible reimbursement over three years. Effective October 1, 2012,
Medicare dual-eligible co-insurance reimbursement decreased from 100% to 88%, with further reductions to 77% and 65% as of
October 1, 2013 and 2014, respectively. Any reductions in Medicare or Medicaid reimbursement could materially adversely affect
our profitability.

Our future revenue, financial condition and results of operations could be impacted by continued cost containment pressures

on Medicaid spending.

Medicaid, which is largely administered by the states, is a significant payor for our skilled nursing services. Rapidly increasing
Medicaid spending, combined with slow state revenue growth, has led many states to institute measures aimed at controlling
spending growth. For example, in February 2009, the California legislature approved a new budget to help relieve a $42 billion
budget deficit. The budget package was signed after months of negotiation, during which time California's governor declared a
fiscal state of emergency in California. The new budget implemented spending cuts in several areas, including Medi-Cal spending.
Further, California initially had extended its cost-based Medi-Cal long-term care reimbursement system enacted through Assembly
Bill 1629 (A.B.1629) through the 2009-2010 and 2010-2011 rate years with a growth rate of up to five percent for both years.
However, due to California's severe budget crisis, in July 2009, the State passed a budget-balancing proposal that eliminated this
five percent growth cap by amending the current statute to provide that, for the 2009-2010 and 2010-2011 rate years, the weighted
average Medi-Cal reimbursement rate paid to long-term care facilities shall not exceed the weighted average Medi-Cal
reimbursement rate for the 2008-2009 rate year. In addition, the budget proposal increased the amounts that California nursing
facilities will pay to Medi-Cal in quality assurance fees for the 2009-2010 and 2010-2011 rate years by including Medicare revenue
in the calculation of the quality assurance fee that nursing facilities pay under A.B. 1629. Although overall reimbursement from
Medi-Cal remained stable, individual facility rates varied.

California's Governor signed the budget trailer into law in October 2010. Despite its enactment, these changes in
reimbursement to long-term care facilities were to be implemented retroactively to the beginning of the calendar quarter in which
California submitted its request for federal approval of CMS. In January, 2011, the California Governor proposed a budget for
2011-2012 which proposes to reduce Medi-Cal provider payments by 10%, including payments to long-term care facilities.

On March 24, 2011, the governor of California signed Assembly Bill 97 (AB 97), the budget trailer bill on health, into
law. AB 97 outlines significant cuts to state health and human services programs. Specifically, the law reduced provider payments
by 10% for physicians, pharmacies, clinics, medical transportation, certain hospitals, home health, and nursing facilities. AB X1
19 Long Term Care was subsequently approved by the governor on June 28, 2011. Federal approval was obtained on October 27,

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2011. AB X1 19 limited the 10% payment reduction to skilled-nursing providers to 14 months for the services provided on June
1, 2011 through July 31, 2012. The 10% reduction in provider payments was repaid on or before December 31, 2012.

California’s Governor released a 2014-2015 budget that includes $1.2 billion in additional Medi-Cal funding. This

proposal, however, would not eliminate retroactive rate cuts for hospital-based skilled nursing facilities.

Because state legislatures control the amount of state funding for Medicaid programs, cuts or delays in approval of such
funding by legislatures could reduce the amount of, or cause a delay in, payment from Medicaid to skilled nursing facilities. Since
a significant portion of our revenue is generated from our skilled nursing operating subsidiaries in California, these budget
reductions, if approved, could adversely affect our net patient service revenue and profitability. We expect continuing cost
containment pressures on Medicaid outlays for skilled nursing facilities, and any such decline could adversely affect our financial
condition and results of operations.

To generate funds to pay for the increasing costs of the Medicaid program, many states utilize financial arrangements such
as provider taxes. Under provider tax arrangements, states collect taxes or fees from healthcare providers and then return the
revenue to these providers as Medicaid expenditures. Congress, however, has placed restrictions on states' use of provider tax and
donation programs as a source of state matching funds. Under the Medicaid Voluntary Contribution and Provider-Specific Tax
Amendments of 1991, the federal medical assistance percentage available to a state was reduced by the total amount of healthcare
related taxes that the state imposed, unless certain requirements are met. The federal medical assistance percentage is not reduced
if the state taxes are broad-based and not applied specifically to Medicaid reimbursed services. In addition, the healthcare providers
receiving Medicaid reimbursement must be at risk for the amount of tax assessed and must not be guaranteed to receive
reimbursement through the applicable state Medicaid program for the tax assessed. Lower Medicaid reimbursement rates would
adversely affect our revenue, financial condition and results of operations.

We may not be fully reimbursed for all services for which each facility bills through consolidated billing, which could adversely

affect our revenue, financial condition and results of operations.

Skilled nursing facilities are required to perform consolidated billing for certain items and services furnished to patients and
residents. The consolidated billing requirement essentially confers on the skilled nursing facility itself the Medicare billing
responsibility for the entire package of care that its patients receive in these situations. The BBA also affected skilled nursing
facility payments by requiring that post-hospitalization skilled nursing services be “bundled” into the hospital's Diagnostic Related
Group (DRG) payment in certain circumstances. Where this rule applies, the hospital and the skilled nursing facility must, in
effect, divide the payment which otherwise would have been paid to the hospital alone for the patient's treatment, and no additional
funds are paid by Medicare for skilled nursing care of the patient. At present, this provision applies to a limited number of DRGs,
but already is apparently having a negative effect on skilled nursing facility utilization and payments, either because hospitals are
finding it difficult to place patients in skilled nursing facilities which will not be paid as before or because hospitals are reluctant
to discharge the patients to skilled nursing facilities and lose part of their payment. This bundling requirement could be extended
to more DRGs in the future, which would accentuate the negative impact on skilled nursing facility utilization and payments. We
may not be fully reimbursed for all services for which each facility bills through consolidated billing, which could adversely affect
our revenue, financial condition and results of operations.

Reforms to the U.S. healthcare system will impose new requirements upon us and may lower our reimbursements.

PPACA and the Health Care and Education Reconciliation Act of 2010 (the Reconciliation Act) include sweeping changes

to how health care is paid for and furnished in the United States.

PPACA, as modified by the Reconciliation Act, is projected to expand access to Medicaid for approximately 11 to 13 million
additional people each year between 2015 - 2024. It also reduces the projected growth of Medicare by $106 billion by 2020 by
tying payments to providers more closely to quality outcomes. It also imposes new obligations on skilled nursing facilities, requiring
them to disclose information regarding ownership, expenditures and certain other information. This information is disclosed on
a website for comparison by members of the public.

To address potential fraud and abuse in federal health care programs, including Medicare and Medicaid, PPACA includes
provider screening and enhanced oversight periods for new providers and suppliers, as well as enhanced penalties for submitting
false claims. It also provides funding for enhanced anti-fraud activities. The new law imposes enrollment moratoria in elevated
risk areas by requiring providers and suppliers to establish compliance programs. PPACA also provides the federal government
with expanded authority to suspend payment if a provider is investigated for allegations or issues of fraud. Section 6402 of the
PPACA provides that Medicare and Medicaid payments may be suspended pending a “credible investigation of fraud,” unless the
Secretary of Health and Human Services determines that good cause exists not to suspend payments. To the extent the Secretary
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applies this suspension of payments provision to one of our affiliated facilities for allegations of fraud, such a suspension could
adversely affect our results of operations.

Under PPACA, the U.S. Department of Health and Human Services (HHS) will establish, test and evaluate alternative
payment methodologies for Medicare services through a five-year, national, voluntary pilot program starting in 2013. This program
will provide incentives for providers to coordinate patient care across the continuum and to be jointly accountable for an entire
episode of care centered around a hospitalization. HHS will develop qualifying provider payment methods that may include
bundled payments and bids from entities for episodes of care. The bundled payment will cover the costs of acute care inpatient
services; physicians’ services delivered in and outside of an acute care hospital; outpatient hospital services including emergency
department services; post-acute care services, including home health services, skilled nursing services; inpatient rehabilitation
services; and inpatient hospital services. The payment methodology will include payment for services, such as care coordination,
medication reconciliation, discharge planning and transitional care services, and other patient-centered activities. Payments for
items and services cannot result in spending more than would otherwise be expended for such entities if the pilot program were
not implemented. As with Medicare’s shared savings program discussed above, payment arrangements among providers on the
backside of the bundled payment must take into account significant hurdles under the Anti-kickback Law, the Stark Law and the
Civil Monetary Penalties Law. This pilot program may expand in 2016 if expansion would reduce Medicare spending without
also reducing quality of care.

PPACA attempts to improve the health care delivery system through incentives to enhance quality, improve beneficiary
outcomes and increase value of care. One of these key delivery system reforms is the encouragement of Accountable Care
Organizations (ACOs). ACOs will facilitate coordination and cooperation among providers to improve the quality of care for
Medicare beneficiaries and reduce unnecessary costs. Participating ACOs that meet specified quality performance standards will
be eligible to receive a share of any savings if the actual per capita expenditures of their assigned Medicare beneficiaries are a
sufficient percentage below their specified benchmark amount. Quality performance standards will include measures in such
categories as clinical processes and outcomes of care, patient experience and utilization of services.

In addition, PPACA required HHS to develop a plan to implement a value-based purchasing program for Medicare payments
to skilled nursing facilities. HHS delivered a report to Congress outlining its plans for implementing this value-based purchasing
program. The value-based purchasing program would provide payment incentives for Medicare-participating skilled nursing
facilities to improve the quality of care provided to Medicare beneficiaries. Among the most relevant factors in HHS' plans to
implement value-based purchasing for skilled nursing facilities is the current Nursing Home Value-Based Purchasing
Demonstration Project, which concluded in 2012. HHS provided Congress with an outline of plans to implement a value-based
purchasing program, and any permanent value-based purchasing program for skilled nursing facilities will be implemented after
that evaluation.

On April 1, 2014, the President signed into law the Protecting Access to Medicare Act of 2014 which, among other things,
provides the framework for implementation of a value-based purchasing program for skilled nursing facilities. Under this legislation
HHS is required to develop by October 1, 2016 measures and performance standards regarding preventable hospital readmissions
from skilled nursing facilities. Beginning October 1, 2018, HHS will withhold 2% of Medicare payments to all skilled nursing
facilities and distribute this pool of payment to skilled nursing facilities as incentive payments for preventing readmissions to
hospitals.

We cannot predict what effect these changes will have on our business, including the demand for our services or the amount
of reimbursement available for those services. However, it is possible these new laws may lower reimbursement and adversely
affect our business.

The Affordable Care Act and its implementation could impact our business.

In addition, the Affordable Care Act could result in sweeping changes to the existing U.S. system for the delivery and
financing of health care. The details for implementation of many of the requirements under the Affordable Care Act will depend
on the promulgation of regulations by a number of federal government agencies, including the HHS. It is impossible to predict
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the outcome of these changes, what many of the final requirements of the Health Reform Law will be, and the net effect of those
requirements on us. As such, we cannot predict the impact of the Affordable Care Act on our business, operations or financial
performance.

A significant goal of Federal health care reform is to transform the delivery of health care by changing reimbursement for
health care services to hold providers accountable for the cost and quality of care provided. Medicare and many commercial third
party payors are implementing Accountable Care Organization models in which groups of providers share in the benefit and risk
of providing care to an assigned group of individuals at lower cost. Other reimbursement methodology reforms include value-
based purchasing, in which a portion of provider reimbursement is redistributed based on relative performance on designated
economic, clinical quality, and patient satisfaction metrics. In addition, CMS is implementing programs to bundle acute care and
post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. These reimbursement
methodologies and similar programs are likely to continue and expand, both in public and commercial health plans. Providers
who respond successfully to these trends and are able to deliver quality care at lower cost are likely to benefit financially.

The Affordable Care Act and the programs implemented by the law may reduce reimbursements for our services and may
impact the demand for the Company’s products. In addition, various healthcare programs and regulations may be ultimately
implemented at the federal or state level. Failure to respond successfully to these trends could negatively impact our business,
results of operations and/or financial condition.

Increased competition for, or a shortage of, nurses and other skilled personnel could increase our staffing and labor costs

and subject us to monetary fines.

Our success depends upon our ability to retain and attract nurses, Certified Nurse Assistants (CNAs) and therapists. Our
success also depends upon our ability to retain and attract skilled management personnel who are responsible for the day-to-day
operations of each of our affiliated facilities. Each facility has a facility leader responsible for the overall day-to-day operations
of the facility, including quality of care, social services and financial performance. Depending upon the size of the facility, each
facility leader is supported by facility staff that is directly responsible for day-to-day care of the patients and marketing and
community outreach programs. Other key positions supporting each facility may include individuals responsible for physical,
occupational and speech therapy, food service and maintenance. We compete with various healthcare service providers, including
other skilled nursing providers, in retaining and attracting qualified and skilled personnel.

We operate one or more affiliated skilled nursing facilities in the states of Arizona, California, Colorado, Idaho, Iowa,
Nebraska, Nevada, Texas, Utah, Washington, and Wisconsin. With the exception of Utah, which follows federal regulations, each
of these states has established minimum staffing requirements for facilities operating in that state. Failure to comply with these
requirements can, among other things, jeopardize a facility's compliance with the conditions of participation under relevant state
and federal healthcare programs. In addition, if a facility is determined to be out of compliance with these requirements, it may
be subject to a notice of deficiency, a citation, or a significant fine or litigation risk. Deficiencies (depending on the level) may
also result in the suspension of patient admissions and/or the termination of Medicaid participation, or the suspension, revocation
or nonrenewal of the skilled nursing facility's license. If the federal or state governments were to issue regulations which materially
change the way compliance with the minimum staffing standard is calculated or enforced, our labor costs could increase and the
current shortage of healthcare workers could impact us more significantly.

Increased competition for or a shortage of nurses or other trained personnel, or general inflationary pressures may require
that we enhance our pay and benefits packages to compete effectively for such personnel. We may not be able to offset such added
costs by increasing the rates we charge to the patients of our operating subsidiaries. Turnover rates and the magnitude of the
shortage of nurses or other trained personnel vary substantially from facility to facility. An increase in costs associated with, or a
shortage of, skilled nurses, could negatively impact our business. In addition, if we fail to attract and retain qualified and skilled
personnel, our ability to conduct our business operations effectively would be harmed.

We are subject to various government reviews, audits and investigations that could adversely affect our business, including
an obligation to refund amounts previously paid to us, potential criminal charges, the imposition of fines, and/or the loss of
our right to participate in Medicare and Medicaid programs.

As a result of our participation in the Medicaid and Medicare programs, we are subject to various governmental reviews,
audits and investigations to verify our compliance with these programs and applicable laws and regulations. We are also subject
to audits under various government programs, including Recovery Audit Contractors (RAC), Zone Program Integrity Contractors
(ZPIC), Program Safeguard Contractors (PSC) and Medicaid Integrity Contributors (MIC) programs, in which third party firms
engaged by CMS conduct extensive reviews of claims data and medical and other records to identify potential improper payments
under the Medicare programs. Private pay sources also reserve the right to conduct audits. We believe that billing and reimbursement
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errors and disagreements are common in our industry. We are regularly engaged in reviews, audits and appeals of our claims for
reimbursement due to the subjectivities inherent in the process related to patient diagnosis and care, record keeping, claims
processing and other aspects of the patient service and reimbursement processes, and the errors and disagreements those
subjectivities can produce. An adverse review, audit or investigation could result in:

• an obligation to refund amounts previously paid to us pursuant to the Medicare or Medicaid programs or from private

payors, in amounts that could be material to our business;

• state or federal agencies imposing fines, penalties and other sanctions on us;

•

loss of our right to participate in the Medicare or Medicaid programs or one or more private payor networks;

• an increase in private litigation against us; and

• damage to our reputation in various markets.

In 2004, one of our Medicare fiscal intermediaries began to conduct selected reviews of claims previously submitted by and
paid to some of our affiliated facilities. While we have always been subject to post-payment audits and reviews, more intensive
“probe reviews” appear to be a permanent procedure with our fiscal intermediary. Although some of these probe reviews identified
patient miscoding, documentation deficiencies and other errors in our recordkeeping and Medicare billing, these errors resulted
in no Medicare revenue recoupment, net of appeal recoveries, to the federal government and related resident copayments. As of
December 31, 2014, we had one facility under probe review.

If the government or court were to conclude that such errors and deficiencies constituted criminal violations, or were to
conclude that such errors and deficiencies resulted in the submission of false claims to federal healthcare programs, or if it were
to discover other problems in addition to the ones identified by the probe reviews that rose to actionable levels, we and certain of
our officers might face potential criminal charges and/or civil claims, administrative sanctions and penalties for amounts that could
be material to our business, results of operations and financial condition. In addition, we and/or some of the key personnel of our
operating subsidiaries could be temporarily or permanently excluded from future participation in state and federal healthcare
reimbursement programs such as Medicaid and Medicare. In any event, it is likely that a governmental investigation alone,
regardless of its outcome, would divert material time, resources and attention from our management team and our staff, and could
have a materially detrimental impact on our results of operations during and after any such investigation or proceedings.

In some cases, probe reviews can also result in a facility being temporarily placed on prepayment review of reimbursement
claims, requiring additional documentation and adding steps and time to the reimbursement process for the affected facility. Failure
to meet claim filing and documentation requirements during the prepayment review could subject a facility to an even more
intensive “targeted review,” where a corrective action plan addressing perceived deficiencies must be prepared by the facility and
approved by the fiscal intermediary. During a targeted review, additional claims are reviewed pre-payment to ensure that the
prescribed corrective actions are being followed. Failure to make corrections or to otherwise meet the claim documentation and
submission requirements could eventually result in Medicare decertification. None of our operating subsidiaries are currently on
prepayment review, although some may be placed on prepayment review in the future. We have no operating subsidiaries that are
currently undergoing targeted review.

Public and government calls for increased survey and enforcement efforts toward long-term care facilities could result in
increased scrutiny by state and federal survey agencies. In addition, potential sanctions and remedies based upon alleged
regulatory deficiencies could negatively affect our financial condition and results of operations.

CMS has undertaken several initiatives to increase or intensify Medicaid and Medicare survey and enforcement activities,
including federal oversight of state actions. CMS is taking steps to focus more survey and enforcement efforts on facilities with
findings of substandard care or repeat violations of Medicaid and Medicare standards, and to identify multi-facility providers with
patterns of noncompliance. In addition, the Department of Health and Human Services has adopted a rule that requires CMS to
charge user fees to healthcare facilities cited during regular certification, recertification or substantiated complaint surveys for
deficiencies, which require a revisit to assure that corrections have been made. CMS is also increasing its oversight of state survey
agencies and requiring state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat
violations are identified, to investigate complaints more promptly, and to survey facilities more consistently.

The intensified and evolving enforcement environment impacts providers like us because of the increase in the scope or
number of inspections or surveys by governmental authorities and the severity of consequent citations for alleged failure to comply
with regulatory requirements. We also divert personnel resources to respond to federal and state investigations and other
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enforcement actions. The diversion of these resources, including our management team, clinical and compliance staff, and others
take away from the time and energy that these individuals could otherwise spend on routine operations. As noted, from time to
time in the ordinary course of business, we receive deficiency reports from state and federal regulatory bodies resulting from such
inspections or surveys. The focus of these deficiency reports tends to vary from year to year. Although most inspection deficiencies
are resolved through an agreed-upon plan of corrective action, the reviewing agency typically has the authority to take further
action against a licensed or certified facility, which could result in the imposition of fines, imposition of a provisional or conditional
license, suspension or revocation of a license, suspension or denial of payment for new admissions, loss of certification as a
provider under state or federal healthcare programs, or imposition of other sanctions, including criminal penalties. In the past, we
have experienced inspection deficiencies that have resulted in the imposition of a provisional license and could experience these
results in the future. We currently have no affiliated facilities operating under provisional licenses which were the result of inspection
deficiencies.

Furthermore, in some states, citations in one facility impact other facilities in the state. Revocation of a license at a given
facility could therefore impair our ability to obtain new licenses or to renew existing licenses at other facilities, which may also
trigger defaults or cross-defaults under our leases and our credit arrangements, or adversely affect our ability to operate or obtain
financing in the future. If state or federal regulators were to determine, formally or otherwise, that one facility's regulatory history
ought to impact another of our existing or prospective facilities, this could also increase costs, result in increased scrutiny by state
and federal survey agencies, and even impact our expansion plans. Therefore, our failure to comply with applicable legal and
regulatory requirements in any single facility could negatively impact our financial condition and results of operations as a whole.

When a facility is found to be deficient under state licensing and Medicaid and Medicare standards, sanctions may be
threatened or imposed such as denial of payment for new Medicaid and Medicare admissions, civil monetary penalties, focused
state and federal oversight and even loss of eligibility for Medicaid and Medicare participation or state licensure. Sanctions such
as denial of payment for new admissions often are scheduled to go into effect before surveyors return to verify compliance.
Generally, if the surveyors confirm that the facility is in compliance upon their return, the sanctions never take effect. However,
if they determine that the facility is not in compliance, the denial of payment goes into effect retroactive to the date given in the
original notice. This possibility sometimes leaves affected operators, including us, with the difficult task of deciding whether to
continue accepting patients after the potential denial of payment date, thus risking the retroactive denial of revenue associated
with those patients' care if the operators are later found to be out of compliance, or simply refusing admissions from the potential
denial of payment date until the facility is actually found to be in compliance. In the past, some of our affiliated facilities have
been in denial of payment status due to findings of continued regulatory deficiencies, resulting in an actual loss of the revenue
associated with the Medicare and Medicaid patients admitted after the denial of payment date. Additional sanctions could ensue
and, if imposed, these sanctions, entailing various remedies up to and including decertification, would further negatively affect
our financial condition and results of operations. From time to time, we have opted to voluntarily stop accepting new patients
pending completion of a new state survey, in order to avoid possible denial of payment for new admissions during the deficiency
cure period, or simply to avoid straining staff and other resources while retraining staff, upgrading operating systems or making
other operational improvements.

Facilities with otherwise acceptable regulatory histories generally are given an opportunity to correct deficiencies and continue
their participation in the Medicare and Medicaid programs by a certain date, usually within nine months, although where denial
of payment remedies are asserted, such interim remedies go into effect much sooner. Facilities with deficiencies that immediately
jeopardize patient health and safety and those that are classified as poor performing facilities, however, are not generally given
an opportunity to correct their deficiencies prior to the imposition of remedies and other enforcement actions. Moreover, facilities
with poor regulatory histories continue to be classified by CMS as poor performing facilities notwithstanding any intervening
change in ownership, unless the new owner obtains a new Medicare provider agreement instead of assuming the facility's existing
agreement. However, new owners (including us, historically) nearly always assume the existing Medicare provider agreement
due to the difficulty and time delays generally associated with obtaining new Medicare certifications, especially in previously-
certified locations with sub-par operating histories. Accordingly, facilities that have poor regulatory histories before we acquire
them and that develop new deficiencies after we acquire them are more likely to have sanctions imposed upon them by CMS or
state regulators. In addition, CMS has increased its focus on facilities with a history of serious quality of care problems through
the special focus facility initiative. A facility's administrators and owners are notified when it is identified as a special focus facility.
This information is also provided to the general public. The special focus facility designation is based in part on the facility's
compliance history typically dating before our acquisition of the facility. Local state survey agencies recommend to CMS that
facilities be placed on special focus status. A special focus facility receives heightened scrutiny and more frequent regulatory
surveys. Failure to improve the quality of care can result in fines and termination from participation in Medicare and Medicaid.
A facility “graduates” from the program once it demonstrates significant improvements in quality of care that are continued over
time.

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We have received notices of potential sanctions and remedies based upon alleged regulatory deficiencies from time to time,
and such sanctions have been imposed on some of our affiliated facilities. We have had several affiliated facilities placed on special
focus facility status, due largely or entirely to their respective regulatory histories prior to our acquisition of the operating
subsidiaries, and have successfully graduated four affiliated facilities from the program to date. CMS currently has included one
of our affiliated facilities on its special focus facilities listing. To date, this affiliated facility has passed both surveys. The successful
completion of two surveys are required for a special focus facility to graduate from the program. Other affiliated facilities may
be identified for such status in the future.

Annual caps that limit the amounts that can be paid for outpatient therapy services rendered to any Medicare beneficiary

may reduce our future revenue and profitability or cause us to incur losses.

Some of our rehabilitation therapy revenue is paid by the Medicare Part B program under a fee schedule. Congress has
established annual caps that limit the amounts that can be paid (including deductible and coinsurance amounts) for rehabilitation
therapy services rendered to any Medicare beneficiary under Medicare Part B. The BBA requires a combined cap for physical
therapy and speech-language pathology and a separate cap for occupational therapy.

The DRA directs CMS to create a process to allow exceptions to therapy caps for certain medically necessary services
provided on or after January 1, 2006 for patients with certain conditions or multiple complexities whose therapy services are
reimbursed under Medicare Part B. A significant portion of the patients in our affiliated skilled nursing facilities and patients
served by our rehabilitation therapy programs whose therapy is reimbursed under Medicare Part B have qualified for the exceptions
to these reimbursement caps. DRA added Sec. 1833(g)(5) of the Social Security Act and directed them to develop a process that
allows exceptions for Medicare beneficiaries to therapy caps when continued therapy is deemed medically necessary.

In addition, the Multiple Procedure Payment Reduction (MPPR) was increased from a 25% to 50% reduction applied to
therapy by reducing payments for practice expense of the second and subsequent therapies when therapies are provided on the
same day. The implementation of MPPR includes 1) facilities that provide Medicare Part B speech-language pathology,
occupational therapy, and physical therapy services and bill under the same provider number; and 2) providers in private practice,
including speech-language pathologists, who perform and bill for multiple services in a single day. The change from 25% of the
practice expense to a 50% reduction went into effect for Medicare Part B services provided on or after April 1, 2013.

Our hospice operating subsidiaries are subject to annual Medicare caps calculated by Medicare. If such caps were to be
exceeded by any of our hospice providers, our business and consolidated financial condition, results of operations and cash
flows could be materially adversely affected.

With respect to our hospice operating subsidiaries, overall payments made by Medicare to each provider number are subject
to an inpatient cap amount and an overall payment cap, which are calculated and published by the Medicare fiscal intermediary
on an annual basis covering the period from November 1 through October 31. If payments received by any one of our hospice
provider numbers exceeds either of these caps, we are required to reimburse Medicare for payments received in excess of the caps,
which could have a material adverse effect on our business and consolidated financial condition, results of operations and cash
flows.

We are subject to extensive and complex federal and state government laws and regulations which could change at any time

and increase our cost of doing business and subject us to enforcement actions.

We, along with other companies in the healthcare industry, are required to comply with extensive and complex laws and

regulations at the federal, state and local government levels relating to, among other things:

•

facility and professional licensure, certificates of need, permits and other government approvals;

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• adequacy and quality of healthcare services;

• qualifications of healthcare and support personnel;

• quality of medical equipment;

• confidentiality, maintenance and security issues associated with medical records and claims processing;

•

relationships with physicians and other referral sources and recipients;

• constraints on protective contractual provisions with patients and third-party payors;

• operating policies and procedures;

• certification of additional facilities by the Medicare program; and

• payment for services.

The laws and regulations governing our operations, along with the terms of participation in various government programs,
regulate how we do business, the services we offer, and our interactions with patients and other healthcare providers. These laws
and regulations are subject to frequent change. We believe that such regulations may increase in the future and we cannot predict
the ultimate content, timing or impact on us of any healthcare reform legislation. Changes in existing laws or regulations, or the
enactment of new laws or regulations, could negatively impact our business. If we fail to comply with these applicable laws and
regulations, we could suffer civil or criminal penalties and other detrimental consequences, including denial of reimbursement,
imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicaid and
Medicare programs, restrictions on our ability to acquire new facilities or expand or operate existing facilities, the loss of our
licenses to operate and the loss of our ability to participate in federal and state reimbursement programs.

We are subject to federal and state laws, such as the federal False Claims Act, state false claims acts, the illegal remuneration
provisions of the Social Security Act, the federal anti-kickback laws, state anti-kickback laws, and the federal “Stark” laws, that
govern financial and other arrangements among healthcare providers, their owners, vendors and referral sources, and that are
intended to prevent healthcare fraud and abuse. Among other things, these laws prohibit kickbacks, bribes and rebates, as well as
other direct and indirect payments or fee-splitting arrangements that are designed to induce the referral of patients to a particular
provider for medical products or services payable by any federal healthcare program, and prohibit presenting a false or misleading
claim for payment under a federal or state program. They also prohibit some physician self-referrals. Possible sanctions for violation
of any of these restrictions or prohibitions include loss of eligibility to participate in federal and state reimbursement programs
and civil and criminal penalties. Changes in these laws could increase our cost of doing business. If we fail to comply, even
inadvertently, with any of these requirements, we could be required to alter our operations, refund payments to the government,
enter into corporate integrity, deferred prosecution or similar agreements with state or federal government agencies, and become
subject to significant civil and criminal penalties. For example, in April 2013, we announced that we reached a tentative settlement
with the Department of Justice (DOJ) regarding their investigation related to claims submitted to the Medicare program for
rehabilitation services provided at skilled nursing facilities in Southern California. As part of the settlement, we entered into a
Corporate Integrity Agreement with the Office of Inspector General-HHS. Failure to comply with the terms of the Corporate
Integrity Agreement could result in substantial civil or criminal penalties and being excluded from government health care programs,
which could adversely affect our financial condition and results of operations.

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes
to the federal False Claims Act (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following
changes by FERA, health care providers face significant penalties for known retention of government overpayments, even if no
false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an
obligation to pay money or property to the government. This includes the retention of any government overpayment. The
government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long
as it is knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections
not only for employees, but also contractors and agents. Thus, there is no need for an employment relationship in order to qualify
for protection against retaliation for whistleblowing.

We are also required to comply with state and federal laws governing the transmission, privacy and security of health
information. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires us to comply with certain standards
for the use of individually identifiable health information within our company, and the disclosure and electronic transmission of
such information to third parties, such as payors, business associates and patients. These include standards for common electronic
healthcare transactions and information, such as claim submission, plan eligibility determination, payment information submission
and the use of electronic signatures; unique identifiers for providers, employers and health plans; and the security and privacy of
individually identifiable health information. In addition, some states have enacted comparable or, in some cases, more stringent
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privacy and security laws. If we fail to comply with these state and federal laws, we could be subject to criminal penalties and
civil sanctions and be forced to modify our policies and procedures.

On January 25, 2013 the Department of Health and Human Services promulgated new HIPAA privacy, security, and
enforcement regulations, which increase significantly the penalties and enforcement practices of the Department regarding HIPAA
violations. In addition, any breach of individually identifiable health information can result in obligations under HIPAA and state
laws to notify patients, federal and state agencies, and in some cases media outlets, regarding the breach incident. Breach incidents
and violations of HIPAA or state privacy and security laws could subject us to significant penalties, and could have a significant
impact on our business. The new HIPAA regulations are effective as of March 26, 2013, and compliance was required by September
23, 2013.

Our failure to obtain or renew required regulatory approvals or licenses or to comply with applicable regulatory requirements,
the suspension or revocation of our licenses or our disqualification from participation in federal and state reimbursement programs,
or the imposition of other harsh enforcement sanctions could increase our cost of doing business and expose us to potential
sanctions. Furthermore, if we were to lose licenses or certifications for any of our affiliated facilities as a result of regulatory action
or otherwise, we could be deemed to be in default under some of our agreements, including agreements governing outstanding
indebtedness and lease obligations.

Increased civil and criminal enforcement efforts of government agencies against skilled nursing facilities could harm our

business, and could preclude us from participating in federal healthcare programs.

Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part
of numerous ongoing investigations of healthcare companies and, in particular, skilled nursing facilities. The focus of these
investigations includes, among other things:

• cost reporting and billing practices;

• quality of care;

•

financial relationships with referral sources; and

• medical necessity of services provided.

If any of our affiliated facilities is decertified or loses its licenses, our revenue, financial condition or results of operations
would be adversely affected. In addition, the report of such issues at any of our affiliated facilities could harm our reputation for
quality care and lead to a reduction in the patient referrals of our operating subsidiaries and ultimately a reduction in occupancy
at these facilities. Also, responding to enforcement efforts would divert material time, resources and attention from our management
team and our staff, and could have a materially detrimental impact on our results of operations during and after any such investigation
or proceedings, regardless of whether we prevail on the underlying claim.

Federal law provides that practitioners, providers and related persons may not participate in most federal healthcare programs,
including the Medicaid and Medicare programs, if the individual or entity has been convicted of a criminal offense related to the
delivery of a product or service under these programs or if the individual or entity has been convicted under state or federal law
of a criminal offense relating to neglect or abuse of patients in connection with the delivery of a healthcare product or service.
Other individuals or entities may be, but are not required to be, excluded from such programs under certain circumstances, including,
but not limited to, the following:

• medical necessity of services provided;

• conviction related to fraud;

• conviction relating to obstruction of an investigation;

• conviction relating to a controlled substance;

•

licensure revocation or suspension;

• exclusion or suspension from state or other federal healthcare programs;

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•

filing claims for excessive charges or unnecessary services or failure to furnish medically necessary services;

• ownership or control of an entity by an individual who has been excluded from the Medicaid or Medicare programs,
against whom a civil monetary penalty related to the Medicaid or Medicare programs has been assessed or who has been
convicted of a criminal offense under federal healthcare programs; and

•

the transfer of ownership or control interest in an entity to an immediate family or household member in anticipation of,
or following, a conviction, assessment or exclusion from the Medicare or Medicaid programs.

The OIG, among other priorities, is responsible for identifying and eliminating fraud, abuse and waste in certain federal
healthcare programs. The OIG has implemented a nationwide program of audits, inspections and investigations and from time to
time issues “fraud alerts” to segments of the healthcare industry on particular practices that are vulnerable to abuse. The fraud
alerts inform healthcare providers of potentially abusive practices or transactions that are subject to criminal activity and reportable
to the OIG. An increasing level of resources has been devoted to the investigation of allegations of fraud and abuse in the Medicaid
and Medicare programs, and federal and state regulatory authorities are taking an increasingly strict view of the requirements
imposed on healthcare providers by the Social Security Act and Medicaid and Medicare programs. Although we have created a
corporate compliance program that we believe is consistent with the OIG guidelines, the OIG may modify its guidelines or interpret
its guidelines in a manner inconsistent with our interpretation or the OIG may ultimately determine that our corporate compliance
program is insufficient.

In some circumstances, if one facility is convicted of abusive or fraudulent behavior, then other facilities under common
control or ownership may be decertified from participating in Medicaid or Medicare programs. Federal regulations prohibit any
corporation or facility from participating in federal contracts if it or its principals have been barred, suspended or declared ineligible
from participating in federal contracts. In addition, some state regulations provide that all facilities under common control or
ownership licensed within a state may be de-licensed if one or more of the facilities are de-licensed. If any of our affiliated facilities
were decertified or excluded from participating in Medicaid or Medicare programs, our revenue would be adversely affected.

The Office of the Inspector General or other organizations may choose to more closely scrutinize the billing practices of for-
profit skilled nursing facilities, which could result in an increase in regulatory monitoring and oversight, decreased
reimbursement rates, or otherwise adversely affect our business, financial condition and results of operations.

In December 2010, the OIG released a report entitled “Questionable Billing by Skilled Nursing Facilities.” The report
examined the billing practices of skilled nursing facilities based on Medicare Part A claims from 2006 to 2008 and found, among
other things, that for-profit skilled nursing facilities were more likely to bill for higher paying therapy RUGs, particularly in the
ultra high therapy categories, than government and not-for-profit operators. It also found that for-profit skilled nursing facilities
showed a higher incidence of patients using RUGs with higher activities of daily living (ADL) scores, and had a “long” average
length of stay among Part A beneficiaries, compared to their government and not-for-profit counterparts. The OIG recommended
that CMS vigilantly monitor overall payments to skilled nursing facilities, adjust RUG rates annually, change the method for
determining how much therapy is needed to ensure appropriate payments and conduct additional reviews for skilled nursing
operators that exceed certain thresholds for higher paying therapy RUGs. CMS concurred with and agreed to take action on three
of the four recommendations, declining only to change the methodology for assessing a patient's therapy needs. The OIG issued
a separate memorandum to CMS listing 384 specific facilities that the OIG had identified as being in the top one percent for use
of ultra high therapy, RUGs with high ADL scores, or “long” average lengths of stay, and CMS agreed to forward the list to the
appropriate fiscal intermediaries or other contractors for follow up. Although we believe our therapy assessment and billing
practices are consistent with applicable law and CMS requirements, we cannot predict the extent to which the OIG's
recommendations to CMS will be implemented and, what effect, if any, such proposals would have on us. Two of our affiliated
facilities have been listed on the report. Our business model, like those of some other for-profit operators, is based in part on
seeking out higher-acuity patients whom we believe are generally more profitable, and over time our overall patient mix has
consistently shifted to higher-acuity and higher-RUGs patients in most facilities we operate. We also use specialized care-delivery
software that assists our caregivers in more accurately capturing and recording ADL services in order to, among other things,
increase reimbursement to levels appropriate for the care actually delivered. These efforts may place us under greater scrutiny
with the OIG, CMS, our fiscal intermediaries, recovery audit contractors and others, as well as other government agencies, unions,
advocacy groups and others who seek to pursue their own mandates and agendas. In its fiscal year 2014 work plan, OIG specifically
stated that it will continue to study and report on questionable Part A and Part B billing practices amongst skilled nursing facilities.
Efforts by officials and others to make or advocate for any increase in regulatory monitoring and oversight, adversely change
RUG rates, revise methodologies for assessing and treating patients, or conduct more frequent or intense reviews of our treatment
and billing practices, could reduce our reimbursement, increase our costs of doing business and otherwise adversely affect our
business, financial condition and results of operations.

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State efforts to regulate or deregulate the healthcare services industry or the construction or expansion of healthcare facilities

could impair our ability to expand our operations, or could result in increased competition.

Some states require healthcare providers, including skilled nursing facilities, to obtain prior approval, known as a certificate

of need, for:

•

the purchase, construction or expansion of healthcare facilities;

• capital expenditures exceeding a prescribed amount; or

• changes in services or bed capacity.

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

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

Changes in federal and state employment-related laws and regulations could increase our cost of doing business.

Our operating subsidiaries are subject to a variety of federal and state employment-related laws and regulations, including,
but not limited to, the U.S. Fair Labor Standards Act which governs such matters as minimum wages, overtime and other working
conditions, the Americans with Disabilities Act (ADA) and similar state laws that provide civil rights protections to individuals
with disabilities in the context of employment, public accommodations and other areas, the National Labor Relations Act,
regulations of the Equal Employment Opportunity Commission (EEOC), regulations of the Office of Civil Rights, regulations of
state Attorneys General, family leave mandates and a variety of similar laws enacted by the federal and state governments that
govern these and other employment law matters. Because labor represents such a large portion of our operating costs, changes in
federal and state employment-related laws and regulations could increase our cost of doing business.

The compliance costs associated with these laws and evolving regulations could be substantial. For example, all of our
affiliated facilities are required to comply with the ADA. The ADA has separate compliance requirements for “public
accommodations” and “commercial properties,” but generally requires that buildings be made accessible to people with disabilities.
Compliance with ADA requirements could require removal of access barriers and non-compliance could result in imposition of
government fines or an award of damages to private litigants. Further legislation may impose additional burdens or restrictions
with respect to access by disabled persons. In addition, federal proposals to introduce a system of mandated health insurance and
flexible work time and other similar initiatives could, if implemented, adversely affect our operations. We also may be subject to
employee-related claims such as wrongful discharge, discrimination or violation of equal employment law. While we are insured
for these types of claims, we could experience damages that are not covered by our insurance policies or that exceed our insurance
limits, and we may be required to pay such damages directly, which would negatively impact our cash flow from operations.

Compliance with federal and state fair housing, fire, safety and other regulations may require us to make unanticipated

expenditures, which could be costly to us.

We must comply with the federal Fair Housing Act and similar state laws, which prohibit us from discriminating against
individuals if it would cause such individuals to face barriers in gaining residency in any of our affiliated facilities. Additionally,
the Fair Housing Act and other similar state laws require that we advertise our services in such a way that we promote diversity
and not limit it. We may be required, among other things, to change our marketing techniques to comply with these requirements.

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In addition, we are required to operate our affiliated facilities in compliance with applicable fire and safety regulations,
building codes and other land use regulations and food licensing or certification requirements as they may be adopted by
governmental agencies and bodies from time to time. Like other healthcare facilities, our affiliated skilled nursing facilities are
subject to periodic surveys or inspections by governmental authorities to assess and assure compliance with regulatory requirements.
Surveys occur on a regular (often annual or biannual) schedule, and special surveys may result from a specific complaint filed by
a patient, a family member or one of our competitors. We may be required to make substantial capital expenditures to comply
with these requirements.

We depend largely upon reimbursement from third-party payors, and our revenue, financial condition and results of
operations could be negatively impacted by any changes in the acuity mix of patients in our affiliated facilities as well as payor
mix and payment methodologies.

Our revenue is affected by the percentage of the patients of our operating subsidiaries who require a high level of skilled
nursing and rehabilitative care, whom we refer to as high acuity patients, and by our mix of payment sources. Changes in the
acuity level of patients we attract, as well as our payor mix among Medicaid, Medicare, private payors and managed care companies,
significantly affect our profitability because we generally receive higher reimbursement rates for high acuity patients and because
the payors reimburse us at different rates. For the year ended December 31, 2014, 70.4% of our revenue was provided by government
payors that reimburse us at predetermined rates. If our labor or other operating costs increase, we will be unable to recover such
increased costs from government payors. Accordingly, if we fail to maintain our proportion of high acuity patients or if there is
any significant increase in the percentage of the patients of our operating subsidiaries for whom we receive Medicaid reimbursement,
our results of operations may be adversely affected.

Initiatives undertaken by major insurers and managed care companies to contain healthcare costs may adversely affect our
business. Among other initiatives, these payors attempt to control healthcare costs by contracting with healthcare providers to
obtain services on a discounted basis. We believe that this trend will continue and may limit reimbursements for healthcare services.
If insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for
services, we may lose patients if we choose not to renew our contracts with these insurers at lower rates.

Compliance with state and federal employment, immigration, licensing and other laws could increase our cost of doing

business.

We have hired personnel, including skilled nurses and therapists, from outside the United States. If immigration laws are
changed, or if new and more restrictive government regulations proposed by the Department of Homeland Security are enacted,
our access to qualified and skilled personnel may be limited.

We operate in at least one state that requires us to verify employment eligibility using procedures and standards that exceed
those required under federal Form I-9 and the statutes and regulations related thereto. Proposed federal regulations would extend
similar requirements to all of the states in which our affiliated facilities operate. To the extent that such proposed regulations or
similar measures become effective, and we are required by state or federal authorities to verify work authorization or legal residence
for current and prospective employees beyond existing Form I-9 requirements and other statutes and regulations currently in effect,
it may make it more difficult for us to recruit, hire and/or retain qualified employees, may increase our risk of non-compliance
with state and federal employment, immigration, licensing and other laws and regulations and could increase our cost of doing
business.

We are subject to litigation that could result in significant legal costs and large settlement amounts or damage awards.

The skilled nursing business involves a significant risk of liability given the age and health of the patients and residents of
our operating subsidiaries and the services we provide. We and others in our industry are subject to a large and increasing number
of claims and lawsuits, including professional liability claims, alleging that our services have resulted in personal injury, elder
abuse, wrongful death or other related claims. The defense of these lawsuits has in the past, and may in the future, result in
significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. Plaintiffs tend to
sue every healthcare provider who may have been involved in the patient's care and, accordingly, we respond to multiple lawsuits
and claims every year.

In addition, plaintiffs' attorneys have become increasingly more aggressive in their pursuit of claims against healthcare
providers, including skilled nursing providers and other long-term care companies, and have employed a wide variety of advertising
and publicity strategies. Among other things, these strategies include establishing their own Internet websites, paying for premium
advertising space on other websites, paying Internet search engines to optimize their plaintiff solicitation advertising so that it
appears in advantageous positions on Internet search results, including results from searches for our company and affiliated
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facilities, using newspaper, magazine and television ads targeted at customers of the healthcare industry generally, as well as at
customers of specific providers, including us. From time to time, law firms claiming to specialize in long-term care litigation have
named us, our affiliated facilities and other specific healthcare providers and facilities in their advertising and solicitation materials.
These advertising and solicitation activities could result in more claims and litigation, which could increase our liability exposure
and legal expenses, divert the time and attention of the personnel of our operating subsidiaries from day-to-day business operations,
and materially and adversely affect our financial condition and results of operations. Furthermore, to the extent the frequency and/
or severity of losses from such claims and suits increases, our liability insurance premiums could increase and/or available insurance
coverage levels could decline, which could materially and adversely affect our financial condition and results of operations.

Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and
theories, and we are routinely subjected to varying types of claims. One particular type of suit arises from alleged violations of
state-established minimum staffing requirements for skilled nursing facilities. Failure to meet these requirements can, among other
things, jeopardize a facility's compliance with conditions of participation under certain state and federal healthcare programs; it
may also subject the facility to a notice of deficiency, a citation, civil monetary penalty, or litigation. These class-action “staffing”
suits have the potential to result in large jury verdicts and settlements, and have become more prevalent in the wake of a previous
substantial jury award against one of our competitors. We expect the plaintiff's bar to continue to be aggressive in their pursuit of
these staffing and similar claims.

A class action staffing suit was previously filed against us in the State of California, alleging, among other things, violations
of certain Health and Safety Code provisions and a violation of the Consumer Legal Remedies Act at certain of our California
affiliated facilities. In 2007, we settled this class action suit, and the settlement was approved by the affected class and the Court.
We have been defending a second such staffing class-action claim filed in Los Angeles Superior Court; however, a settlement was
reached with class counsel and has received Court approval. The total costs associated with the settlement, including attorney's
fees, estimated class payout, and related costs and expenses, were approximately $6.5 million, of which, approximately $1.5
million and $2.6 million of this amount was recorded in the fiscal year ended December 31, 2013 and 2012, respectively, with the
balance having been expensed in prior periods. We believe that the settlement will not have a material ongoing adverse effect on
our business, financial condition or results of operations.

Other claims and suits, including class actions, continue to be filed against us and other companies in our industry. For
example, there has been an increase in the number of wage and hour class action claims filed in several of the jurisdictions where
we are present. Allegations typically include claimed failures to permit or properly compensate for meal and rest periods, or failure
to pay for time worked. If there were a significant increase in the number of these claims or an increase in amounts owing should
plaintiffs be successful in their prosecution of these claims, this could have a material adverse effect to our business, financial
condition, results of operations and cash flows. In addition, we contract with a variety of landlords, lenders, vendors, suppliers,
consultants and other individuals and businesses. These contracts typically contain covenants and default provisions. If the other
party to one or more of our contracts were to allege that we have violated the contract terms, we could be subject to civil liabilities
which could have a material adverse effect on our financial condition and results of operations.

Were litigation to be instituted against one or more of our subsidiaries, a successful plaintiff might attempt to hold us or
another subsidiary liable for the alleged wrongdoing of the subsidiary principally targeted by the litigation. If a court in such
litigation decided to disregard the corporate form, the resulting judgment could increase our liability and adversely affect our
financial condition and results of operations.

On February 26, 2009, Congress reintroduced the Fairness in Nursing Home Arbitration Act of 2009. After failing to be
enacted into law in the 110th Congress in 2008, the Fairness in Nursing Home Arbitration Act of 2009 was introduced in the 111th
Congress and referred to the House and Senate judiciary committees in March 2009. The 111th Congress did not pass the bill and
therefore has been cleared from the present agenda. This bill was reintroduced in the 112th Congress as the Fairness in Nursing
Home Arbitration Act of 2012, and was referred to the House Judiciary committee. If enacted, this bill would require, among other
things, that agreements to arbitrate nursing home disputes be made after the dispute has arisen rather than before prospective
patients move in, to prevent nursing home operators and prospective patients from mutually entering into a pre-admission pre-
dispute arbitration agreement. We use arbitration agreements, which have generally been favored by the courts, to streamline the
dispute resolution process and reduce our exposure to legal fees and excessive jury awards. If we are not able to secure pre-
admission arbitration agreements, our litigation exposure and costs of defense in patient liability actions could increase, our liability
insurance premiums could increase, and our business may be adversely affected.

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The U.S. Department of Justice has conducted an investigation into the billing and reimbursement processes of some of our

operating subsidiaries, which could adversely affect our operations and financial condition.

In October 2013, we entered into a settlement agreement (the Settlement Agreement) with the DOJ pertaining to an
investigation of certain of our operating subsidiaries. Pursuant to the settlement agreement, we made a single lump-sum remittance
to the government in the amount of $48.0 million in October 2013. We have denied engaging in any illegal conduct, and have
agreed to the settlement amount without any admission of wrongdoing in order to resolve the allegations and to avoid the uncertainty
and expense of protracted litigation.

In connection with the settlement and effective as of October 1, 2013, we entered into a five-year corporate integrity agreement
(the CIA) with the Office of Inspector General-HHS. The CIA acknowledges the existence of our current compliance program,
which is in accord with the Office of the Inspector General (OIG)’s guidance related to an effective compliance program, and
requires that we continue during the term of the CIA to maintain said compliance program designed to promote compliance with
the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federal health care programs. We are also
required to notify the Office of Inspector General-HHS in writing, of, among other things: (i) any ongoing government investigation
or legal proceeding involving an allegation that we have committed a crime or has engaged in fraudulent activities; (ii) any other
matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related
to compliance with federal healthcare programs; and (iii) any change in location, sale, closing, purchase, or establishment of a
new business unit or location related to items or services that may be reimbursed by Federal health care programs. We are also
required to retain an Independent Review Organization (IRO) to review certain clinical documentation annually for the term of
the CIA.

Our participation in federal healthcare programs is not currently affected by the Settlement Agreement or the CIA. In the
event of an uncured material breach of the CIA, we could be excluded from participation in federal healthcare programs and/or
subject to prosecution.

If any additional litigation were to proceed in the future, and we are subjected to, alleged to be liable for, or agree to a
settlement of, claims or obligations under federal Medicare statutes, the federal False Claims Act, or similar state and federal
statutes and related regulations, our business, financial condition and results of operations and cash flows could be materially and
adversely affected and our stock price could be adversely impacted. Among other things, any settlement or litigation could involve
the payment of substantial sums to settle any alleged civil violations, and may also include our assumption of specific procedural
and financial obligations going forward under a corporate integrity agreement and/or other arrangement with the government.

We conduct regular internal investigations into the care delivery, recordkeeping and billing processes of our operating
subsidiaries. These reviews sometimes detect instances of noncompliance which we attempt to correct, which can decrease our
revenue.

As an operator of healthcare facilities, we have a program to help us comply with various requirements of federal and private
healthcare programs. Our compliance program includes, among other things, (1) policies and procedures modeled after applicable
laws, regulations, government manuals and industry practices and customs that govern the clinical, reimbursement and operational
aspects of our subsidiaries, (2) training about our compliance process for all of the employees of our operating subsidiaries, our
directors and officers, and training about Medicare and Medicaid laws, fraud and abuse prevention, clinical standards and practices,
and claim submission and reimbursement policies and procedures for appropriate employees, and (3) internal controls that monitor,
for example, the accuracy of claims, reimbursement submissions, cost reports and source documents, provision of patient care,
services, and supplies as required by applicable standards and laws, accuracy of clinical assessment and treatment documentation,
and implementation of judicial and regulatory requirements (i.e., background checks, licensing and training).

From time to time our systems and controls highlight potential compliance issues, which we investigate as they arise.
Historically, we have, and would continue to do so in the future, initiated internal inquiries into possible recordkeeping and related
irregularities at our affiliated skilled nursing facilities, which were detected by our internal compliance team in the course of its
ongoing reviews.

Through these internal inquiries, we have identified potential deficiencies in the assessment of and recordkeeping for small
subsets of patients. We have also identified and, at the conclusion of such investigations, assisted in implementing, targeted
improvements in the assessment and recordkeeping practices to make them consistent with the existing standards and policies
applicable to our affiliated skilled nursing facilities in these areas. We continue to monitor the measures implemented for
effectiveness, and perform follow-up reviews to ensure compliance. Consistent with healthcare industry accounting practices, we
record any charge for refunded payments against revenue in the period in which the claim adjustment becomes known.

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If additional reviews result in identification and quantification of additional amounts to be refunded, we would accrue
additional liabilities for claim costs and interest, and repay any amounts due in normal course. If future investigations ultimately
result in findings of significant billing and reimbursement noncompliance which could require us to record significant additional
provisions or remit payments, our business, financial condition and results of operations could be materially and adversely affected
and our stock price could decline.

We may be unable to complete future facility or business acquisitions at attractive prices or at all, which may adversely affect
our revenue; we may also elect to dispose of underperforming or non-strategic operating subsidiaries, which would also decrease
our revenue.

To date, our revenue growth has been significantly driven by our acquisition of new facilities and businesses. Subject to
general market conditions and the availability of essential resources and leadership within our company, we continue to seek both
single-and multi-facility acquisition and business acquisition opportunities that are consistent with our geographic, financial and
operating objectives.

We face competition for the acquisition of facilities and businesses and expect this competition to increase. Based upon
factors such as our ability to identify suitable acquisition candidates, the purchase price of the facilities, prevailing market
conditions, the availability of leadership to manage new facilities and our own willingness to take on new operations, the rate at
which we have historically acquired facilities has fluctuated significantly. In the future, we anticipate the rate at which we may
acquire facilities will continue to fluctuate, which may affect our revenue.

We have also historically acquired a few facilities, either because they were included in larger, indivisible groups of facilities
or under other circumstances, which were or have proven to be non-strategic or less desirable, and we may consider disposing of
such facilities or exchanging them for facilities which are more desirable. To the extent we dispose of such a facility without
simultaneously acquiring a facility in exchange, our revenues might decrease.

We may not be able to successfully integrate acquired facilities and businesses into our operations, and we may not achieve

the benefits we expect from any of our facility acquisitions.

We may not be able to successfully or efficiently integrate new acquisitions with our existing operating subsidiaries, culture
and systems. The process of integrating acquisitions into our existing operations may result in unforeseen operating difficulties,
divert management's attention from existing operations, or require an unexpected commitment of staff and financial resources,
and may ultimately be unsuccessful. Existing operations available for acquisition frequently serve or target different markets than
those that we currently serve. We also may determine that renovations of acquired facilities and changes in staff and operating
management personnel are necessary to successfully integrate those acquisitions into our existing operations. We may not be able
to recover the costs incurred to reposition or renovate newly operating subsidiaries. The financial benefits we expect to realize
from many of our acquisitions are largely dependent upon our ability to improve clinical performance, overcome regulatory
deficiencies, rehabilitate or improve the reputation of the operations in the community, increase and maintain occupancy, control
costs, and in some cases change the patient acuity mix. If we are unable to accomplish any of these objectives at the operating
subsidiaries we acquire, we will not realize the anticipated benefits and we may experience lower than anticipated profits, or even
losses.

During the year ended December 31, 2014, we continued to expand our operations with the addition of fifteen stand-alone
skilled nursing operations, three stand-alone assisted living operations, three home health agencies, four hospice agencies, one
home care business, one primary care group and one transitional care management company, with a total of 1,453 operational
skilled nursing beds and 333 operational assisted living units. During the year ended December 31, 2013, we acquired seven
stand-alone skilled nursing operations, three stand-alone assisted living operations, three home health operations, three hospice
operations and one urgent care center with a total of 652 operational skilled nursing beds and 281 operational assisted living units.
This growth has placed and will continue to place significant demands on our current management resources. Our ability to manage
our growth effectively and to successfully integrate new acquisitions into our existing business will require us to continue to
expand our operational, financial and management information systems and to continue to retain, attract, train, motivate and
manage key employees, including facility-level leaders and our local directors of nursing. We may not be successful in attracting
qualified individuals necessary for future acquisitions to be successful, and our management team may expend significant time
and energy working to attract qualified personnel to manage facilities we may acquire in the future. Also, the newly acquired
facilities may require us to spend significant time improving services that have historically been substandard, and if we are unable
to improve such facilities quickly enough, we may be subject to litigation and/or loss of licensure or certification. If we are not
able to successfully overcome these and other integration challenges, we may not achieve the benefits we expect from any of our
facility acquisitions, and our business may suffer.

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In undertaking acquisitions, we may be adversely impacted by costs, liabilities and regulatory issues that may adversely affect

our operations.

In undertaking acquisitions, we also may be adversely impacted by unforeseen liabilities attributable to the prior providers
who operated those facilities, against whom we may have little or no recourse. Many facilities we have historically acquired were
underperforming financially and had clinical and regulatory issues prior to and at the time of acquisition. Even where we have
improved operating subsidiaries and patient care at affiliated facilities that we have acquired, we still may face post-acquisition
regulatory issues related to pre-acquisition events. These may include, without limitation, payment recoupment related to our
predecessors' prior noncompliance, the imposition of fines, penalties, operational restrictions or special regulatory status. Further,
we may incur post-acquisition compliance risk due to the difficulty or impossibility of immediately or quickly bringing non-
compliant facilities into full compliance. Diligence materials pertaining to acquisition targets, especially the underperforming
facilities that often represent the greatest opportunity for return, are often inadequate, inaccurate or impossible to obtain, sometimes
requiring us to make acquisition decisions with incomplete information. Despite our due diligence procedures, facilities that we
have acquired or may acquire in the future may generate unexpectedly low returns, may cause us to incur substantial losses, may
require unexpected levels of management time, expenditures or other resources, or may otherwise not meet a risk profile that our
investors find acceptable. For example, in July of 2006 we acquired a facility that had a history of intermittent noncompliance.
Although the affiliated facility had already been surveyed once by the local state survey agency after being acquired by us, and
that survey would have met the heightened requirements of the special focus facility program, based upon the facility's compliance
history prior to our acquisition, in January 2008, state officials nevertheless recommended to CMS that the facility be placed on
special focus facility status. In addition, in October of 2006, we acquired a facility which had a history of intermittent non-
compliance. This affiliated facility was surveyed by the local state survey agency during the third quarter of 2008 and passed the
heightened survey requirements of the special focus facility program. Both affiliated facilities have successfully graduated from
the Centers for Medicare and Medicaid Services' Special Focus program. As of December 31, 2014, we had one affiliated facility
on special focus facility status. To date, this affiliated facility has passed both surveys. The successful completion of two surveys
are required for a special focus facility to graduate from the program. Other affiliated facilities may be identified for such status
in the future.

In addition, we might encounter unanticipated difficulties and expenditures relating to any of the acquired facilities, including
contingent liabilities. For example, when we acquire a facility, we generally assume the facility's existing Medicare provider
number for purposes of billing Medicare for services. If CMS later determined that the prior owner of the facility had received
overpayments from Medicare for the period of time during which it operated the facility, or had incurred fines in connection with
the operation of the facility, CMS could hold us liable for repayment of the overpayments or fines. If the prior operator is defunct
or otherwise unable to reimburse us, we may be unable to recover these funds. We may be unable to improve every facility that
we acquire. In addition, operation of these facilities may divert management time and attention from other operations and priorities,
negatively impact cash flows, result in adverse or unanticipated accounting charges, or otherwise damage other areas of our
company if they are not timely and adequately improved.

We also incur regulatory risk in acquiring certain facilities due to the licensing, certification and other regulatory requirements
affecting our right to operate the acquired facilities. For example, in order to acquire facilities on a predictable schedule, or to
acquire declining operations quickly to prevent further pre-acquisition declines, we frequently acquire such facilities prior to
receiving license approval or provider certification. We operate such facilities as the interim manager for the outgoing licensee,
assuming financial responsibility, among other obligations for the facility. To the extent that we may be unable or delayed in
obtaining a license, we may need to operate the facility under a management agreement from the prior operator. Any inability in
obtaining consent from the prior operator of a target acquisition to utilizing its license in this manner could impact our ability to
acquire additional facilities. If we were subsequently denied licensure or certification for any reason, we might not realize the
expected benefits of the acquisition and would likely incur unanticipated costs and other challenges which could cause our business
to suffer.

Termination of our patient admission agreements and the resulting vacancies in our affiliated facilities could cause revenue

at our affiliated facilities to decline.

Most state regulations governing skilled nursing and assisted living facilities require written patient admission agreements
with each patient. Several of these regulations also require that each patient have the right to terminate the patient agreement for
any reason and without prior notice. Consistent with these regulations, all of our skilled nursing patient agreements allow patients
to terminate their agreements without notice, and all of our assisted living resident agreements allow patients to terminate their
agreements upon thirty days' notice. Patients and residents terminate their agreements from time to time for a variety of reasons,
causing some fluctuations in our overall occupancy as patients and residents are admitted and discharged in normal course. If an
unusual number of patients or residents elected to terminate their agreements within a short time, occupancy levels at our affiliated

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facilities could decline. As a result, beds may be unoccupied for a period of time, which would have a negative impact on our
revenue, financial condition and results of operations.

We face significant competition from other healthcare providers and may not be successful in attracting patients and residents

to our affiliated facilities.

The skilled nursing, assisted living, home health and hospice fields are highly competitive, and we expect that these fields
may become increasingly competitive in the future. Our affiliated skilled nursing facilities compete primarily on a local and
regional basis with many long-term care providers, from national and regional multi-facility providers that have substantially
greater financial resources to small providers who operate a single nursing facility. We also compete with other skilled nursing
and assisted living facilities, and with inpatient rehabilitation facilities, long-term acute care hospitals, home healthcare and other
similar services and care alternatives. Increased competition could limit our ability to attract and retain patients, attract and retain
skilled personnel, maintain or increase private pay and managed care rates or expand our business.

We may not be successful in attracting patients to our operating subsidiaries, particularly Medicare, managed care, and
private pay patients who generally come to us at higher reimbursement rates. Some of our competitors have greater financial and
other resources than us, may have greater brand recognition and may be more established in their respective communities than
we are. Competing companies may also offer newer facilities or different programs or services than we do and may thereby attract
current or potential patients. Other competitors may have lower expenses or other competitive advantages, and, therefore, present
significant price competition for managed care and private pay patients. In addition, some of our competitors operate on a not-
for-profit basis or as charitable organizations and have the ability to finance capital expenditures on a tax-exempt basis or through
the receipt of charitable contributions, neither of which are available to us.

If we do not achieve and maintain competitive quality of care ratings from CMS and private organizations engaged in similar
monitoring activities, or if the frequency of CMS surveys and enforcement sanctions increases, our business may be negatively
affected.

CMS, as well as certain private organizations engaged in similar monitoring activities, provides comparative data available
to the public on its web site, rating every skilled nursing facility operating in each state based upon quality-of-care indicators.
These quality-of-care indicators include such measures as percentages of patients with infections, bedsores and unplanned weight
loss. In addition, CMS has undertaken an initiative to increase Medicaid and Medicare survey and enforcement activities, to focus
more survey and enforcement efforts on facilities with findings of substandard care or repeat violations of Medicaid and Medicare
standards, and to require state agencies to use enforcement sanctions and remedies more promptly when substandard care or repeat
violations are identified. We have found a correlation between negative Medicaid and Medicare surveys and the incidence of
professional liability litigation. From time to time, we experience a higher than normal number of negative survey findings in
some of our affiliated facilities.

In December 2008, CMS introduced the Five-Star Quality Rating System to help consumers, their families and caregivers
compare nursing homes more easily. The Five-Star Quality Rating System gives each nursing home a rating of between one and
five stars in various categories. In cases of acquisitions, the previous operator's clinical ratings are included in our overall Five-
Star Quality Rating. The prior operator's results will impact our rating until we have sufficient clinical measurements subsequent
to the acquisition date. If we are unable to achieve quality of care ratings that are comparable or superior to those of our competitors,
our ability to attract and retain patients could be adversely affected.

CMS also recently announced two proposed post-acute care provider initiatives. First, CMS proposes to expand and strengthen
the Five Star Quality Rating System for nursing homes to improve consumer information about quality measures at individual
nursing homes. In addition, CMS announced proposals to adopt new standards that home health agencies must comply with in
order to participate in the Medicare program, including the strengthening of patient rights and communication requirements that
focus on patient well-being.

If we are unable to obtain insurance, or if insurance becomes more costly for us to obtain, our business may be adversely

affected.

It may become more difficult and costly for us to obtain coverage for resident care liabilities and other risks, including
property and casualty insurance. For example, the following circumstances may adversely affect our ability to obtain insurance
at favorable rates:

• we experience higher-than-expected professional liability, property and casualty, or other types of claims or losses;

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• we receive survey deficiencies or citations of higher-than-normal scope or severity;

• we acquire especially troubled operations or facilities that present unattractive risks to current or prospective insurers;

•

insurers tighten underwriting standards applicable to us or our industry; or

•

insurers or reinsurers are unable or unwilling to insure us or the industry at historical premiums and coverage levels.

If any of these potential circumstances were to occur, our insurance carriers may require us to significantly increase our self-
insured retention levels or pay substantially higher premiums for the same or reduced coverage for insurance, including workers
compensation, property and casualty, automobile, employment practices liability, directors and officers liability, employee
healthcare and general and professional liability coverages.

In some states, the law prohibits or limits insurance coverage for the risk of punitive damages arising from professional
liability and general liability claims or litigation. Coverage for punitive damages is also excluded under some insurance policies.
As a result, we may be liable for punitive damage awards in these states that either are not covered or are in excess of our insurance
policy limits. Claims against us, regardless of their merit or eventual outcome, also could inhibit our ability to attract patients or
expand our business, and could require our management to devote time to matters unrelated to the day-to-day operation of our
business.

With few exceptions, workers' compensation and employee health insurance costs have also increased markedly in recent
years. To partially offset these increases, we have increased the amounts of our self-insured retention (SIR) and deductibles in
connection with general and professional liability claims. We also have implemented a self-insurance program for workers
compensation in all states, except Washington and Texas, and elected non-subscriber status for workers' compensation in Texas.
In Washington, the insurance coverage is financed through premiums paid by the employers and employees. If we are unable to
obtain insurance, or if insurance becomes more costly for us to obtain, or if the coverage levels we can economically obtain decline,
our business may be adversely affected.

Our self-insurance programs may expose us to significant and unexpected costs and losses.

We have maintained general and professional liability insurance since 2002 and workers' compensation insurance since 2005
through a wholly-owned subsidiary insurance company, Standardbearer Insurance Company, Ltd. (Standardbearer), to insure our
self-insurance reimbursements (SIR) and deductibles as part of a continually evolving overall risk management strategy. We
establish the insurance loss reserves based on an estimation process that uses information obtained from both company-specific
and industry data. The estimation process requires us to continuously monitor and evaluate the life cycle of the claims. Using data
obtained from this monitoring and our assumptions about emerging trends, we, along with an independent actuary, develop
information about the size of ultimate claims based on our historical experience and other available industry information. The
most significant assumptions used in the estimation process include determining the trend in costs, the expected cost of claims
incurred but not reported and the expected costs to settle or pay damages with respect to unpaid claims. It is possible, however,
that the actual liabilities may exceed our estimates of loss. We may also experience an unexpectedly large number of successful
claims or claims that result in costs or liability significantly in excess of our projections. For these and other reasons, our self-
insurance reserves could prove to be inadequate, resulting in liabilities in excess of our available insurance and self-insurance. If
a successful claim is made against us and it is not covered by our insurance or exceeds the insurance policy limits, our business
may be negatively and materially impacted.

Further, because our SIR under our general and professional liability and workers compensation programs applies on a per
claim basis, there is no limit to the maximum number of claims or the total amount for which we could incur liability in any policy
period.

In May 2006, we began self-insuring our employee health benefits. With respect to our health benefits self-insurance, our
reserves and premiums are computed based on a mix of company specific and general industry data that is not specific to our own
company. Even with a combination of limited company-specific loss data and general industry data, our loss reserves are based
on actuarial estimates that may not correlate to actual loss experience in the future. Therefore, our reserves may prove to be
insufficient and we may be exposed to significant and unexpected losses.

The geographic concentration of our affiliated facilities could leave us vulnerable to an economic downturn, regulatory

changes or acts of nature in those areas.

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Our affiliated facilities located in Arizona, California and Texas account for the majority of our total revenue. As a result of
this concentration, the conditions of local economies, changes in governmental rules, regulations and reimbursement rates or
criteria, changes in demographics, state funding, acts of nature and other factors that may result in a decrease in demand and/or
reimbursement for skilled nursing services in these states could have a disproportionately adverse effect on our revenue, costs and
results of operations. Moreover, since approximately 30% of our affiliated facilities are located in California, we are particularly
susceptible to revenue loss, cost increase or damage caused by natural disasters such as fires, earthquakes or mudslides.

In addition, our affiliated facilities in Iowa, Nebraska and Texas are more susceptible to revenue loss, cost increases or
damage caused by natural disasters including hurricanes, tornadoes and flooding. These acts of nature may cause disruption to
us, the employees of our operating subsidiaries and our affiliated facilities, which could have an adverse impact on the patients
of our operating subsidiaries and our business. In order to provide care for the patients of our operating subsidiaries, we are
dependent on consistent and reliable delivery of food, pharmaceuticals, utilities and other goods to our affiliated facilities, and
the availability of employees to provide services at our affiliated facilities. If the delivery of goods or the ability of employees to
reach our affiliated facilities were interrupted in any material respect due to a natural disaster or other reasons, it would have a
significant impact on our affiliated facilities and our business. Furthermore, the impact, or impending threat, of a natural disaster
may require that we evacuate one or more facilities, which would be costly and would involve risks, including potentially fatal
risks, for the patients. The impact of disasters and similar events is inherently uncertain. Such events could harm the patients and
employees of our operating subsidiaries, severely damage or destroy one or more of our affiliated facilities, harm our business,
reputation and financial performance, or otherwise cause our business to suffer in ways that we currently cannot predict.

The actions of a national labor union that has pursued a negative publicity campaign criticizing our business in the past

may adversely affect our revenue and our profitability.

We continue to maintain our right to inform the employees of our operating subsidiaries about our views of the potential
impact of unionization upon the workplace generally and upon individual employees. With one exception, to our knowledge the
staffs at our affiliated facilities that have been approached to unionize have uniformly rejected union organizing efforts. If employees
decide to unionize, our cost of doing business could increase, and we could experience contract delays, difficulty in adapting to
a changing regulatory and economic environment, cultural conflicts between unionized and non-unionized employees, strikes and
work stoppages, and we may conclude that affected facilities or operations would be uneconomical to continue operating.

The unwillingness on the part of both our management and staff to accede to union demands for “neutrality” and other
concessions has resulted in a negative labor campaign by at least one labor union, the Service Employees International Union.
From 2002 to 2007, this union, and individuals and organizations allied with or sympathetic to this union actively prosecuted a
negative retaliatory publicity action, also known as a “corporate campaign,” against us and filed, promoted or participated in
multiple legal actions against us. The union's campaign asserted, among other allegations, poor treatment of patients, inferior
medical services provided by the employees of our operating subsidiaries, poor treatment of the employees of our operating
subsidiaries, and health code violations by us. In addition, the union has publicly mischaracterized actions taken by the DHS
against us and our affiliated facilities. In numerous cases, the union's allegations created the false impression that violations and
other events that occurred at facilities prior to our acquisition of those facilities were caused by us. Since a large component of
our business involves acquiring underperforming and distressed facilities, and improving the quality of operations at these facilities,
we may have been associated with the past poor performance of these facilities. To the extent this union or another elects to directly
or indirectly prosecute a corporate campaign against us or any of our affiliated facilities, our business could be negatively affected.

The Service Employees International Union has issued in the past, and may again issue in the future, public statements
alleging that we or other for-profit skilled nursing operators have engaged in unfair, questionable or illegal practices in various
areas, including staffing, patient care, patient evaluation and treatment, billing and other areas and activities related to the industry
and our operating subsidiaries. We continue to anticipate similar criticisms, charges and other negative publicity from such sources
on a regular basis, particularly in the current political environment and following the recent December 2010 OIG report entitled
“Questionable Billing by Skilled Nursing Facilities," described above in " The Office of the Inspector General or other organizations
may choose to more closely scrutinize the billing practices of for-profit skilled nursing facilities, which could result in an increase
in regulatory monitoring and oversight, decreased reimbursement rates, or otherwise adversely affect our business, financial
condition and results of operations." Two of our affiliated facilities have been listed on the report. Such reports provide unions
and their allies with additional opportunities to make negative statements about, and to encourage regulators to seek investigatory
and enforcement actions against, the industry in general and non-union operators like us specifically. Although we believe that
our operations and business practices substantially conform to applicable laws and regulations, we cannot predict the extent to
which we might be subject to adverse publicity or calls for increased regulatory scrutiny from union and union ally sources, or
what effect, if any, such negative publicity would have on us, but to the extent they are successful, our revenue may be reduced,
our costs may be increased and our profitability and business could be adversely affected.

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This union has also attempted to pressure hospitals, doctors, insurers and other healthcare providers and professionals to
cease doing business with or referring patients to us. If this union or another union is successful in convincing the patients of our
operating subsidiaries, their families or our referral sources to reduce or cease doing business with us, our revenue may be reduced
and our profitability could be adversely affected. Additionally, if we are unable to attract and retain qualified staff due to negative
public relations efforts by this or other union organizations, our quality of service and our revenue and profits could decline. Our
strategy for responding to union allegations involves clear public disclosure of the union's identity, activities and agenda, and
rebuttals to its negative campaign.

Our ability to respond to unions, however, may be limited by some state laws, which purport to make it illegal for any
recipient of state funds to promote or deter union organizing. For example, such a state law passed by the California Legislature
was successfully challenged on the grounds that it was preempted by the National Labor Relations Act, only to have the challenge
overturned by the Ninth Circuit in 2006 before being ultimately upheld by the United States Supreme Court in 2008. In addition,
proposed legislation making it more difficult for employees and their supervisors to educate co-workers and oppose unionization,
such as the proposed Employee Free Choice Act which would allow organizing on a single “card check” and without a secret
ballot and similar changes to federal law, regulation and labor practice being advocated by unions and considered by Congress
and the National Labor Relations Board, could make it more difficult to maintain union-free workplaces in our affiliated facilities.
If proponents of these and similar laws are successful in facilitating unionization procedures or hindering employer responses
thereto, our ability to oppose unionization efforts could be hindered, and our business could be negatively affected.

Because we lease substantially all of our affiliated facilities, we could experience risks associated with leased property,

including risks relating to lease termination, lease extensions and special charges, which could adversely affect our
business, financial position or results of operations.

As of December 31, 2014, we leased 125 of our 136 affiliated facilities. Most of our leases are triple-net leases, which means
that, in addition to rent, we are required to pay for the costs related to the property (including property taxes, insurance, and
maintenance and repair costs). We are responsible for paying these costs notwithstanding the fact that some of the benefits
associated with paying these costs accrue to the landlords as owners of the associated facilities.

Each lease provides that the landlord may terminate the lease for a number of reasons, including, subject to applicable cure
periods, the default in any payment of rent, taxes or other payment obligations or the breach of any other covenant or agreement
in the lease. Termination of a lease could result in a default under our debt agreements and could adversely affect our business,
financial position or results of operations. There can be no assurance that we will be able to comply with all of our obligations
under the leases in the future.

In addition, if some of our leased affiliated facilities should prove to be unprofitable, we could remain obligated for lease
payments and other obligations under the leases even if we decided to withdraw from those locations. We could incur special
charges relating to the closing of such facilities including lease termination costs, impairment charges and other special charges
that would reduce our net income and could adversely affect our business, financial condition and results of operations.

Failure to generate sufficient cash flow to cover required payments or meet operating covenants under our long-term debt,
mortgages and long-term operating leases could result in defaults under such agreements and cross-defaults under other debt,
mortgage or operating lease arrangements, which could harm our operating subsidiaries and cause us to lose facilities or
experience foreclosures.

In May 2014, we paid in full all outstanding borrowings under the Senior Credit Facility, bonds and mortgage notes and
transferred remaining outstanding borrowings under the Ten Project Notes and promissory notes to CareTrust in connection with
the Spin-Off. We also entered into the 2014 Credit Facility in May 2014 with a lending consortium arranged by SunTrust (the
2014 Credit Facility) in an aggregate amount of $150.0 million. As of December 31, 2014, our operating subsidiaries had $65.0
million outstanding under the 2014 Credit Facility.

On September 24, 2014, we assumed an existing HUD-insured loan with Red Mortgage Capital, LLC of approximately $3.4
million in connection with our acquisition of the assisted living facility in Arizona. The term of the mortgage loan is for twenty
five years, with monthly principal and interest payments. As of December 31, 2014, our operating subsidiary had $3.4 million
outstanding, of which $0.1 million is classified as short-term and the remaining $3.3 million is classified as long-term. The balance
of the loan is due on October 1, 2037.

In addition, we had $1.1 billion of future operating lease obligations as of December 31, 2014. We intend to continue
financing our affiliated facilities through mortgage financing, long-term operating leases and other types of financing, including
borrowings under our lines of credit and future credit facilities we may obtain.

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We may not generate sufficient cash flow from operations to cover required interest, principal and lease payments. In addition,
our outstanding credit facilities and mortgage loans contain restrictive covenants and require us to maintain or satisfy specified
coverage tests on a consolidated basis and on a facility or facilities basis. These restrictions and operating covenants include,
among other things, requirements with respect to occupancy, debt service coverage, project yield, net leverage ratios, minimum
interest coverage ratios and minimum asset coverage ratios. These restrictions may interfere with our ability to obtain additional
advances under existing credit facilities or to obtain new financing or to engage in other business activities, which may inhibit
our ability to grow our business and increase revenue.

From time to time, the financial performance of one or more of our mortgaged facilities may not comply with the required
operating covenants under the terms of the mortgage. Any non-payment, noncompliance or other default under our financing
arrangements could, subject to cure provisions, cause the lender to foreclose upon the facility or facilities securing such indebtedness
or, in the case of a lease, cause the lessor to terminate the lease, each with a consequent loss of revenue and asset value to us or a
loss of property. Furthermore, in many cases, indebtedness is secured by both a mortgage on one or more facilities, and a guaranty
by us. In the event of a default under one of these scenarios, the lender could avoid judicial procedures required to foreclose on
real property by declaring all amounts outstanding under the guaranty immediately due and payable, and requiring us to fulfill
our obligations to make such payments. If any of these scenarios were to occur, our financial condition would be adversely affected.
For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis
in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which would
negatively impact our earnings and cash position. Further, because our mortgages and operating leases generally contain cross-
default and cross-collateralization provisions, a default by us related to one facility could affect a significant number of other
facilities and their corresponding financing arrangements and operating leases.

Because our term loans, promissory notes, bonds, mortgages and lease obligations are fixed expenses and secured by specific
assets, and because our revolving loan obligations are secured by virtually all of our assets, if reimbursement rates, patient acuity
mix or occupancy levels decline, or if for any reason we are unable to meet our loan or lease obligations, we may not be able to
cover our costs and some or all of our assets may become at risk. Our ability to make payments of principal and interest on our
indebtedness and to make lease payments on our operating leases depends upon our future performance, which will be subject to
general economic conditions, industry cycles and financial, business and other factors affecting our operating subsidiaries, many
of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt
or to make lease payments on our operating leases, we may be required, among other things, to seek additional financing in the
debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets, reduce or delay planned
capital expenditures or delay or abandon desirable acquisitions. Such measures might not be sufficient to enable us to service our
debt or to make lease payments on our operating leases. The failure to make required payments on our debt or operating leases
or the delay or abandonment of our planned growth strategy could result in an adverse effect on our future ability to generate
revenue and sustain profitability. In addition, any such financing, refinancing or sale of assets might not be available on terms that
are economically favorable to us, or at all.

If we decide to expand our presence in the assisted living, home health, hospice or urgent care industries, we would become

subject to risks in a market in which we have limited experience.

The majority of our affiliated facilities have historically been skilled nursing facilities. If we decide to expand our presence
in the assisted living, home health, hospice and urgent care industries or other relevant healthcare service, our existing overall
business model would change and we would become subject to risks in a market in which we have limited experience. Although
assisted living operating subsidiaries generally have lower costs and higher margins than skilled nursing, they typically generate
lower overall revenue than skilled nursing operating subsidiaries. In addition, assisted living and urgent care revenue is derived
primarily from private payors as opposed to government reimbursement. In most states, skilled nursing, assisted living, home
health, hospice and urgent care are regulated by different agencies, and we have less experience with the agencies that regulate
assisted living, home health, hospice and urgent care. In general, we believe that assisted living is a more competitive industry
than skilled nursing. If we decided to expand our presence in the assisted living, home health, hospice and urgent care industries,
we might have to adjust part of our existing business model, which could have an adverse effect on our business.

If our referral sources fail to view us as an attractive skilled nursing provider, or if our referral sources otherwise refer fewer

patients, our patient base may decrease.

We rely significantly on appropriate referrals from physicians, hospitals and other healthcare providers in the communities
in which we deliver our services to attract appropriate residents and patients to our affiliated facilities. Our referral sources are
not obligated to refer business to us and may refer business to other healthcare providers. We believe many of our referral sources
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refer business to us as a result of the quality of our patient care and our efforts to establish and build a relationship with our referral
sources. If we lose, or fail to maintain, existing relationships with our referral resources, fail to develop new relationships, or if
we are perceived by our referral sources as not providing high quality patient care, our occupancy rate and the quality of our
patient mix could suffer. In addition, if any of our referral sources have a reduction in patients whom they can refer due to a
decrease in their business, our occupancy rate and the quality of our patient mix could suffer.

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

We may experience cyber attacks, and as a result, unauthorized parties may obtain access to our computer systems and
networks. Such cyber attacks could result in the misappropriation of our proprietary information and technology or interrupt our
business. The reliability and security of our information technology infrastructure is critical to our business. To the extent that any
disruptions or security breaches result in significant loss or damage to our data, or inappropriate disclosure of significant proprietary
information, it could require notice to state and federal agencies of such a breach, cause damage to our reputation and affect our
relationships with our patients, may result in civil and/or criminal fines and penalties or related class action litigation, any of which
could have a material adverse effect on our business, results of operations and financial condition.

We may need additional capital to fund our operating subsidiaries and finance our growth, and we may not be able to obtain

it on terms acceptable to us, or at all, which may limit our ability to grow.

Our ability to maintain and enhance our affiliated facilities and equipment in a suitable condition to meet regulatory standards,
operate efficiently and remain competitive in our markets requires us to commit substantial resources to continued investment in
our affiliated facilities and equipment. We are sometimes more aggressive than our competitors in capital spending to address
issues that arise in connection with aging and obsolete facilities and equipment. In addition, continued expansion of our business
through the acquisition of existing facilities, expansion of our existing facilities and construction of new facilities may require
additional capital, particularly if we were to accelerate our acquisition and expansion plans. Financing may not be available to us
or may be available to us only on terms that are not favorable. In addition, some of our outstanding indebtedness and long-term
leases restrict, among other things, our ability to incur additional debt. If we are unable to raise additional funds or obtain additional
funds on terms acceptable to us, we may have to delay or abandon some or all of our growth strategies. Further, if additional funds
are raised through the issuance of additional equity securities, the percentage ownership of our stockholders would be diluted.
Any newly issued equity securities may have rights, preferences or privileges senior to those of our common stock.

The condition of the financial markets, including volatility and deterioration in the capital and credit markets, could limit
the availability of debt and equity financing sources to fund the capital and liquidity requirements of our business, as well as,
negatively impact or impair the value of our current portfolio of cash, cash equivalents and investments, including U.S. Treasury
securities and U.S.-backed investments.

Financial markets experienced significant disruptions from 2008 through 2010. These disruptions impacted liquidity in the
debt markets, making financing terms for borrowers less attractive and, in certain cases, significantly reducing the availability of
certain types of debt financing. As a result of these market conditions, the cost and availability of credit has been and may continue
to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets has led
many lenders and institutional investors to reduce, and in some cases, cease to provide credit to borrowers.

Further, our cash, cash equivalents and investments are held in a variety of interest-bearing instruments, including U.S.
treasury securities. As a result of the uncertain domestic and global political, credit and financial market conditions, investments
in these types of financial instruments pose risks arising from liquidity and credit concerns. Given that future deterioration in the
U.S. and global credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in
the fair value of our cash, cash equivalents, or investments will not occur. Uncertainty surrounding the trading market for U.S.
government securities or impairment of the U.S. government's ability to satisfy its obligations under such treasury securities could
impact the liquidity or valuation of our current portfolio of cash, cash equivalents, and investments, a substantial portion of which
were invested in U.S. treasury securities. Further, unless and until the current U.S. and global political, credit and financial market
crisis has been sufficiently resolved, it may be difficult for us to liquidate our investments prior to their maturity without incurring
a loss, which would have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Though we anticipate that the cash amounts generated internally, together with amounts available under the revolving credit
facility portion of the 2014 Credit Facility, will be sufficient to implement our business plan for the foreseeable future, we may
need additional capital if a substantial acquisition or other growth opportunity becomes available or if unexpected events occur
or opportunities arise. We cannot assure you that additional capital will be available or available on terms favorable to us. If capital
is not available, we may not be able to fund internal or external business expansion or respond to competitive pressures or other
market conditions.

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Delays in reimbursement may cause liquidity problems.

If we experience problems with our billing information systems or if issues arise with Medicare, Medicaid or other payors,
we may encounter delays in our payment cycle. From time to time, we have experienced such delays as a result of government
payors instituting planned reimbursement delays for budget balancing purposes or as a result of prepayment reviews. For example,
in January 2009, the State of California announced expected cash shortages in February which impacted payments to Medi-Cal
providers from late March through April. Medi-Cal had also delayed the release of the reimbursement rates which were announced
in January 2010. These rate increases were put in place on a retrospective basis, effective August 1, 2009.

Further, on March 24, 2011, the governor of California signed Assembly Bill 97 (AB 97), the budget trailer bill on health, into
law. AB 97 outlines significant cuts to state health and human services programs. Specifically, the law reduced provider payments
by 10% for physicians, pharmacies, clinics, medical transportation, certain hospitals, home health, and nursing facilities. AB X1
19 Long Term Care was subsequently approved by the governor on June 28, 2011. Federal approval was obtained on October 27,
2011. AB X1 19 limited the 10% payment reduction to skilled-nursing providers to 14 months for the services provided on June
1, 2011 through July 31, 2012. The 10% reduction in provider payments was repaid by December 31, 2012. There can be no
assurance that similar delays or reductions in our payment cycle of provider payments will not lead to material adverse consequences
in the future.

Compliance with the regulations of the Department of Housing and Urban Development may require us to make unanticipated

expenditures which could increase our costs.

One of our affiliated facilities is currently subject to regulatory agreements with the Department of Housing and Urban
Development (HUD) that give the Commissioner of HUD broad authority to require us to be replaced as the operator of those
facilities in the event that the Commissioner determines there are operational deficiencies at such facilities under HUD regulations.
In 2006, one of our HUD-insured mortgaged facilities did not pass its HUD inspection. Following an unsuccessful appeal of the
decision, we requested a re-inspection. The re-inspection occurred in the fourth quarter of 2009 and the facility passed its HUD
re-inspection. Compliance with HUD's requirements can often be difficult because these requirements are not always consistent
with the requirements of other federal and state agencies. Appealing a failed inspection can be costly and time-consuming and, if
we do not successfully remediate the failed inspection, we could be precluded from obtaining HUD financing in the future or we
may encounter limitations or prohibitions on our operation of HUD-insured facilities. This facility was transferred to CareTrust
as part of the Spin-Off.

Failure to comply with existing environmental laws could result in increased expenditures, litigation and potential loss to

our business and in our asset value.

Our operating subsidiaries are subject to regulations under various federal, state and local environmental laws, primarily
those relating to the handling, storage, transportation, treatment and disposal of medical waste; the identification and warning of
the presence of asbestos-containing materials in buildings, as well as the encapsulation or removal of such materials; and the
presence of other substances in the indoor environment.

Our affiliated facilities generate infectious or other hazardous medical waste due to the illness or physical condition of the
patients. Each of our affiliated facilities has an agreement with a waste management company for the proper disposal of all
infectious medical waste, but the use of a waste management company does not immunize us from alleged violations of such laws
for operating subsidiaries for which we are responsible even if carried out by a third party, nor does it immunize us from third-
party claims for the cost to cleanup disposal sites at which such wastes have been disposed.

Some of the affiliated facilities we lease, own or may acquire may have asbestos-containing materials. Federal regulations
require building owners and those exercising control over a building's management to identify and warn their employees and other
employers operating in the building of potential hazards posed by workplace exposure to installed asbestos-containing materials
and potential asbestos-containing materials in their buildings. Significant fines can be assessed for violation of these regulations.
Building owners and those exercising control over a building's management may be subject to an increased risk of personal injury
lawsuits. Federal, state and local laws and regulations also govern the removal, encapsulation, disturbance, handling and disposal
of asbestos-containing materials and potential asbestos-containing materials when such materials are in poor condition or in the
event of construction, remodeling, renovation or demolition of a building. Such laws may impose liability for improper handling
or a release into the environment of asbestos containing materials and potential asbestos-containing materials and may provide
for fines to, and for third parties to seek recovery from, owners or operators of real properties for personal injury or improper work
exposure associated with asbestos-containing materials and potential asbestos-containing materials. The presence of asbestos-

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containing materials, or the failure to properly dispose of or remediate such materials, also may adversely affect our ability to
attract and retain patients and staff, to borrow when using such property as collateral or to make improvements to such property.

The presence of mold, lead-based paint, underground storage tanks, contaminants in drinking water, radon and/or other
substances at any of the affiliated facilities we lease, own or may acquire may lead to the incurrence of costs for remediation,
mitigation or the implementation of an operations and maintenance plan and may result in third party litigation for personal injury
or property damage. Furthermore, in some circumstances, areas affected by mold may be unusable for periods of time for repairs,
and even after successful remediation, the known prior presence of extensive mold could adversely affect the ability of a facility
to retain or attract patients and staff and could adversely affect a facility's market value and ultimately could lead to the temporary
or permanent closure of the facility.

If we fail to comply with applicable environmental laws, we would face increased expenditures in terms of fines and
remediation of the underlying problems, potential litigation relating to exposure to such materials, and a potential decrease in
value to our business and in the value of our underlying assets.

In addition, because environmental laws vary from state to state, expansion of our operating subsidiaries to states where we

do not currently operate may subject us to additional restrictions in the manner in which we operate our affiliated facilities.

If we fail to safeguard the monies held in our patient trust funds, we will be required to reimburse such monies, and we may

be subject to citations, fines and penalties.

Each of our affiliated facilities is required by federal law to maintain a patient trust fund to safeguard certain assets of their
residents and patients. If any money held in a patient trust fund is misappropriated, we are required to reimburse the patient trust
fund for the amount of money that was misappropriated. If any monies held in our patient trust funds are misappropriated in the
future and are unrecoverable, we will be required to reimburse such monies, and we may be subject to citations, fines and penalties
pursuant to federal and state laws.

We are a holding company with no operations and rely upon our multiple independent operating subsidiaries to provide us
with the funds necessary to meet our financial obligations. Liabilities of any one or more of our subsidiaries could be imposed
upon us or our other subsidiaries.

We are a holding company with no direct operating assets, employees or revenues. Each of our affiliated facilities is operated
through a separate, wholly-owned, independent subsidiary, which has its own management, employees and assets. Our principal
assets are the equity interests we directly or indirectly hold in our multiple operating and real estate holding subsidiaries. As a
result, we are dependent upon distributions from our subsidiaries to generate the funds necessary to meet our financial obligations
and pay dividends. Our subsidiaries are legally distinct from us and have no obligation to make funds available to us. The ability
of our subsidiaries to make distributions to us will depend substantially on their respective operating results and will be subject
to restrictions under, among other things, the laws of their jurisdiction of organization, which may limit the amount of funds
available for distribution to investors or shareholders, agreements of those subsidiaries, the terms of our financing arrangements
and the terms of any future financing arrangements of our subsidiaries.

Changes in federal and state income tax laws and regulations could adversely affect our provision for income taxes and

estimated income tax liabilities.

We are subject to both state and federal income taxes. Our effective tax rate could be adversely affected by changes in the
mix of earnings in states with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes
in tax laws and regulations, changes in our interpretations of tax laws, including pending tax law changes. In addition, in certain
cases more than one state in which we operate has indicated an intent to attempt to tax the same assets and activities, which could
result in double taxation if successful. Unanticipated changes in our tax rates or exposure to additional income tax liabilities could
affect our profitability.

We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other local,
state and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine
the adequacy of our estimated income tax liabilities. The outcomes from these continuous examinations could adversely affect
our provision for income taxes and estimated income tax liabilities.

If the Spin-Off were to fail to qualify as a tax-free transaction for U.S. federal income tax purposes, we could be subject to

significant tax liabilities and, in certain circumstances, we could be required to indemnify CareTrust for material taxes
pursuant to indemnification obligations under the Tax Matters Agreement that we entered into with CareTrust.

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We received a private letter ruling from the Internal Revenue Services (IRS), which provides substantially to the effect that,
on the basis of certain facts presented and representations and assumptions set forth in the request submitted to the IRS, the Spin-
Off will qualify as tax-free under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code (the IRS Ruling). The IRS Ruling
does not address certain requirements for tax-free treatment of the Spin-Off under Section 355 of the Code, and we received tax
opinions from our tax advisor and counsel, substantially to the effect that, with respect to such requirements on which the IRS
will not rule, such requirements have been satisfied. The IRS Ruling, and the tax opinions that we received from our tax advisor
and counsel, rely on, among other things, certain facts, representations, assumptions and undertakings, including those relating
to the past and future conduct of our and CareTrust’s businesses, and the IRS Ruling and the tax opinions would not be valid if
such facts, representations, assumptions and undertakings were incorrect in any material respect. Notwithstanding the IRS Ruling
and the tax opinions, the IRS could determine the Spin-Off should be treated as a taxable transaction for U.S. federal income tax
purposes if it determines any of the facts, representations, assumptions or undertakings that were included in the request for the
IRS Ruling are false or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the IRS
Ruling.

If the Spin-Off ultimately is determined to be taxable, we would recognize taxable gain in an amount equal to the excess,
if any, of the fair market value of the shares of CareTrust common stock held by us on the distribution date over our tax basis in
such shares. Such taxable gain and resulting tax liability would be substantial.

In addition, under the terms of the Tax Matters Agreement that we entered into with CareTrust in connection with the Spin-
Off, we generally are responsible for any taxes imposed on CareTrust that arise from the failure of the Spin-Off to qualify as tax-
free for U.S. federal income tax purposes, within the meaning of Sections 368(a)(1)(D) and 355 of the Code, to the extent such
failure to qualify is attributable to certain actions, events or transactions relating to our stock, assets or business, or a breach of
the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in
connection with the request for the IRS Ruling or the representation letter provided in connection with the tax opinion relating to
the Spin-Off. Our indemnification obligations to CareTrust and its subsidiaries, officers and directors are not limited by any
maximum amount. If we are required to indemnify CareTrust under the circumstance set forth in the Tax Matters Agreement, we
may be subject to substantial tax liabilities.

In connection with the Spin-Off, CareTrust will indemnify us and we will indemnify CareTrust for certain liabilities.
There can be no assurance that the indemnities from CareTrust will be sufficient to insure us against the full amount of
such liabilities, or that CareTrust’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the Separation and Distribution Agreement that we entered into with CareTrust in connection with the Spin-Off,
the Tax Matters Agreement and other agreements we entered into in connection with the Spin-Off, CareTrust agreed to indemnify
us for certain liabilities, and we agreed to indemnify CareTrust for certain liabilities. However, third parties might seek to hold us
responsible for liabilities that CareTrust agreed to retain under these agreements, and there can be no assurance that CareTrust
will be able to fully satisfy its indemnification obligations under these agreements. Moreover, even if we ultimately succeed in
recovering from CareTrust any amounts for which we are held liable to a third party, we may be temporarily required to bear these
losses while seeking recovery from CareTrust. In addition, indemnities that we may be required to provide to CareTrust could be
significant and could adversely affect our business.

Risks Related to Ownership of our Common Stock

We may not be able to pay or maintain dividends and the failure to do so would adversely affect our stock price.

Our ability to pay and maintain cash dividends is based on many factors, including our ability to make and finance acquisitions,
our ability to negotiate favorable lease and other contractual terms, anticipated operating cost levels, the level of demand for our
beds, the rates we charge and actual results that may vary substantially from estimates. Some of the factors are beyond our control
and a change in any such factor could affect our ability to pay or maintain dividends. In addition, the revolving credit facility
portion of the Senior Credit Facility restricts our ability to pay dividends to stockholders if we receive notice that we are in default
under this agreement. The failure to pay or maintain dividends could adversely affect our stock price.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses

for our stockholders.

The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the
trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the
market price of our common stock will not fluctuate or decline significantly in the future. On some occasions in the past, when
the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the

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company that issued the stock. If any of our stockholders brought a lawsuit against us due to volatility in the market price of our
common stock, we could incur substantial costs defending or settling the lawsuit. Such a lawsuit could also divert the time and
attention of our management from our business.

Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by offering debt or additional equity securities, including
commercial paper, medium-term notes, senior or subordinated notes, preferred shares or shares of our common stock. Upon
liquidation, holders of our debt securities and preferred shares, and lenders with respect to other borrowings, would receive a
distribution of our available assets prior to any distribution to the holders of our common stock. Additional equity offerings may
dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock, or both.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock
bear the risk of our future offerings reducing the market price of our common stock and diluting their shareholdings in us. We
also intend to continue to actively pursue acquisitions of facilities and may issue shares of stock in connection with these acquisitions.

Any shares issued in connection with our acquisitions, the exercise of outstanding stock options or otherwise would dilute

the holdings of the investors who purchase our shares.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could result in a
restatement of our financial statements, cause investors to lose confidence in our financial statements and our company and
have a material adverse effect on our business and stock price.

We produce our consolidated financial statements in accordance with the requirements of GAAP. Effective internal controls
are necessary for us to provide reliable financial reports to help mitigate the risk of fraud and to operate successfully as a publicly
traded company. As a public company, we are required to document and test our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, which requires annual management assessments
of the effectiveness of our internal controls over financial reporting.

Testing and maintaining internal controls can divert our management's attention from other matters that are important to our
business. We may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting in
accordance with Section 404 or our independent registered public accounting firm may not be able or willing to issue an unqualified
report if we conclude that our internal controls over financial reporting are not effective. If either we are unable to conclude that
we have effective internal controls over financial reporting or our independent registered public accounting firm is unable to
provide us with an unqualified report as required by Section 404, investors could lose confidence in our reported financial
information and our company, which could result in a decline in the market price of our common stock, and cause us to fail to
meet our reporting obligations in the future, which in turn could impact our ability to raise additional financing if needed in the
future.

Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law contain provisions
that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common
stock.

Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that may
enable our Board of Directors to resist a change in control. These provisions may discourage, delay or prevent a change in the
ownership of our company or a change in our management, even if doing so might be beneficial to our stockholders. In addition,
these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. Such
provisions set forth in our amended and restated certificate of incorporation or our amended and restated bylaws include:

• our Board of Directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly

referred to as “blank check” preferred stock, with rights senior to those of common stock;

• advance notice requirements for stockholders to nominate individuals to serve on our Board of Directors or to submit

proposals that can be acted upon at stockholder meetings;

• our Board of Directors is classified so not all members of our board are elected at one time, which may make it more

difficult for a person who acquires control of a majority of our outstanding voting stock to replace our directors;

• stockholder action by written consent is limited;

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• special meetings of the stockholders are permitted to be called only by the chairman of our Board of Directors, our chief

executive officer or by a majority of our Board of Directors;

• stockholders are not permitted to cumulate their votes for the election of directors;

• newly created directorships resulting from an increase in the authorized number of directors or vacancies on our Board

of Directors are filled only by majority vote of the remaining directors;

• our Board of Directors is expressly authorized to make, alter or repeal our bylaws; and

• stockholders are permitted to amend our bylaws only upon receiving the affirmative vote of at least a majority of our

outstanding common stock.

We are also subject to the anti-takeover provisions of Section 203 of the General Corporation Law of the State of Delaware.
Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that
person for three years without special approval, which could discourage a third party from making a takeover offer and could
delay or prevent a change of control. For purposes of Section 203, “interested stockholder” means, generally, someone owning
more than 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting
stock during the past three years, subject to certain exceptions as described in Section 203.

These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and
Delaware law could discourage acquisition proposals and make it more difficult or expensive for stockholders or potential acquirers
to obtain control of our Board of Directors or initiate actions that are opposed by our then-current Board of Directors, including
delaying or impeding a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction
or changes in our Board of Directors could cause the market price of our common stock to decline.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

Service Center. We currently lease 29,829 square feet of office space in Mission Viejo, California for our Service Center
pursuant to a lease that expires in August 2019. We have two options to extend our lease term at this location for an additional
five-year term for each option.

Facilities. As of December 31, 2014, we operated 136 affiliated facilities in Arizona, California, Colorado, Idaho, Iowa,
Nebraska, Nevada, Texas, Utah, Wisconsin and Washington, with the operational capacity to serve approximately 14,725 patients.
Of the 136 facilities that we operated, we owned eleven facilities and leased 125 facilities pursuant to operating leases, three of
which contain purchase options that provide us with the right to purchase or agreements to purchase the facility in the future. We
currently do not manage any facilities for third parties, except on a short-term basis pending receipt of new operating licenses by
our operating subsidiaries.

The following table provides summary information regarding the number of operational beds at our skilled nursing and

assisted and independent living facilities at December 31, 2014:

State
Arizona
California
Colorado
Idaho
Iowa
Nevada
Nebraska
Texas
Utah
Washington
Wisconsin
Total

Skilled nursing
Assisted living
Independent living
Total

Leased without
a Purchase
Option

Purchase
Agreement or
Leased with a
Purchase
Option

Owned

Total
Operational
Beds

1,885
3,873
587
477
356
304
366
3,146
1,252
739
—
12,985

11,235
1,498
252
12,985

—
508
—
—
—
—
—
—
—
—
—
508

438
70
—
508

561
425
—
—
—
—
—
—
108
—
138
1,232

887
333
12
1,232

2,446
4,806
587
477
356
304
366
3,146
1,360
739
138
14,725

12,560
1,901
264
14,725

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Home health and hospice agencies. As of December 31, 2014, we had 23 home health and hospice operating subsidiaries

in Arizona, California, Colorado, Idaho, Iowa, Texas, Utah, and Washington.

The following table provides summary information regarding the locations of our home health and hospice care agencies

at December 31, 2014:

State
Arizona
California(1)
Colorado(1)
Idaho(1)
Iowa
Texas(1)
Oregon
Utah(1)
Washington(1)
Total

Home Health
Services

Hospice Services
1

—

2
1
2

2
12

2
1
2

—

1
11

(1) Including a home health and a hospice agency that are located in the same location

In addition, as of December 31, 2014, we had fourteen urgent care centers, which are all in Washington, at December 31,

2014.

Item 3.

Legal Proceedings

Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to
interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation, as
well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. We believe
that we are in compliance in all material respects with all applicable laws and regulations.

Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures
designed to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed
to limit payments made to providers will not adversely affect us.

Income Tax Examinations — During the third quarter of 2014, we received a notification from the IRS that our 2012 tax
return will be examined. During the first quarter of 2012, the State of California initiated an examination of our income tax returns
for the 2008 and 2009 income tax years. The examination was primarily focused on the Captive and the treatment of related
insurance matters. The examination was closed with no adjustments. See Note 15, Income Taxes of Notes to Consolidated Financial
Statements.

Indemnities — From time to time, we enter into certain types of contracts that contingently require us to indemnify parties
against third-party claims. These contracts primarily include (i) certain real estate leases, under which we may be required to
indemnify property owners or prior facility operators for post-transfer environmental or other liabilities and other claims arising
from our use of the applicable premises, (ii) operations transfer agreements, in which we agree to indemnify past operators of
facilities we acquire against certain liabilities arising from the transfer of the operation and/or the operation thereof after the
transfer, (iii) certain lending agreements, under which we may be required to indemnify the lender against various claims and
liabilities, and (iv) certain agreements with our officers, directors and employees, under which we may be required to indemnify
such persons for liabilities arising out of their employment relationships. The terms of such obligations vary by contract and, in
most instances, a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts
cannot be reasonably estimated until a specific claim is asserted. Consequently, because no claims have been asserted, no liabilities
have been recorded for these obligations on our balance sheets for any of the periods presented.

Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients and
residents served by our operating subsidiaries. We, our operating subsidiaries, and others in the industry are subject to an increasing
number of claims and lawsuits, including professional liability claims, alleging that services provided have resulted in personal
injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs,
regardless of the outcome, and can result in large settlement amounts or damage awards.

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In addition to the potential lawsuits and claims described above, we are also subject to potential lawsuits under the Federal
False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such
as Medicare) or payor. A violation may provide the basis for exclusion from federally-funded healthcare programs. Such exclusions
could have a correlative negative impact on our financial performance. Some states, including California, Arizona and Texas, have
enacted similar whistleblower and false claims laws and regulations. In addition, the Deficit Reduction Act of 2005 created
incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, we could face increased
scrutiny, potential liability and legal expenses and costs based on claims under state false claims acts in markets in which it does
business.

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes
to the Federal False Claims Act (FCA), expanding the types of activities subject to prosecution and whistleblower liability.
Following changes by FERA, health care providers face significant penalties for the knowing retention of government
overpayments, even if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding
or decreasing an obligation to pay money or property to the government. This includes the retention of any government overpayment.
The government can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as
long as it is knowingly improper. In addition, FERA extended protections against retaliation for whistleblowers, including
protections not only for employees, but also contractors and agents. Thus, there is generally no need for an employment relationship
in order to qualify for protection against retaliation for whistleblowing.

A class action staffing suit was previously filed against us and certain of our California subsidiaries in the State of California,
alleging, among other things, violations of certain Health and Safety Code provisions and a violation of the Consumer Legal
Remedies Act. In 2007, we settled this class action suit, and the settlement was approved by the affected class and the Court. We
have been defending a second such staffing class-action claim filed in Los Angeles Superior Court; however, a settlement was
reached with class counsel and has received Court approval. The total costs associated with the settlement, including attorney's
fees, estimated class payout, and related costs and expenses, were approximately $6.5 million, of which, approximately $1.5
million and $2.6 million of this amount was recorded during the year ended December 31, 2013 and 2012, respectively, with the
balance having been expensed in prior periods. We believe that the settlement will not have a material ongoing adverse effect on
our business, financial condition or results of operations.

Other claims and suits, including class actions, continue to be filed against us and other companies in our industry. If there
were a significant increase in the number of these claims or an increase in amounts owing should plaintiffs be successful in their
prosecution of these claims, this could materially adversely affect our business, financial condition, results of operations and cash
flows.

We and our affiliates subsidiaries have been, and continue to be, subject to claims and legal actions that arise in the ordinary
course of business, including potential claims related to patient care and treatment as well as employment related claims. We do
not believe that the ultimate resolution of these actions will have a material adverse effect on our business, cash flows, financial
condition or results of operations. A significant increase in the number of these claims or an increase in amounts owing should
plaintiffs be successful in their prosecution of these claims, could materially adversely affect our business, financial condition,
results of operations and cash flows.

We cannot predict or provide any assurance as to the possible outcome of any litigation. If any litigation were to proceed,
and we, our affiliates and subsidiaries are subjected to, alleged to be liable for, or agrees to a settlement of, claims or obligations
under Federal Medicare statutes, the Federal False Claims Act, or similar State and Federal statutes and related regulations, our
business, financial condition and results of operations and cash flows could be materially and adversely affected and its stock
price could be adversely impacted. Among other things, any settlement or litigation could involve the payment of substantial sums
to settle any alleged civil violations, and may also include the assumption of specific procedural and financial obligations by the
Company or its subsidiaries going forward under a corporate integrity agreement and/or other arrangement with the government.

Medicare Revenue Recoupments — We are subject to reviews relating to Medicare services, billings and potential
overpayments. The Company had one operation subject to probe review during the year ended December 31, 2014. We anticipate

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that these probe reviews will increase in frequency in the future. Further, we currently have no affiliated facilities on prepayment
review; however, others may be placed on prepayment review in the future. If a facility fails prepayment review, the facility could
then be subject to undergo targeted review, which is a review that targets perceived claims deficiencies. We have no affiliated
facilities that are currently undergoing targeted review.

U.S. Government Inquiry — In late 2006, we learned that we might be the subject of an on-going criminal and civil
investigation by the DOJ. This was confirmed in March 2007. The investigation was prompted by a whistleblower complaint,
and related primarily to claims submitted to the Medicare program for rehabilitation services provided at skilled nursing facilities
in Southern California. We recorded an initial estimated liability in the amount of $15.0 million in the fourth quarter of 2012 for
the resolution of claims connected to the investigation based on the facts available at the time. In April 2013, we and government
representatives reached an agreement in principle to resolve the allegations and close the investigation. Based on these discussions,
we recorded and announced an additional charge in the amount of $33.0 million in the first quarter of 2013, increasing the total
reserve to resolve the matter to $48.0 million (the Reserve Amount).

In October 2013, we completed and executed a settlement agreement (the Settlement Agreement) with the DOJ and received
the final approval of the Office of Inspector General-HHS and the United States District Court for the Central District of California.
Pursuant to the Settlement Agreement, we made a single lump-sum remittance to the government in the amount of $48.0 million
in October 2013. We have denied engaging in any illegal conduct, and have agreed to the settlement amount without any admission
of wrongdoing in order to resolve the allegations and to avoid the uncertainty and expense of protracted litigation.

In connection with the settlement and effective as of October 1, 2013, we entered into a five-year corporate integrity agreement
(the CIA) with the Office of Inspector General-HHS. The CIA acknowledges the existence of our current compliance program,
which is in accord with the Office of the Inspector General (OIG)’s guidance related to an effective compliance program, and
requires that we continue during the term of the CIA to maintain a compliance program designed to promote compliance with the
statutes, regulations, and written directives of Medicare, Medicaid, and all other federal health care programs. We are also required
to notify the Office of Inspector General-HHS in writing, of, among other things: (i) any ongoing government investigation or
legal proceeding involving an allegation that we have committed a crime or have engaged in fraudulent activities; (ii) any other
matter that a reasonable person would consider a probable violation of applicable criminal, civil, or administrative laws related
to compliance with federal healthcare programs; and (iii) any change in location, sale, closing, purchase, or establishment of a
new business unit or location related to items or services that may be reimbursed by federal health care programs. We are also
required to retain an Independent Review Organization (IRO) to review certain clinical documentation annually for the term of
the CIA.

Participation in federal healthcare programs by us is not affected by the Settlement Agreement or the CIA. In the event of
an uncured material breach of the CIA, we could be excluded from participation in federal healthcare programs and/or subject
to prosecution.

Item 4.

Mine Safety Disclosures

None.

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PART II.

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock has been traded under the symbol “ENSG” on the NASDAQ Global Select Market since our initial
public offering on November 8, 2007. Prior to that time, there was no public market for our common stock. The following table
shows the high and low sale prices for the common stock as reported by the NASDAQ Global Select Market for the periods
indicated:

Fiscal 2013

First Quarter

Second Quarter

Third Quarter

Fourth Quarter
Fiscal 2014

First Quarter

Second Quarter(1)

Third Quarter

Fourth Quarter

High

Low

33.70

38.08

42.26

46.39

45.48

47.78

36.16

46.08

27.54

31.57

35.24

39.60

38.20

26.02

28.00

33.17

(1) Stock prices on and before June 1, 2014 include the value of the CareTrust business, which was spun off on that date. The prices after that date reflect only
the business of Ensign after the Spin-Off. The stock price on the distribution date, which was June 1, 2014, was adjusted by using the proportion of the
CareTrust when-issued closing stock price to the total Company closing stock price on such date.

During fiscal 2014, we declared aggregate cash dividends of $0.29 per share of common stock, for a total of approximately

$6.4 million. As of February 3, 2015, there were approximately 216 holders of record of our common stock.

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Notwithstanding anything to the contrary set forth in any of our filings under the Securities Act or the Exchange Act that

might incorporate future filings, including this Annual Report on Form 10-K, in whole or in part, the Stock Performance Graph
and supporting data which follows shall not be deemed to be incorporated by reference into any such filings except to the
extent that we specifically incorporate any such information into any such future filings.

The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any
dividends thereafter) on December 31, 2009 in (i) our common stock, (ii) the Skilled Nursing Facilities Peer Group 1 and (iii) the
NASDAQ Market Index. Our stock price performance shown in the graph below is not indicative of future stock price performance.

COMPARISON OF 60 MONTH CUMULATIVE TOTAL RETURN*
Among Ensign Group, the NASDAQ Composite Index
and a Peer Group

*$100 invested on 12/31/09 in stock in index, including reinvestment of dividends.

Fiscal year ending December 31.

The Ensign Group, Inc.
NASDAQ Market Index
Peer Group

December 31,

2009

2010

2011

2012

2013

2014

$ 100.00 $ 163.62 $ 162.62 $ 181.83 $ 298.68 $ 522.55
$ 100.00 $ 118.02 $ 117.04 $ 137.47 $ 192.62 $ 221.02
$ 100.00 $ 141.66 $ 116.47 $ 139.75 $ 173.77 $ 245.95

The current composition of the Skilled Nursing Facilities Peer Group 1, SIC Code 8051 is as follows:

AdCare Health Systems, Inc., Diversicare Healthcare Services, Five Star Quality Care, Inc., National Healthcare Corporation,
Skilled Healthcare Group, Inc., and The Ensign Group, Inc.

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Dividend Policy

The following table summarizes common stock dividends declared to shareholders during the two most recent fiscal years:

2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Dividend per
Share

Aggregate
Dividend
Declared

(in thousands)

$
$
$
$

0.065 $
0.065 $
0.065 $
0.070 $

0.070
0.070
0.070
0.075

$
$
$
$

1,437
1,438
1,443
1,564

1,570
1,580
1,584
1,707

We do not have a formal dividend policy but we currently intend to continue to pay regular quarterly dividends to the holders
of our common stock. From 2002 to 2014, we paid aggregate annual dividends equal to approximately 5% to 18% of our net
income, after adjusting for the charge related to the U.S. Government inquiry settlement of $33.0 million and $15.0 million in
fiscal years ended December 31, 2013 and 2012, respectively. However, future dividends will continue to be at the discretion of
our board of directors, and we may or may not continue to pay dividends at such rate. We expect that the payment of dividends
will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general
business conditions, legal restrictions on the payment of dividends and other factors the Board of Directors deems relevant. A
portion of the proceeds received from CareTrust in connection with the Spin-Off will be used to pay dividend payments. See Note
2, Spin-Off of Real Estate Assets Through a Real Estate Investment Trust in the to Consolidated Financial Statements for additional
information.

The 2014 Credit Facility restricts our subsidiaries' and our ability to pay dividends to stockholders in excess of 20% of
consolidated net income, or at all if we receive notice that we are in default under the facility. In addition, we are a holding company
with no direct operating assets, employees or revenues. As a result, we are dependent upon distributions from our independent
operating subsidiaries to generate the funds necessary to meet our financial obligations and pay dividends. It is possible that in
certain quarters, we may pay dividends that exceed our net income for such period as calculated in accordance with U.S. GAAP.

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Item 6. Selected Financial Data

The following selected consolidated financial data for the periods indicated have been derived from our consolidated financial
statements. The financial data set forth below should be read in connection with Part II, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and with our consolidated financial statements and related notes thereto:

2014

$1,027,406

2013

Year Ended December 31,
2012
(In thousands, except per share data)
$ 758,277
$ 823,155
$ 904,556

2011

2010

$ 649,532

822,669

725,989

656,424

600,804

516,668

—

48,488

56,895

26,430

954,482

72,924

33,000

13,613

40,103

33,909

15,000

13,281

31,819

28,358

—

13,725

29,766

23,286

—

14,478

26,099

16,633

846,614

744,882

667,581

573,878

57,942

78,273

90,696

75,654

(12,976)

(12,787)

(12,229)

(13,778)

(9,123)

594

506

255

249

248

(12,382)

(12,281)

(11,974)

(13,529)

(8,875)

60,542

26,801

33,741

—

33,741

(2,209)

35,950

—

35,950

1.61

—

1.61

1.56

45,661

20,003

25,658

(1,804)

23,854

(186)

24,040

25,844

(1,804)

24,040

1.18

(0.08)

1.10

1.16

(0.09)

1.07

66,299

25,134

41,165

(1,357)

39,808

(783)

40,591

41,948

(1,357)

40,591

1.96

(0.07)

1.89

1.91

(0.06)

1.85

77,167

29,492

47,675

—

47,675

—

47,675

—

47,675

2.27

—

2.27

2.21

—

2.21

66,779

26,253

40,526

—

40,526

—

40,526

—

40,526

1.95

—

1.95

1.92

—

1.92

22,341

23,095

21,900

22,364

21,429

21,942

20,967

21,583

20,744

21,159

Revenue

Expense:

Cost of services (exclusive of facility rent and depreciation and
amortization shown separately below)

Charge related to U.S. Government inquiry

Facility rent - cost of services

General and administrative expense

Depreciation and amortization

Total expenses

Income from operations

Other income (expense):

Interest expense

Interest income

Other expense, net

Income before provision for income taxes

Provision for income taxes

Income from continuing operations

Loss from discontinued operations

Net income

Less: net loss attributable to noncontrolling interests

Net income attributable to The Ensign Group, Inc.

Amounts attributable to The Ensign Group, Inc.:

Income from continuing operations attributable to The Ensign
Group, Inc.

Loss from discontinued operations, net of income tax

Net income attributable to The Ensign Group, Inc.

Net income per share(1):

Basic:

Income from continuing operations attributable to The Ensign
Group, Inc.
Loss from discontinued operations (2)

Net income attributable to The Ensign Group, Inc.

Diluted:

Income from continuing operations attributable to The Ensign
Group, Inc.
Loss from discontinued operations (2)

Net income attributable to The Ensign Group, Inc.

Weighted average common shares outstanding:

Basic

Diluted

(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) See Note 22 of Notes to Consolidated Financial Statements.

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Consolidated Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Long-term debt, less current maturities
Equity
Cash dividends declared per common share

Other Non-GAAP Financial Data:
EBITDA(1)
Adjusted EBITDA(1)(2)
EBITDAR(1)
Adjusted EBITDAR(1)(2)

______________________

December 31,

2014

2013

2012

2011

2010

(In thousands, except per share data)

50,408
83,209
493,916
68,279
257,803
0.29

65,755
98,540
716,315
251,895
357,257
0.27

40,685
46,252
690,862
200,505
327,884
0.25

29,584
40,252
596,339
181,556
277,485
0.23

72,088
76,642
479,892
139,451
228,203
0.21

Year Ended December 31,
2013
(In thousands)

2012

2014

$ 101,563
112,829
150,051
159,376

92,037
136,741
105,650
149,345

$ 107,414
131,427
120,695
143,848

(1) EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are supplemental non-GAAP financial measures.
Regulation G, Conditions for Use of Non-GAAP Financial Measures, and other provisions of the Exchange Act define
and prescribe the conditions for use of certain non-GAAP financial information. We calculate EBITDA as net income
from continuing operations, adjusted for net losses attributable to noncontrolling interest, before (a) interest expense, net,
(b) provision for income taxes, and (c) depreciation and amortization. We calculate EBITDAR by adjusting EBITDA to
exclude facility rent—cost of services. These non-GAAP financial measures are used in addition to and in conjunction
with results presented in accordance with GAAP. These non-GAAP financial measures should not be relied upon to the
exclusion of GAAP financial measures. These non-GAAP financial measures reflect an additional way of viewing aspects
of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP
financial measures, provide a more complete understanding of factors and trends affecting our business.

We believe EBITDA, Adjusted EBITDA, EBITDAR and Adjusted EBITDAR are useful to investors and other external users

of our financial statements in evaluating our operating performance because:

•

they are widely used by investors and analysts in our industry as a supplemental measure to evaluate the overall operating
performance of companies in our industry without regard to items such as interest expense, net and depreciation and
amortization, which can vary substantially from company to company depending on the book value of assets, capital
structure and the method by which assets were acquired; and

they help investors evaluate and compare the results of our operations from period to period by removing the impact of
our capital structure and asset base from our operating results.

We use EBITDA, Adjusted EBITDA, EBITDAR and Adjusted EBITDAR:

as measurements of our operating performance to assist us in comparing our operating performance on a consistent basis;

to allocate resources to enhance the financial performance of our business;

to evaluate the effectiveness of our operational strategies; and

to compare our operating performance to that of our competitors.

We typically use EBITDA, Adjusted EBITDA, EBITDAR and Adjusted EBITDAR to compare the operating performance
of each operation. EBITDA and EBITDAR are useful in this regard because they do not include such costs as net interest expense,
income taxes, depreciation and amortization expense, and, with respect to EBITDAR, facility rent — cost of services, which may
vary from period-to-period depending upon various factors, including the method used to finance facilities, the amount of debt
that we have incurred, whether a facility is owned or leased, the date of acquisition of a facility or business, and the tax law of the
state in which a business unit operates. As a result, we believe that the use of EBITDA and EBITDAR provide a meaningful and
consistent comparison of our business between periods by eliminating certain items required by GAAP.

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We also establish compensation programs and bonuses for our leaders that are partially based upon the achievement of

Adjusted EBITDAR targets.

Despite the importance of these measures in analyzing our underlying business, designing incentive compensation and for
our goal setting, EBITDA, Adjusted EBITDA, EBITDAR and Adjusted EBITDAR are non-GAAP financial measures that have
no standardized meaning defined by GAAP. Therefore, our EBITDA, Adjusted EBITDA, EBITDAR and Adjusted EBITDAR
measures have limitations as analytical tools, and they should not be considered in isolation, or as a substitute for analysis of our
results as reported in accordance with GAAP. Some of these limitations are:

•

they do not reflect our current or future cash requirements for capital expenditures or contractual commitments;

they do not reflect changes in, or cash requirements for, our working capital needs;

they do not reflect the net interest expense, or the cash requirements necessary to service interest or principal payments,
on our debt;

they do not reflect any income tax payments we may be required to make;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have
to be replaced in the future, and EBITDA and EBITDAR do not reflect any cash requirements for such replacements;
and

other companies in our industry may calculate these measures differently than we do, which may limit their usefulness
as comparative measures.

We compensate for these limitations by using them only to supplement net income on a basis prepared in accordance with

GAAP in order to provide a more complete understanding of the factors and trends affecting our business.

Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely
on any single financial measure. Because these non-GAAP financial measures are not standardized, it may not be possible to
compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. For
information about our financial results as reported in accordance with GAAP, see our consolidated financial statements and related
notes included elsewhere in this document.

(2) Adjusted EBITDA is EBITDA adjusted for non-core business items, which for the reported periods includes, to the extent

applicable:

•
•
•
•
•
•
•
•
•
•
•

charge related to the U.S. Government inquiry;
expenses incurred in connection with the Company's spin-off of CareTrust;
legal costs incurred in connection with the U.S. Government inquiry;
settlement of a class action lawsuit;
impairment charges
results at our newly opened urgent care centers (including the portion related to the non-controlling interest);
results at our newly constructed skilled nursing facility;
results at three independent living facilities transferred to CareTrust as part of the Spin-Off transaction;
acquisition-related costs;
costs incurred to recognize income tax credits; and
rent related to our newly opened urgent care centers, one newly constructed skilled nursing facility and three
independent living facilities transferred to CareTrust.

Adjusted EBITDAR is EBITDAR adjusted for the above noted non-core business items.

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The table below reconciles net income to EBITDA, Adjusted EBITDA, EBITDAR and Adjusted EBITDAR for the

periods presented:

Consolidated statements of income data:
Net income
Less: net loss attributable to noncontrolling interests
Loss from discontinued operations
Interest expense, net
Provision for income taxes
Depreciation and amortization

EBITDA

Facility rent—cost of services

EBITDAR

EBITDA

Charge related to the U.S. Government inquiry(a)
Expenses related to the Spin-Off(b)
Legal costs(c)
Settlement of class action lawsuit(d)
Impairment of goodwill and other indefinite-lived
intangibles(e)
Urgent care center (earnings) losses(f)
Earnings at three operations transferred to REIT(g)

Loss at skilled nursing facility not at full operation
(h)
Acquisition related costs(i)
Costs incurred to recognize income tax credits(j)

Rent related to items(f), (g), and (h) above(k)

Adjusted EBITDA

Facility rent—cost of services
Less: rent related to items(f), (g) and (h) above(k)

Adjusted EBITDAR

_______________________

2014

$ 33,741
(2,209)
—
12,382
26,801
26,430
$ 101,563
48,488
$ 150,051

$ 101,563
—
9,026
—
—

—
(389)
(122)

—
672
138

2013

Year Ended December 31,
2012
(In thousands)

2011

23,854
(186)
1,804
12,281
20,003
33,909
92,037
13,613
$ 105,650

92,037
33,000
4,050
1,098
1,524

490
1,844
—

1,256
288
145

39,808
(783)
1,357
11,974
25,134
28,358
$ 107,414
13,281
$ 120,695

$ 107,414
15,000
—
1,945
2,596

47,675
—
—
13,529
29,492
23,286
$ 113,982
13,725
$ 127,707

$ 113,982
—
—
—
1,544

2,225
546
—

—
250
591

—
—
—

—
452
—

2010

40,526
—
—
8,875
26,253
16,633
92,287
14,478
$ 106,765

92,287
—
—
—
—

185
—
—

—
150
—

1,941
$ 112,829
48,488
(1,941)
$ 159,376

1,009
$ 136,741
13,613
(1,009)
$ 149,345

860
$ 131,427
13,281
(860)
$ 143,848

—
$ 115,978
13,725
—
$ 129,703

—
92,622
14,478
—
$ 107,100

(a) Charges related to our resolution of any claims connected to the DOJ settlement.
(b) Expenses incurred in connection with the Spin-Off.
(c) Legal costs incurred in connection with the settlement of the investigation into the billing and reimbursement processes of some of

our subsidiaries conducted by the DOJ.

(d) Settlement of a class action lawsuit regarding minimum staffing requirements in the State of California.
(e) Impairment charges to goodwill for a skilled nursing facility in Utah during the year ended December 31, 2013 and a decline in the
estimated fair value of redeemable noncontrolling interest of our urgent care franchising business during the year ended December 31,
2012.

(f) Operating results at newly opened urgent care centers. This amount excluded rent, depreciation, interest and income taxes. The results
also excluded the net loss attributable to the variable interest entity associated with our urgent care business of approximately $2.2
million.

(g) Results at three independent living facilities which were transferred to CareTrust as part of the Spin-Off, excluding rent, depreciation,

interest and income taxes.

(h) Losses incurred through the second quarter of 2013 at one newly constructed skilled nursing facility which began operations during

the first quarter of 2013, excluding rent, depreciation, interest and income taxes.

(i) Costs incurred to acquire an operation which are not capitalizable.
(j) Costs incurred to recognize income tax credits which contributed to a decrease in effective tax rate.
(k) Rent related to newly opened urgent care centers, one newly constructed skilled nursing facility which began operations during the
first quarter of 2013, and the three independent living facilities which were transferred to CareTrust as part of the Spin-Off, not included
in items (f), (g) and (h) above.

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Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes,
which appear elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of
various factors, including those discussed below and elsewhere in this Annual Report. See Part I. Item 1A. Risk Factors and
Cautionary Note Regarding Forward-Looking Statements.

Overview

We are a provider of skilled nursing and rehabilitative care services through the operation of 136 facilities, twelve home
health and eleven hospice operations, one home care business, one transitional care management company, fourteen urgent care
centers and a mobile x-ray and diagnostic company as of December 31, 2014, located in Arizona, California, Colorado, Idaho,
Iowa, Nebraska, Nevada, Oregon, Texas, Utah, Washington and Wisconsin. Our operating subsidiaries, each of which strives to
be the service of choice in the community it serves, provide a broad spectrum of skilled nursing, assisted living, home health and
hospice, mobile ancillary, and urgent care services. As of December 31, 2014, we owned eleven of our 136 affiliated facilities
and operated an additional 125 facilities under long-term lease arrangements, and had options to purchase three of those 125
facilities.

The following table summarizes our affiliated facilities and operational skilled nursing, assisted living and independent

living beds by ownership status as of December 31, 2014:

Number of facilities
Percentage of total

Owned
11
8.1%

Operational skilled nursing, assisted living and independent living beds

1,232

Percentage of total

8.4%

Leased
(with a
Purchase
Option)
3
2.2%
508
3.4%

Leased
(without a
Purchase
Option)
122
89.7%

12,985

88.2%

Total

136
100.0%

14,725

100.0%

We are a holding company with no direct operating assets, employees or revenues. Our operating subsidiaries are operated
by separate, independent entities, each of which has its own management, employees and assets. In addition, certain of our wholly-
owned subsidiaries, referred to collectively as the Service Center, provide centralized accounting, payroll, human resources,
information technology, legal, risk management and other centralized services to the other operating subsidiaries through
contractual relationships with such subsidiaries. We also have a wholly-owned captive insurance subsidiary (the Captive) that
provides some claims-made coverage to our operating subsidiaries for general and professional liability, as well as coverage for
certain workers’ compensation insurance liabilities. References herein to the consolidated “Company” and “its” assets and
activities, as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report, are not meant to imply, nor
should they be construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any
of the subsidiaries are operated by The Ensign Group.

Real Estate Investment Trust (REIT) Spin-Off. On June 1, 2014, we completed the separation of our healthcare business and
our real estate business into two publicly traded companies through a tax-free distribution of all of the outstanding shares of
common stock of CareTrust REIT, Inc. (CareTrust) to our stockholders on a pro rata basis (the Spin-Off). Our stockholders
received one share of CareTrust common stock for each share of our common stock held at the close of business on May 22, 2014,
the record date for the Spin-Off. As a result of the Spin-Off, we lease back real property associated with 94 affiliated skilled
nursing, assisted living and independent living facilities from CareTrust on a triple-net basis (the Master Leases), under which we
are responsible for all costs at the properties, including property taxes, insurance and maintenance and repair costs.

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As a result of the early retirement of long-term debt, we incurred losses of $5.8 million consisting of $4.1 million in repayment
penalties and the write-off of unamortized debt discount and deferred financing costs and $1.7 million of recognized loss due to
the discontinuance of cash flow hedge accounting for the related interest-rate swap. We also entered into a new credit facility
agreement (the 2014 Credit Facility) agreement in an aggregate principal amount of $150.0 million with a lending consortium
arranged by SunTrust Bank (SunTrust) effective May 30, 2014. We have and continue to expect to use the 2014 Credit Facility
for working capital purposes, to fund acquisitions and for general corporate purposes. As of December 31, 2014, our subsidiaries
had $65.0 million outstanding under the 2014 Credit Facility. See further details at Note 18, Debt of Notes to Consolidated
Financial Statements.

Corporate Integrity Agreement — In connection with the settlement with the U.S. Department of Justice and effective as
of October 1, 2013 (the Settlement Agreement), we entered into a five-year corporate integrity agreement (the CIA) with the Office
of Inspector General-HHS. The CIA acknowledges the existence of our current compliance program, and requires that we continue
during the term of the CIA to maintain a compliance program designed to promote compliance with the statutes, regulations, and
written directives of Medicare, Medicaid, and all other federal health care programs. Our participation in federal healthcare
programs is not affected by the Settlement Agreement or the CIA. In the event of an uncured material breach of the CIA, we could
be excluded from participation in federal healthcare programs and/or subject to prosecution. See further details of the CIA at Note
20, Commitments and Contingencies of Notes to Consolidated Financial Statements.

Acquisition History

The following table sets forth the location of our affiliated facilities and the number of operational beds located at our

facilities as of December 31, 2014:

Total

Cumulative number of
skilled nursing and
assisted living
operations

Cumulative number of
operational skilled
nursing, assisted living
and independent living
beds/units

136

4,806

2,446

3,146

1,360

587

739

477

304

366

356

138

14,725

In addition to the operation acquisitions above, in 2014, we acquired seven home health and hospice agencies. As of
December 31, 2014, we provided home health and hospice services through our 23 operating subsidiaries in Arizona, California,
Colorado, Idaho, Iowa, Oregon, Texas, Utah and Washington.

During the third quarter of 2014, we acquired an assisted living operation, a hospice agency, a home health agency and a
hospice license in four states for an aggregate purchase price of $8.3 million. We assumed an existing HUD-insured loan as part
of the transaction. We also entered into a long-term lease agreement and assumed the operations of one skilled nursing facility in

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one state. We did not acquire any material assets or assume any liabilities other than the tenant's post-assumption rights and
obligations under the lease. The acquisition of the assisted living operation and the long-term lease of a skilled nursing operation
added 135 and 67 operational assisted living units and skilled nursing beds, respectively, to our operating subsidiaries. The
acquisitions of the home health and hospice agencies and hospice license did not have an impact on the number of beds operated
by our operating subsidiaries.

During the fourth quarter of 2014, we acquired eight skilled nursing operations, two assisted living operations, one home
health agency, two hospice agencies and one private home care business in three states for an aggregate purchase price of $49.8
million. The acquisitions of skilled nursing and assisted living facilities added 623 and 66 operational skilled nursing beds and
assisted living units, respectively, to our operating subsidiaries. The acquisitions of the home health and hospice agencies and
private home care business did not have an impact on the number of beds operated by our operating subsidiaries.

See further discussion of facility acquisitions in Note 8, Acquisitions in Notes to Consolidated Financial Statements.

Key Performance Indicators

We manage our fiscal aspects of our business by monitoring key performance indicators that affect our financial performance.

These indicators and their definitions include the following:

Transitional, Skilled and Assisted Living Services

• Routine revenue. Routine revenue is generated by the contracted daily rate charged for all contractually inclusive skilled
nursing services. The inclusion of therapy and other ancillary treatments varies by payor source and by contract. Services
provided outside of the routine contractual agreement are recorded separately as ancillary revenue, including Medicare
Part B therapy services, and are not included in the routine revenue definition.

•

Skilled revenue. The amount of routine revenue generated from patients in the skilled nursing facilities who are receiving
higher levels of care under Medicare, managed care, Medicaid, or other skilled reimbursement programs. The other skilled
patients that are included in this population represent very high acuity patients who are receiving high levels of nursing
and ancillary services which are reimbursed by payors other than Medicare or managed care. Skilled revenue excludes
any revenue generated from our assisted living services.

Skilled mix. The amount of our skilled revenue as a percentage of our total routine revenue. Skilled mix (in days) represents
the number of days our Medicare, managed care, or other skilled patients are receiving services at the skilled nursing
facilities divided by the total number of days patients (less days from assisted living services) from all payor sources are
receiving services at the skilled nursing facilities for any given period (less days from assisted living services).

• Quality mix. The amount of routine non-Medicaid revenue as a percentage of our total routine revenue. Quality mix (in
days) represents the number of days our non-Medicaid patients are receiving services at the skilled nursing facilities
divided by the total number of days patients from all payor sources are receiving services at the skilled nursing facilities
for any given period (less days from assisted living services).

• Average daily rates. The routine revenue by payor source for a period at the skilled nursing facilities divided by actual

patient days for that revenue source for that given period.

• Occupancy percentage (operational beds). The total number of patients occupying a bed in a skilled nursing, assisted
living or independent living facility as a percentage of the beds in a facility which are available for occupancy during the
measurement period.

• Number of facilities and operational beds. The total number of skilled nursing, assisted living and independent living

facilities that we own or operate and the total number of operational beds associated with these facilities.

Skilled and Quality Mix. Like most skilled nursing providers, we measure both patient days and revenue by payor. Medicare,
managed care and other skilled patients, whom we refer to as high acuity patients, typically require a higher level of skilled nursing
and rehabilitative care. Accordingly, Medicare and managed care reimbursement rates are typically higher than from other payors.

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In most states, Medicaid reimbursement rates are generally the lowest of all payor types. Changes in the payor mix can significantly
affect our revenue and profitability.

The following table summarizes our overall skilled mix and quality mix from our skilled nursing services for the periods
indicated as a percentage of our total routine revenue (less revenue from assisted living services) and as a percentage of total
patient days (less days from assisted living services):

Skilled Mix:

Days

Revenue
Quality Mix:

Days

Revenue

Year ended December 31,

2014

2013

2012

27.6%

50.8%

40.7%

59.9%

26.4%

50.0%

40.1%

59.5%

25.9%

50.0%

39.1%

59.5%

Occupancy. We define occupancy derived from our transitional, skilled and assisted services as the ratio of actual patient
days (one patient day equals one resident occupying one bed for one day) during any measurement period to the number of beds
in facilities which are available for occupancy during the measurement period. The number of licensed and independent living
beds in a skilled nursing, assisted living or independent living facility that are actually operational and available for occupancy
may be less than the total official licensed bed capacity. This sometimes occurs due to the permanent dedication of bed space to
alternative purposes, such as enhanced therapy treatment space or other desirable uses calculated to improve service offerings
and/or operational efficiencies in a facility. In some cases, three- and four-bed wards have been reduced to two-bed rooms for
resident comfort, and larger wards have been reduced to conform to changes in Medicare requirements. These beds are seldom
expected to be placed back into service. We believe that reporting occupancy based on operational beds is consistent with industry
practices and provides a more useful measure of actual occupancy performance from period to period.

The following table summarizes our overall occupancy statistics for the periods indicated:

Occupancy:

Operational beds at end of period

Available patient days

Actual patient days

Occupancy percentage (based on operational beds)

Home Health and Hospice

Year ended December 31,

2014

2013

2012

14,725

5,029,738

3,921,758

13,204

4,710,768

3,648,651

12,198

4,371,034

3,452,598

78.0%

77.5%

79.0%

• Medicare episodic admissions. The total number of episodic admissions derived from patients who are receiving care

under Medicare reimbursement programs.

• Average Medicare revenue per completed episode. The average amount of revenue for each completed 60-day episode

generated from patients who are receiving care under Medicare reimbursement programs.

• Average daily census. The average number of patients who are receiving hospice care as a percentage of total number of

patient days.

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Segments

Beginning in the fourth quarter of 2014, we realigned our operating segments to more closely correlate with our service
offerings, which coincide with the way that we measure performance and allocate resources. We have two reportable segments:
(1) transitional, skilled and assisted living services, which includes the operation of skilled nursing facilities and assisted and
independent living facilities and is the largest portion of our business; and (2) home health and hospice services, which includes
our home health, home care and hospice businesses. Our Chief Executive Officer, who is our chief operating decision maker, or
CODM, reviews financial information at the operating segment level.

We also report an “all other” category that includes revenue from our urgent care centers and a mobile x-ray and diagnostic
company. Our urgent care centers and mobile x-ray and diagnostic businesses are neither significant individually nor in aggregate
and therefore do not constitute a reportable segment. Our reporting segments are business units that offer different services and
that are managed separately to provide greater visibility into those operations. The expansion of our home health and hospice
business led us to separate our home health and hospice businesses into a distinct reportable segment in the fourth quarter of 2014.
Previously, we had a single reportable segment, healthcare services, which included providing skilled nursing, assisted living,
home health and hospice, urgent care and related ancillary services. We have presented 2013 and 2012 financial information on
a comparative basis to conform with the current year segment presentation.

Revenue Sources

The following table sets forth our total revenue by payor source generated by each of our reportable segments and our "All

Other" category and as a percentage of total revenue for the periods indicated (dollars in thousands):

Medicaid
Medicare

Medicaid-skilled

Subtotal

Managed care

Private and other

Year ended December 31, 2014

Home
Health and
Hospice
Services

5,245
38,421

—
43,666
7,581

3,269

TSA
Services

352,874
274,723

51,157
678,754
138,215

133,349

All Other
—
$
—

—
—
—

22,572 (1)

Total
Revenue

358,119
313,144

51,157
722,420
145,796

159,190

Total revenue

950,318
(1) Private and other payors in our "All Other" category includes revenue from urgent care centers and other ancillary businesses.

$ 1,027,406

22,572

54,516

Year ended December 31, 2013

Revenue %
34.9%
30.5

5.0
70.4
14.2

15.4

100.0%

Medicaid
Medicare
Medicaid-skilled

Subtotal

Managed care
Private and other

Home
Health and
Hospice
Services

3,223
28,694
—
31,917
5,499
2,346

TSA
Services

320,580
264,223
36,085
620,888
112,669
119,722

All Other
—
$
—
—
—
—
11,515 (1)

Total
Revenue

323,803
292,917
36,085
652,805
118,168

Revenue %
35.8%
32.4
4.0
72.2
13.1

133,583
904,556

14.7
100.0%

Total revenue

853,279
(1) Private and other payors in our "All Other" category includes revenue from urgent care centers and other ancillary businesses.

39,762

11,515

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Medicaid
Medicare

Medicaid-skilled

Subtotal

Managed care

Private and other

Year ended December 31, 2012

TSA
Services

301,051
261,745

25,418
588,214
102,737

108,702

Home
Health and
Hospice
Services

995
16,833

—
17,828
3,531

1,927

All Other
—
$
—

—
—
—

216 (1)

Total
Revenue

302,046
278,578

25,418
606,042
106,268

110,845

Total revenue

799,653
(1) Private and other payors in our "All Other" category includes revenue from urgent care centers and other ancillary businesses.

823,155

23,286

216

Revenue %
36.7%
33.8

3.1
73.6
12.9

13.5

100.0%

Transitional, Skilled and Assisted Living Services

Skilled Nursing Operations. Within our skilled nursing operations, we generate our revenue from Medicaid, private pay,
managed care and Medicare payors. We believe that our skilled mix, which we define as the number of days our Medicare,
managed care, or other skilled patients are receiving services at our skilled nursing operations divided by the total number of
patient days (less days from assisted living services) from all payor sources are receiving services at our skilled nursing facilities
for any given period (less days from assisted living services), is an important indicator of our success in attracting high-acuity
patients because it represents the percentage of our patients who are reimbursed by Medicare and managed care payors, for whom
we receive higher reimbursement rates.

Assisted and Independent Living Operations. Within our assisted and independent living operations, we generate revenue

primarily from private pay sources, with a small portion earned from Medicaid or other state-specific programs.

Home Health and Hospice Services

Home Health. We provided home health care in Arizona, California, Colorado, Idaho, Iowa, Oregon, Texas, Utah and
Washington as of December 31, 2014. We derive the majority of our revenue from our home health business from Medicare and
managed care. The payment is adjusted for differences between estimated and actual payment amounts, an inability to obtain
appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. The home
health prospective payment system (PPS) provides home health agencies with payments for each 60-day episode of care for each
beneficiary. If a beneficiary is still eligible for care after the end of the first episode, a second episode can begin. There are no
limits to the number of episodes a beneficiary who remains eligible for the home health benefit can receive. While payment for
each episode is adjusted to reflect the beneficiary’s health condition and needs, a special outlier provision exists to ensure appropriate
payment for those beneficiaries that have the most expensive care needs. The payment under the Medicare program is also adjusted
for certain variables including, but not limited to: (a) a low utilization payment adjustment if the number of visits was fewer than
five; (b) a partial payment if the patient transferred to another provider or the Company received a patient from another provider
before completing the episode; (c) a payment adjustment based upon the level of therapy services required; (d) the number of
episodes of care provided to a patient, regardless of whether the same home health provider provided care for the entire series of
episodes; (e) changes in the base episode payments established by the Medicare program; (f) adjustments to the base episode
payments for case mix and geographic wages; and (g) recoveries of overpayments.

Hospice. As of December 31, 2014, we provided hospice care in Arizona, California, Colorado, Idaho, Texas, Utah and
Washington. We derive substantially all of the revenue from our hospice business from Medicare reimbursement. The estimated
payment rates are daily rates for each of the levels of care we deliver. The payment is adjusted for an inability to obtain appropriate
billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk. Additionally, as Medicare
hospice revenue is subject to an inpatient cap limit and an overall payment cap, we monitor our provider numbers and estimates
amounts due back to Medicare if a cap has been exceeded.

Other

In addition, as of December 31, 2014, we operated fourteen urgent care clinics, which are all in Washington. Our urgent
care centers provide daily access to healthcare for minor injuries and illnesses, including x-ray and lab services, all from convenient
neighborhood locations with no appointments. As of December 31, 2014, we held 80% of the membership interest of a mobile
70

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x-ray and diagnostic company. The diagnostic company is a leader in providing mobile diagnostic services, including digital x-
ray, ultrasound, electrocardiograms, ankle-brachial index, and phlebotomy services to people in their homes or at long-term care
facilities. Payment for these services varies and is based upon the service provided. The payment is adjusted for an inability to
obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit risk.

Primary Components of Expense

Cost of Services (exclusive of facility rent and depreciation and amortization shown separately). Our cost of services
represents the costs of operating our affiliated subsidiaries, which primarily consists of payroll and related benefits, supplies,
purchased services, and ancillary expenses such as the cost of pharmacy and therapy services provided to patients. Cost of services
also includes the cost of general and professional liability insurance and other general cost of services with respect to our operations.

Facility Rent - Cost of Services. Facility rent - cost of services consists solely of base minimum rent amounts payable under
lease agreements to third-party owners of the facilities that we operate but do not own and does not include taxes, insurance,
impounds, capital reserves or other charges payable under the applicable lease agreements.

General and Administrative Expense. General and administrative expense consists primarily of payroll and related benefits
and travel expenses for our Service Center personnel, including training and other operational support. General and administrative
expense also includes professional fees (including accounting and legal fees), costs relating to our information systems, stock-
based compensation and rent for our Service Center office.

Depreciation and Amortization. Property and equipment are recorded at their original historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the depreciable assets. The following is a summary of
the depreciable lives of our depreciable assets:

Buildings and improvements
Leasehold improvements
Furniture and equipment

Critical Accounting Policies

Minimum of three years to a maximum of 57 years, generally 45 years
Shorter of the lease term or estimated useful life, generally 5 to 15 years
3 to 10 years

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial
statements, which have been prepared in accordance with U.S Generally Accepted Accounting Principles (GAAP). The preparation
of these financial statements and related disclosures requires us to make judgments, estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis we review our judgments and
estimates, including but not limited to those related to doubtful accounts, income taxes, stock compensation, intangible assets
and loss contingencies. We base our estimates and judgments upon our historical experience, knowledge of current conditions and
our belief of what could occur in the future considering available information, including assumptions that we believe to be reasonable
under the circumstances. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty, and actual
results could differ materially from the amounts reported. The following summarizes our critical accounting policies, defined as
those policies that we believe: (a) are the most important to the portrayal of our financial condition and results of operations; and
(b) require management's most subjective or complex judgments, often as a result of the need to make estimates about the effects
of matters that are inherently uncertain.

Revenue Recognition

We recognize revenue when the following four conditions have been met: (i) there is persuasive evidence that an arrangement
exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably
assured. Our revenue is derived primarily from providing healthcare services to patients and is recognized on the date services
are provided at amounts billable to individual patients. For patients under reimbursement arrangements with third-party payors,
including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per
patient, daily basis.

Revenue from Medicare and Medicaid programs account for 70.4%, 72.2% and 73.6% of our revenue for the years ended
December 31, 2014, 2013 and 2012, respectively. We record revenue from these governmental and managed care programs as
services are performed at their expected net realizable amounts under these programs. Our revenue from governmental and managed
care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare

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industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or
adjustment becomes known based on final settlement. We recorded adjustments upon settlement to revenue which were not material
to our consolidated revenue for the years ended December 31, 2014, 2013 and 2012.

Our service specific revenue recognition policies are as follows:

Skilled Nursing, Assisted and Independent Living Revenue

Our revenue is derived primarily from providing long-term healthcare services to patients and is recognized on the date
services are provided at amounts billable to individual patients. For patients under reimbursement arrangements with third-party
payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts or
rate on a per patient, daily basis or as services are performed.

Home Health Revenue

Medicare Revenue

Net service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate
that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was
unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the
patient transferred to another provider or we received a patient from another provider before completing the episode; (d) a payment
adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a patient, regardless
of whether the same home health provider provided care for the entire series of episodes; (f) changes in the base episode payments
established by the Medicare Program; (g) adjustments to the base episode payments for case mix and geographic wages; and (h)
recoveries of overpayments.

We make adjustments to Medicare revenue on completed episodes to reflect differences between estimated and actual payment
amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons
unrelated to credit risk. Therefore, we believe that its reported net service revenue and patient accounts receivable will be the net
amounts to be realized from Medicare for services rendered.

In addition to revenue recognized on completed episodes, we also recognize a portion of revenue associated with episodes
in progress. Episodes in progress are 60-day episodes of care that begin during the reporting period, but were not completed as of
the end of the period. As such, we estimate revenue and recognize it on a daily basis. The primary factors underlying this estimate
are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per episode and our estimate
of the average percentage complete based on visits performed.

Non-Medicare Revenue

Episodic Based Revenue — We recognize revenue in a similar manner as we recognize Medicare revenue for episodic-based
rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can vary based upon
the negotiated terms.

Non-episodic Based Revenue — Revenue is recorded on an accrual basis based upon the date of service at amounts equal

to its established or estimated per-visit rates, as applicable.

Hospice Revenue

Revenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates.
The estimated payment rates are daily rates for each of the levels of care we deliver. We make adjustments to revenue for an
inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons unrelated to credit
risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit and an overall payment cap, we monitor our
provider numbers and estimated amounts due back to Medicare if a cap has been exceeded. We record these adjustments as a
reduction to revenue and increases to other accrued liabilities.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist primarily of amounts due from Medicare and Medicaid programs, other government programs,
managed care health plans and private payor sources. Estimated provisions for doubtful accounts are recorded to the extent it is
probable that a portion or all of a particular account will not be collected.

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In evaluating the collectability of accounts receivable, we consider a number of factors, including the age of the accounts,
changes in collection patterns, the composition of patient accounts by payor type and the status of ongoing disputes with third-
party payors. On an annual basis, the historical collection percentages are reviewed by payor and by state and are updated to
reflect our recent collection experience. In order to determine the appropriate reserve rate percentages which ultimately establish
the allowance, we analyze historical cash collection patterns by payor and by state. The percentages applied to the aged receivable
balances are based on our historical experience and time limits, if any, for managed care, Medicare, Medicaid and other payors.
We periodically refine our estimates of the allowance for doubtful accounts based on experience with the estimation process and
changes in circumstances.

Self-Insurance

We are partially self-insured for general and professional liability up to a base amount per claim (the self-insured retention)
with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured through third-party policies
with coverage limits per occurrence, per location and on an aggregate basis for us. For claims made after January 1, 2013, the
combined self-insured retention was $0.5 million per claim, subject to an additional one-time deductible of $1.0 million for
California affiliated facilities and a separate, one-time, deductible of $0.8 million for non-California facilities. For all affiliated
facilities, except those located in Colorado, the third-party coverage above these limits was $1.0 million per claim, $3.0 million
per facility, with a $5.0 million blanket aggregate and an additional state-specific aggregate where required by state law. In Colorado,
the third-party coverage above these limits was $1.0 million per claim and $3.0 million per facility for skilled nursing facilities,
which is independent of the aforementioned blanket aggregate applicable to our other 129 affiliated facilities.

The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states
except Texas and Washington are self-insured through the Captive, the related assets and liabilities of which are included in the
accompanying consolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider.
These requirements include, but are not limited to, maintaining statutory capital. Our policy is to accrue amounts equal to the
actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been
incurred but not reported. We develop information about the size of the ultimate claims based on historical experience, current
industry information and actuarial analysis. We evaluate the estimates for claim loss exposure on a quarterly basis.

Our operating subsidiaries are self-insured for workers’ compensation liability for all states, except Texas and Washington.
To protect ourselves against loss exposure in California with this policy, we have purchased individual specific excess insurance
coverage that insures individual claims that exceed $0.5 million per occurrence. In Texas, the operating subsidiaries have elected
non-subscriber status for workers’ compensation claims, and we maintain individual stop-loss coverage for individual claims that
exceed $0.8 million per occurrence. As of July 1, 2014, our operating subsidiaries in other states, with the exception of Washington,
are under a loss sensitive plan that insures individual claims that exceed $0.4 million per occurrence. In Washington, the operating
subsidiaries' coverage is financed through premiums paid by the employers and employees. The claims and pay benefits are
managed through a state insurance pool. Outside of California, Texas, and Washington, we have purchased insurance coverage
that insures individual claims that exceed $0.4 million per accident. In all states, except Washington, we accrue amounts equal
to the estimated costs to settle open claims, as well as an estimate of the cost of claims that have been incurred but not reported.
We use actuarial valuations to estimate the liability based on historical experience and industry information.

We self-fund medical (including prescription drugs) and dental healthcare benefits to the majority of our affiliated subsidiaries'
employees. We are fully liable for all financial and legal aspects of these benefit plans. To protect ourselves against loss exposure
with this policy, we have purchased individual stop-loss insurance coverage that insures individual claims that exceed $0.3 million
for each covered person with an additional one-time aggregate individual stop loss deductible of $0.1 million.

We believe that adequate provision has been made in the financial statements for liabilities that may arise out of patient
care, workers’ compensation, healthcare benefits and related services provided to date. The amount of our reserves was determined
based on an estimation process that uses information obtained from both company-specific and industry data. This estimation
process requires us to continuously monitor and evaluate the life cycle of the claims. Using data obtained from this monitoring
and our assumptions about emerging trends, we, with the assistance of an independent actuary, develop information about the size
of ultimate claims based on our historical experience and other available industry information. The most significant assumptions
used in the estimation process include determining the trend in costs, the expected cost of claims incurred but not reported and
the expected costs to settle or pay damage awards with respect to unpaid claims. The self-insured liabilities are based upon estimates,
and while management believes that the estimates of loss are reasonable, the ultimate liability may be in excess of or less than the
recorded amounts. Due to the inherent volatility of actuarially determined loss estimates, it is reasonably possible that we could
experience changes in estimated losses that could be material to our results of operations. If our actual liability exceeds our estimates
of loss, our results of operations, cash flows and financial condition could be materially adversely affected.

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Leases and Leasehold Improvements

At the inception of each lease, we perform an evaluation to determine whether the lease should be classified as an operating
or capital lease. We record rent expense for operating leases that contain scheduled rent increases on a straight-line basis over the
term of the lease. The lease term used for straight-line rent expense is calculated from the date we are given control of the leased
premises through the end of the lease term. The lease term used for this evaluation also provides the basis for establishing depreciable
lives for buildings subject to lease and leasehold improvements, as well as the period over which we record straight-line rent
expense.

Business Combinations

Our acquisition strategy is to purchase or lease operating subsidiaries that are complementary to our current affiliated facilities,
accretive to our business or otherwise advance our strategy. The results of all of our operating subsidiaries are included in the
accompanying Financial Statements subsequent to the date of acquisition. Acquisitions are typically paid for in cash and are
accounted for using the acquisition method of accounting. We account for business combinations using the purchase method of
accounting and, accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the
acquisition date. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount
assigned to identifiable intangible assets. Given the time it takes to obtain pertinent information to finalize the acquired company’s
balance sheet, the initial fair value might not be finalized at the time of the reported period. Accordingly, it is not uncommon for
the initial estimates to be subsequently revised.

In accounting for business combinations, we are required to record the assets and liabilities of the acquired business at fair
value. In developing estimates of fair values for long-lived assets, we utilize a variety of factors including market data, cash flows,
growth rates, and replacement costs. Determining the fair value for specifically identified intangible assets involves significant
judgment, estimates and projections related to the valuation to be applied to intangible assets such as favorable leases, customer
relationships, Medicare licenses, and trade names. The subjective nature of management’s assumptions increases the risk associated
with estimates surrounding the projected performance of the acquired entity. Additionally, as we amortize finite-lived acquired
intangible assets over time, the purchase accounting allocation directly impacts the amortization expense recorded on the financial
statements.

Income Taxes

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

When we take uncertain income tax positions that do not meet the recognition criteria, we record a liability for underpayment
of income taxes and related interest and penalties, if any. In considering the need for and magnitude of a liability for such positions,
we must consider the potential outcomes from a review of the positions by the taxing authorities.

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

Recent Accounting Pronouncements

Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of
grandfathered standards, the Financial Accounting Standards Board (FASB) Accounting Standards Codification™ (ASC) is the
sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. We have reviewed the FASB
issued Accounting Standards Update (ASU) accounting pronouncements and interpretations thereof that have effectiveness dates
during the periods reported and in future periods. For any new pronouncements announced, we consider whether the new
pronouncements could alter previous generally accepted accounting principles and determine whether any new or modified
principles will have a material impact on our reported financial position or operations in the near term. The applicability of any
standard is subject to the formal review of our financial management and certain standards are under consideration.

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In April 2014, the FASB issued an accounting standards update that raises the threshold for disposals to qualify as discontinued
operations and allows companies to have significant continuing involvement with and continuing cash flows from or to the
discontinued operation. It also requires additional disclosures for discontinued operations and new disclosures for individually
material disposal transactions that do not meet the definition of a discontinued operation. This guidance will be effective for fiscal
years beginning after December 15, 2014, which will be our fiscal year 2015, with early adoption permitted. We do not expect
the adoption of the guidance will have a material impact on our consolidated financial statements.

In May 2014, the FASB and International Accounting Standards Board issued their final standard on revenue from contracts
with customers that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers. The new standard supersedes most current revenue recognition guidance, including industry-specific guidance.
This guidance will be effective for fiscal years beginning after December 15, 2016, which will be our fiscal year 2017. Early
adoption is not permitted. We are currently assessing whether the adoption of the guidance will have a material impact on our
consolidated financial statements.

In August 2014, the FASB issued its final standard on going concerns, which requires management to perform interim and
annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are
issued. It also requires additional disclosures if an entity's conditions or events raise substantial doubt about the entity's ability to
continue as a going concern. This guidance applies to all entities and is effective for annual periods ending after December 15,
2016, which will be our fiscal year 2016, with early adoption permitted. We do not expect the adoption of the guidance will have
a material impact on our consolidated financial statements.

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Results of Operations

The following table sets forth details of our revenue, expenses and earnings as a percentage of total revenue for the

periods indicated:

Revenue

Expenses:

Cost of services (exclusive of facility rent, general and administrative expense and
depreciation and amortization shown separately below)

U.S. Government inquiry settlement

Facility rent—cost of services

General and administrative expense

Depreciation and amortization

Total expenses

Income from operations

Other income (expense):

Interest expense

Interest income

Other expense, net

Income before provision for income taxes

Provision for income taxes

Income from continuing operations

Loss from discontinued operations

Net income

Less: net loss attributable to the noncontrolling interests

Net income attributable to The Ensign Group, Inc.

Year Ended December 31,

2014

2013

2012

100.0%

80.1

—

4.7

5.5

2.6

92.9

7.1

(1.3)
—
(1.3)
5.8

2.6

3.2

—

3.2
(0.2)
3.4%

80.3

3.6

1.5

4.4

3.8

93.6

6.4

(1.4)
—
(1.4)
5.0

2.2

2.8
(0.2)
2.6
(0.1)
2.7%

79.7

1.8

1.6

3.9

3.4

90.4

9.6

(1.5)
—
(1.5)
8.1

3.1

5.0
(0.2)
4.8
(0.1)
4.9%

Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

The comparison of results of operations between 2014 and 2013 was impacted significantly by the following items:

•

In the second quarter of 2014, we completed the Spin-Off transaction of our real estate business. As a result, we incurred
approximately $9.0 million of transaction costs associated with the Spin-Off in 2014, which are included in general and
administrative expenses within the consolidated statements of income. See Note 2, Spin-Off of Real Estate Assets through
a Real Estate Investment Trust of Notes to Consolidated Financial Statements for additional information. We also recorded
additional Spin-Off related costs of approximately $5.8 million, consisting of $4.1 million in repayment penalties and
the write-off of unamortized debt discount and deferred financing costs upon retirement of outstanding debt in connection
with the Spin-Off and $1.7 million of recognized loss due to the discontinuance of cash flow hedge accounting for the
related interest-rate swap. See Note 18, Debt of Notes to Consolidated Financial Statements for additional information.
In addition, as part of the transaction, we transferred real properties and entered into new lease agreements with CareTrust,
which resulted in additional rent expense of $32.7 million during the year ended 2014 and a reduction in depreciation
expense. In 2013, we incurred $4.1 million of transaction costs associated with the Spin-Off.

• Our 2013 results are impacted by an accrual of $33.0 million for the settlement to resolve the U.S. Department of Justice
(DOJ) investigation during the first quarter of 2013. In addition, we incurred charges of $2.6 million in settlement charges
and legal costs in 2013 associated with a class action lawsuit. See Note 20, Commitments and Contingencies of the Notes
to Consolidated Financial Statements for additional information. We did not record settlement charges related to the DOJ
investigation in 2014.

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related forecasted cash flows, resulting in the impairment to goodwill. There was no impairment charge to goodwill in
2014.

Revenue

Total consolidated revenue increased $122.9 million, or 13.6% , to $1.0 billion for the year ended December 31, 2014

from $904.6 million for the year ended December 31, 2013.

Years Ended December 31,

2014

2013

Revenue
Dollars

Revenue
Percentage

Revenue
Dollars

Revenue
Percentage

Transitional, skilled and assisted living services:

Skilled nursing facilities
Assisted and independent living facilities

Total transitional, skilled and assisted living services

Home health and hospice services:

Home health
Hospice

Total home health and hospice services

All other (1)
Total revenue

901,470
48,848
950,318

29,577
24,939
54,516
22,572
1,027,406

87.7% $

4.8
92.5

2.9
2.4
5.3
2.2

100.0% $

812,348
40,931
853,279

21,978
17,784
39,762
11,515
904,556

89.8%
4.5
94.3

2.4
2.0
4.4
1.3
100.0%

(1) Includes revenue from services provided at our urgent care clinics and a mobile x-ray and diagnostic company.

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Transitional, Skilled and Assisted Living Services

Total Facility Results:

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Same Facility Results(1):
Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Transitioning Facility Results(2):

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Recently Acquired Facility Results(3):

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Year Ended
December 31,

2014
2013
(Dollars in thousands)

Change

% Change

901,470
48,848
950,318
136
3,921,758

812,348
40,931
853,279
119
3,648,651

89,122
7,917
97,039
17
273,107

78.0%
27.6%
50.8%

77.5%
26.4%
50.0%

11.0%
19.3%
11.4%
14.3%
7.5%
0.5%
1.2%
0.8%

Year Ended
December 31,

2014
2013
(Dollars in thousands)

Change

% Change

724,422
17,456
741,878
82
2,832,584

688,184
16,493
704,677
82
2,784,664

36,238
963
37,201
—
47,920

81.9%
29.3%
52.4%

80.4%
27.9%
51.4%

5.3%
5.8%
5.3%
—%
1.7%
1.5%
1.4%
1.0%

Year Ended
December 31,

2014
2013
(Dollars in thousands)

Change

% Change

99,326
18,171
117,497
25
634,772

96,454
16,467
112,921
25
619,161

2,872
1,704
4,576
—
15,611

71.3%
19.8%
41.5%

69.6%
19.5%
40.7%

3.0%
10.3%
4.1%
—%
2.5%
1.7%
0.3%
0.8%

Year Ended
December 31,

2013
2014
(Dollars in thousands)

Change

% Change

77,722
11,974
89,696
29
426,386

27,710
4,512
32,222
11
171,861

50,012
7,462
57,474
18
254,525

66.5%
24.4%
47.0%

66.2%
20.5%
46.6%

NM
NM
NM
NM
NM
NM
NM
NM

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Transferred to CareTrust(4):

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Actual patient days
Occupancy percentage — Operational beds

___________________

Year Ended
December 31,

2013
2014
(Dollars in thousands)

Change

% Change

— $

1,247
1,247
28,016

3,459
3,459
72,965

70.3%

75.7%

—
(2,212)
(2,212)

NM
NM
NM
NM
NM

(1) Same Facility results represent all facilities purchased prior to January 1, 2011.
(2) Transitioning Facility results represents all facilities purchased from January 1, 2011 to December 31, 2012.
(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2013.
(4) Transferred to CareTrust results represent the results at three independent living facilities which were transferred to CareTrust as

part of the Spin-Off on June 1, 2014. These results were excluded from Same Facility and Transitioning Facility for the year ended
December 31, 2014 and 2013 for comparison purposes.

Revenue. Transitional, skilled and assisted living revenue increased $97.0 million, or 11.4%, to $950.3 million for the year
ended December 31, 2014 compared to $853.3 million for the year ended December 31, 2013. Of the $97.0 million increase,
Medicare and managed care revenue increased $36.0 million, or 9.6%, Medicaid custodial revenue increased $32.3 million, or
10.1%, private and other revenue increased $13.6 million, or 11.4%, and Medicaid skilled revenue increased $15.1 million, or
41.8%. Transitional, skilled and assisted living revenue generated by Recently Acquired Facilities increased by approximately
$57.5 million. Since January 1, 2013, we have acquired 29 facilities in eight states.

Transitional, skilled and assisted living revenue generated by Same Facilities increased $37.2 million, or 5.3%, for the year
ended December 31, 2014 as compared to the year ended December 31, 2013. This increase was primarily due to an increase in
managed care revenue of $12.3 million, or 12.0%, which is primarily attributable to an increase in managed care days of 7.4%
during the year ended December 31, 2014 compared to the year ended December 31, 2013. Medicare days remained consistent
with the year ended December 31, 2013. Managed care revenue per patient day and Medicare revenue per patient day increased
by 3.6% and 0.7%, respectively, during the year ended December 31, 2014 as compared to the year ended December 31, 2013.

Transitional, skilled and assisted living revenue at Transitioning Facilities increased $4.6 million, or 4.1% for the year ended
December 31, 2014 as compared to the year ended December 31, 2013. This increase was primarily due to an increase in managed
care revenue of $2.3 million, or 45.5%, which is primarily attributable to an increase in managed care days of 43.5% during the
year ended December 31, 2014 compared to the year ended December 31, 2013. Managed care revenue per patient day and
Medicare revenue per patient day increased by 4.3% and 2.1%, respectively, during the year ended December 31, 2014 as compared
to the year ended December 31, 2013.

The following table reflects the change in the skilled nursing average daily revenue rates by payor source, excluding services

that are not covered by the daily rate:

Same Facility

2014

2013

Transitioning
2013

2014

Acquisitions

Total

2014

2013

2014

2013

Year Ended December 31,

Skilled Nursing Average
Daily Revenue Rates:

Medicare
Managed care
Other skilled

Total skilled revenue

Medicaid
Private and other payors
Total skilled nursing
revenue

$ 563.94
412.21
440.54
491.20
183.36
193.22

$ 560.04
398.02
456.19
490.35
177.35
187.38

$ 480.80
411.33
812.83
475.57
163.22
170.50

$ 470.74
394.51
697.96
464.84
161.95
167.20

$ 514.38
456.29
321.63
464.31
165.44
182.06

$ 489.75
465.95
253.00
480.12
139.92
149.74

$ 549.12
416.74
437.08
487.55
179.45
185.79

$ 544.51
400.44
460.76
487.53
174.04
179.40

$ 274.48

$ 265.65

$ 227.25

$ 222.42

$ 240.86

$ 211.74

$ 265.41

$ 257.67

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Medicare daily rates at Same Facilities increased by 0.7% for the year ended December 31, 2014 as compared to the year
ended December 31, 2013. This rate was impacted by a 2.0% net market basket increase, which went into effect in October 2014,
and a net market basket increase of 1.3%, which went into effect in October 2013. These net market basket increases were offset
by a 2.0% sequestration reduction, which went into effect on April 1, 2013. In addition, the increase in Medicare daily rates are
impacted by the continuous shift towards higher acuity patients. The decrease in Other Skilled rates was primarily due to the
decrease in our daily sub-acute rates in California. The average Medicaid rate increased 3.1% for the year ended December 31,
2014 relative to the same period in the prior year, primarily due to increases in rates in various states.

Historically, we have generally experienced lower occupancy rates, lower skilled mix and quality mix at Recently Acquired
Facilities and therefore, we anticipate generally lower overall occupancy during years of growth. In the future, if we acquire
additional facilities into our overall portfolio, we expect this trend to continue. Accordingly, we anticipate our overall occupancy
will vary from quarter to quarter based upon the maturity of the facilities within our portfolio.

Payor Sources as a Percentage of Skilled Nursing Services. We use both our skilled mix and quality mix as measures of the
quality of reimbursements we receive at our affiliated skilled nursing facilities over various periods. The following tables set forth
our percentage of skilled nursing patient revenue and days by payor source:

Year Ended December 31,

Same Facility

Transitioning

Acquisitions

Total

2014

2013

2014

2013

2014

2013

2014

2013

Percentage of Skilled
Nursing Revenue:

Medicare

Managed care

Other skilled

Skilled mix

Private and other payors

Quality mix

Medicaid

29.7%

31.1%

32.8%

34.8%

22.7%

28.8%

29.4%

31.4%

15.9

6.8

52.4

7.2

59.6

40.4

14.9

5.4

51.4

7.7

59.1

40.9

6.9

1.8

41.5

21.5

63.0

37.0

4.7

1.2

40.7

21.9

62.6

37.4

20.1

4.2

47.0

11.3

58.3

41.7

17.8

—

46.6

13.8

60.4

39.6

15.3

6.1

50.8

9.1

59.9

40.1

13.9

4.7

50.0

9.5

59.5

40.5

Total skilled nursing

100.0%

Percentage of Skilled
Nursing Days:

Medicare

Managed care
Other skilled
Skilled mix

Private and other payors

Quality mix

Medicaid
Total skilled nursing

Year Ended December 31,

Same Facility

Transitioning

Acquisitions

Total

2014

2013

2014

2013

2014

2013

2014

2013

14.4%

10.7
4.2
29.3
10.3
39.6
60.4
100.0%

14.7%

10.0
3.2
27.9
10.8
38.7
61.3
100.0%

15.5%

3.8
0.5
19.8
28.7
48.5
51.5
100.0%

16.4%

2.7
0.4
19.5
29.1
48.6
51.4
100.0%

10.6%

10.7
3.1
24.4
15.0
39.4
60.6
100.0%

12.4%

8.1
—
20.5
19.6
40.1
59.9
100.0%

14.2%

9.7
3.7
27.6
13.1
40.7
59.3
100.0%

14.8%

8.9
2.7
26.4
13.7
40.1
59.9
100.0%

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Home Heath and Hospice Services

Results:
Home health and hospice revenue

Home health services:
Hospice services:

Total home health and hospice revenue

Home health services:

Year Ended December 31,

2014

2013

Change

% Change

29,577
24,939
54,516

21,978
17,784
39,762

7,599
7,155
14,754

1,131
94

118

34.6%
40.2
37.1%

27.7%
3.4%

39.1%

Medicare Episodic Admissions
Average Medicare Revenue per Completed Episode

Hospice services:

Average Daily Census

5,221
2,840

420

4,090
2,746

302

Home health and hospice revenue increased $14.7 million, or 37.1%, to $54.5 million for the year ended December 31, 2014
compared to $39.8 million for the year ended December 31, 2013. Of the $14.7 million increase, Medicare and managed care
revenue increased $11.8 million, or 34.5% and Medicaid custodial revenue increased $2.0 million, or 62.7%. The increase in
revenue is due primarily to organic growth in existing agencies, coupled with the addition of agencies acquired during the year
ended December 31, 2014. Since January 1, 2014, we have acquired three home health and four hospice operations in four states.
Average Medicare revenue per completed episode increased $94, or 3.4%, to $2,840 for the year ended December 31, 2014
compared to $2,746 for the year ended December 31, 2013. The increase is primarily due to increases in visits per episode.

Cost of Services (exclusive of facility rent and depreciation and amortization shown separately)

Cost of services increased $96.7 million, or 13.3%, to $822.7 million for the year ended December 31, 2014 compared to
$726.0 million for the year ended December 31, 2013. Cost of services as a percentage of total revenue was 80.1% for the year
ended December 31, 2014, which is consistent with the year ended December 31, 2013. The following table sets forth our total
cost of services by each of our reportable segments and our "All Other" category for the periods indicated (dollars in thousands):

Year Ended December 31,

2014

Home
Health
and
Hospice

TSA
Services

All
Other

Total

TSA
Services

2013

Home
Health
and
Hospice

All
Other

Total

Cost of service dollars

$ 756,682

$ 43,497

$ 22,490

$ 822,669

$ 679,976

$ 33,809

$ 12,204

$ 725,989

Transitional, Skilled and Assisted Living Services

Year Ended December 31,

Cost of service dollars
Revenue percentage

2014
2013
(dollars in thousands)
756,682

679,976

79.6%

79.7%

Change

76,706

%
Change

11.3 %
(0.1)%

Cost of services related to our transitional, skilled and assisted living services increased $76.7 million, or 11.3%, to $756.7
million for the year ended December 31, 2014 compared to $680.0 million for the year ended December 31, 2013. Cost of services
as a percentage of total revenue is 79.6% for the year ended December 31, 2014, which is consistent with the year ended December
31, 2013.

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Home Heath and Hospice Services

Cost of service dollars
Revenue percentage

Year Ended December 31,

2014
2013
(dollars in thousands)

Change

%
Change

43,497

33,809

9,688

79.8%

85.0%

28.7 %
(5.2)%

Cost of services related to our home health and hospice services increased $9.7 million, or 28.7%, to $43.5 million for the
year ended December 31, 2014 compared to $33.8 million for the year ended December 31, 2013. Cost of services as a percentage
of total revenue decreased to 79.8% for the year ended December 31, 2014 as compared to 85.0% for the year ended December
31, 2013. The decrease was due to collection efforts, resulting in a decrease in bad debt expense.

Facility Rent — Cost of Services. Facility rent — cost of services increased $34.9 million to $48.5 million for the year ended
December 31, 2014 compared to $13.6 million for the year ended December 31, 2013. Facility rent-cost of service as a percentage
of total revenue increased to 4.7% for the year ended December 31, 2014 from 1.5% for the year ended December 31, 2013. The
increase in rent was primarily due to new lease agreements under the Master Leases entered into with CareTrust associated with
94 affiliated skilled nursing, assisted living and independent living facilities in connection with the Spin-Off and new leases for
newly opened urgent care centers and skilled nursing facilities. Rent expense under the Master Leases is expected to be $4.7
million on a monthly basis for the initial two years.

General and Administrative Expense. General and administrative expense increased $16.8 million to $56.9 million for the
year ended December 31, 2014 compared to $40.1 million for the year ended December 31, 2013. General and administrative
expenses increased as a percentage of total revenue to 5.5% for the year ended December 31, 2014 as compared to 4.4% for the
year ended December 31, 2013. The $16.8 million increase was primarily due to costs of approximately $9.0 million incurred in
connection with the Spin-Off. In 2013, general and administrative expense includes $4.1 million of costs incurred in connection
with the Spin-Off. Excluding these costs, general and administrative expense as a percentage of revenue was 4.7% for the year
ended December 31, 2014 compared to 4.0% for the year ended December 31, 2013. The remaining increase was due to operational
growth and enhancements made to our internal compliance, marketing and managed care teams during 2014.

Depreciation and Amortization. Depreciation and amortization expense decreased $7.5 million, or 22.1% to $26.4 million for
the year ended December 31, 2014 compared to $33.9 million for the year ended December 31, 2013. Depreciation and amortization
expense decreased as a percentage of total revenue to 2.6% for the year ended December 31, 2014 as compared to 3.8% for the
year ended December 31, 2013. This decrease was primarily related to the transfer of real properties to CareTrust in connection
with the Spin-Off, offset by additional depreciation in Recently Acquired Facilities. Included in the $4.7 million depreciation and
amortization expense in Recently Acquired Facilities is $0.5 million of amortization expense of patient base intangible assets
which are amortized over four to eight months.

Other Expense, net. Other expense, net increased $0.1 million to $12.4 million for the year ended December 31, 2014
compared to $12.3 million for the year ended December 31, 2013. Other expense as a percentage of revenue was 1.3% for the
year ended December 31, 2014, which is consistent with the year ended December 31, 2013.

Provision for Income Taxes. Provision for income taxes as a percentage of revenue increased to 2.6% for the year ended
December 31, 2014 as compared to 2.2% for the year ended December 31, 2013. This increase resulted from the increase in
income before income taxes of $14.9 million, or 32.6%. Our effective tax rate was 44.4% for the year ended December 31, 2014
as compared to 43.8% for the year ended December 31, 2013.

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The comparison of results of operations between 2013 and 2012 was impacted significantly by the following items:

• During 2013, we incurred $4.1 million of transaction costs associated with the Spin-Off, which are included in general
and administrative expenses within the consolidated statements of income. See Note 2, Spin-Off of Real Estate Assets
through a Real Estate Investment Trust of Notes to Consolidated Financial Statements for additional information. There
were no Spin-Off transaction costs incurred in 2012.

• Our 2013 and 2012 results were impacted by an accrual of $33.0 million and $15.0 million, respectively, for the settlement
to resolve the DOJ investigation. In addition, we incurred charges of $2.6 million and $4.5 million in settlement charges
and legal costs in 2013 and 2012, respectively, associated with a class action lawsuit. See Note 20, Commitments and
Contingencies of the Notes to Consolidated Financial Statements for additional information.

• During 2013, we recorded a $0.5 million goodwill impairment charge on one facility as a result of the facility experiencing
a significant reduction in admissions due to extensive renovations, which occurred over a year, which resulted in declines
in related forecasted cash flows, resulting in the impairment to goodwill. During 2012, we recorded a $2.2 million
impairment charge of goodwill and other indefinite-lived intangibles due to a decline in the estimated fair value of
redeemable noncontrolling interest of our urgent care franchise business.

Revenue

Revenue increased $81.4 million, or 9.9%, to $904.6 million for the year ended December 31, 2013 from $823.2 million

for the year ended December 31, 2012.

Transitional, skilled and assisted living services:

Skilled nursing facilities
Assisted and independent living facilities
Total transitional, skilled and assisted living services

Home health and hospice services:

Home health
Hospice
Total home health and hospice services

All other (1)
Total revenue

Year Ended December 31,

2013

2012

Revenue
Dollars

Revenue
Percentage

Revenue
Dollars

Revenue
Percentage

812,348
40,931
853,279

21,978
17,784
39,762
11,515
904,556

89.8% $

4.5
94.3

2.4
2.0
4.4
1.3

100.0% $

765,226
34,427
799,653

12,800
10,486
23,286
216
823,155

93.0%
4.2
97.2

1.5
1.3
2.8
—
100.0%

(1) Includes revenue from services provided at our urgent care clinics and a mobile x-ray and diagnostic company.

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Transitional, Skilled and Assisted Living Services

Total Facility Results:

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Same Facility Results(1):
Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Transitioning Facility Results(2):

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Recently Acquired Facility Results(3):

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Number of facilities at period end
Actual patient days
Occupancy percentage — Operational beds
Skilled mix by nursing days
Skilled mix by nursing revenue

Year Ended
December 31,

2013
2012
(Dollars in thousands)

Change

% Change

812,348
40,931
853,279
119
3,648,651

765,226
34,427
799,653
108
3,452,598

47,122
6,504
53,626
11
196,053

77.5%
26.4%
50.0%

79.0%
25.9%
50.0%

6.2 %
18.9 %
6.7 %
10.2 %
5.7 %
(1.5)%
0.5 %
— %

Year Ended
December 31,

2013
2012
(Dollars in thousands)

Change

% Change

663,244
12,766
676,010
77
2,607,158

655,560
11,847
667,407
77
2,626,860

7,684
919
8,603
—
(19,702)

80.8%
28.3%
52.1%

81.2%
27.5%
52.0%

1.2 %
7.8 %
1.3 %
— %
(0.8)%
(0.4)%
0.8 %
0.1 %

Year Ended
December 31,

2013
2012
(Dollars in thousands)

Change

% Change

100,062
16,848
116,910
24
662,661

99,155
16,988
116,143
24
686,375

907
(140)
767
—
(23,714)

73.7%
20.2%
42.0%

74.4%
18.2%
39.2%

0.9 %
(0.8)%
0.7 %
— %
(3.5)%
(0.7)%
2.0 %
2.8 %

Year Ended
December 31,

2013
2012
(Dollars in thousands)

Change

% Change

49,042
7,858
56,900
17
305,867

62.7%
18.0%
38.1%

10,511
2,421
12,932
6
77,574

55.5%
11.2%
20.9%

38,531
5,437
43,968
11
228,293

NM
NM
NM
NM
NM
NM
NM
NM

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Transferred to CareTrust(4):

Skilled nursing revenue
Assisted and independent living revenue

Total transitional, skilled and assisted living revenue

Actual patient days
Occupancy percentage — Operational beds

_______________________

Year Ended
December 31,

2012
2013
(Dollars in thousands)

Change

% Change

— $

3,459
3,459
72,965

3,171
3,171
61,789

75.7%

81.6%

—
288
288
11,176

NM
NM
NM
NM
NM

(1) Same Facility results represent all facilities purchased prior to January 1, 2010.
(2) Transitioning Facility results represents all facilities purchased from January 1, 2010 to December 31, 2011.
(3) Recently Acquired Facility (Acquisitions) results represent all facilities purchased on or subsequent to January 1, 2012.
(4) Transferred to CareTrust results represent the results at three independent living facilities which were transferred to CareTrust as

part of the Spin-Off on June 1, 2014. These results were excluded from Same Facility and Transitioning Facility for the twelve
months ended December 31, 2013 and 2012 for comparison purposes.

Revenue. Transitional, skilled and assisted living revenue increased $53.6 million, or 6.7%, to $853.3 million for the year
ended December 31, 2013 compared to $799.7 million for the year ended December 31, 2012. Of the $53.6 million increase,
Medicare and managed care revenue increased $20.0 million, or 5.6%, Medicaid custodial revenue increased $19.5 million, or
6.5%, private and other revenue increased $11.0 million, or 10.1%, and Medicaid skilled revenue increased $3.1 million, or 9.2%.
Transitional, skilled and assisted living revenue generated by Recently Acquired Facilities increased by approximately $44.0
million. From January 1, 2012 through December 31, 2013, we acquired 17 facilities in seven states.

Transitional, skilled and assisted living revenue generated by Same Facilities increased $8.6 million, or 1.3%, for the year
ended December 31, 2013 as compared to the year ended December 31, 2012. This increase was primarily due to an increase of
0.8% in skilled mix days to 28.3% as compared to 2012. This increase was primarily due to an increase in managed care days of
11.1% during the year ended December 31, 2013 as compared to the year ended December 31, 2012, partially offset by a decrease
in Medicare days of 5.4% during the year ended December 31, 2013 as compared to the year ended December 31, 2012. Managed
care revenue per patient day and Medicare revenue per patient day increased 2.0% and 1.6%, respectively, during the year ended
December 31, 2013 as compared to the year ended December 31, 2012.

Transitional, skilled and assisted living revenue at Transitioning Facilities increased $0.8 million, or 0.7% for the year ended
December 31, 2013 as compared to the year ended December 31, 2012. This increase was due to a 2.0% increase in skilled mix
days primarily attributable to increases in Medicare days of 5.6% and managed care days of 13.3% for the year ended December
31, 2013 as compared to the year ended December 31, 2012.

The following table reflects the change in the skilled nursing average daily revenue rates by payor source, excluding services

that are not covered by the daily rate:

Skilled Nursing Average Daily
Revenue Rates:

Medicare
Managed care
Other skilled

Total skilled revenue

Medicaid
Private and other payors

Same Facility

Transitioning

Acquisitions

Total

2013

2012

2013

2012

2013

2012

2013

2012

Year Ended December 31,

$ 564.45
398.86
455.88
492.13
176.97
188.44

$ 555.44
391.08
457.58
490.63
168.85
189.62

$ 474.16
378.70
708.32
462.86
158.45
167.45

$ 471.25
395.32
529.85
460.25
155.16
165.93

$ 461.98
458.55
253.00
460.78
167.26
154.87

$ 418.73
427.52
-

418.88
204.57
168.26

$ 544.51
400.44
460.76
487.53
174.04
179.40

$ 541.63
391.32
458.67
486.98
167.78
181.52

Total skilled nursing revenue

$ 267.38

$ 259.48

$ 222.39

$ 213.93

$ 218.10

$ 223.11

$ 257.67

$ 252.18

The average Medicare daily rate increased by 0.5%. This rate was impacted by a 1.8% net market basket increase, which
went into effect in October 2012 and a net market basket increase of 1.3%, which went into effect October 2013. These market

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basket increases were offset by a 2% sequestration payment reduction that went into effect on April 1, 2013. The average Medicaid
daily rate increased 3.7% for the year ended December 31, 2013 relative to the same period in the prior year, primarily due to
increases in rates in various states.

Percentage of Skilled Nursing
Revenue:

Medicare

Managed care

Other skilled

Skilled mix

Private and other payors

Quality mix

Medicaid

Year Ended December 31,

Same Facility

Transitioning

Acquisitions

Total

2013

2012

2013

2012

2013

2012

2013

2012

31.3%

33.0%

35.1%

33.3%

26.6%

20.6%

31.4%

32.9%

15.2

5.6

52.1

7.5

59.6

40.4

13.7

5.3

52.0

7.6

59.6

40.4

5.7

1.2

42.0

21.4

63.4

36.6

5.3

0.6

39.2

22.6

61.8

38.2

11.5

—

38.1

12.1

50.2

49.8

0.3

—

20.9

11.2

32.1

67.9

13.9

4.7

50.0

9.5

59.5

40.5

12.4

4.7

50.0

9.5

59.5

40.5

Total skilled nursing

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Percentage of Skilled Nursing
Days:

Medicare

Managed care

Other skilled

Skilled mix

Private and other payors

Quality mix

Medicaid
Total skilled nursing

Year Ended December 31,

Same Facility

Transitioning

Acquisitions

Total

2013

2012

2013

2012

2013

2012

2013

2012

14.8%

15.4%

16.5%

15.1%

12.6%

11.0%

14.8%

15.3%

10.2

3.3

28.3

9.1

3.0

27.5

3.3

0.4

20.2

2.8

0.3

18.2

5.4

—

18.0

0.2

—

11.2

8.9

2.7

26.4

8.0

2.6

25.9

10.7
39.0
61.0
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

10.4
37.9
62.1

29.2
47.4
52.6

14.7
25.9
74.1

28.4
48.6
51.4

17.0
35.0
65.0

13.7
40.1
59.9

13.2
39.1
60.9

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Home Heath and Hospice Services

Results:

Home health and hospice revenue
Home health services:
Hospice services:

Total home health and hospice revenue

Home health services:

Year Ended December 31,

2013

2012

Change

% Change

21,978
17,784
39,762

12,800
10,486
23,286

9,178
7,298
16,476

1,711
136

122

71.7%
69.6
70.8%

71.9%
5.2%

67.8%

Medicare Episodic Admissions
Average Medicare Revenue per Completed Episode

Hospice services:

Average Daily Census

4,090
2,746

302

2,379
2,610

180

Revenue increased $16.5 million, or 70.8%, to $39.8 million for the year ended December 31, 2013 compared to $23.3
million for the year ended December 31, 2012. Of the $16.5 million increase, Medicare and managed care revenue increased
$13.8 million, or 67.9% and Medicaid custodial revenue increased $2.2 million. From January 1, 2012 through December 31,
2013, we acquired five home health and four hospice operations in six states. The increase in revenue is due to organic growth in
existing agencies, coupled with the addition of agencies acquired during the year ended December 31, 2014. During the year
ended December 31, 2013, we acquired three home health and three hospice operations in four states. Average Medicare revenue
per completed episode increased $136, or 5.2%, to $2,746 for the year ended December 31, 2013 compared to $2,610 for the year
ended December 31, 2012. The increase is primarily due to increases in visits per episode.

Cost of Services (exclusive of facility rent and depreciation and amortization shown separately).

Cost of services increased $69.6 million, or 10.6%, to $726.0 million for the year ended December 31, 2013 compared to
$656.4 million for the year ended December 31, 2012. Cost of services as a percentage of total revenue increased to 80.3% for
the year ended December 31, 2013 as compared to 79.7% for the year ended December 31, 2012. The following table sets forth
our total cost of services by each of our reportable segments and our "All Other" category for the periods indicated (dollars in
thousands):

Year Ended December 31,

2013

Home
Health
and
Hospice

TSA
Services

All
Other

Total

TSA
Services

2012

Home
Health
and
Hospice

All
Other

Total

Cost of service dollars

$ 679,976

$ 33,809

$ 12,204

$ 725,989

$ 635,832

$ 18,636

1,956

$ 656,424

Transitional, Skilled and Assisted Living Services

Year Ended December 31,

Cost of service dollars
Revenue percentage

2012
2013
(dollars in thousands)
679,976

635,832

79.7%

79.5%

Change

%
Change

44,144

6.9%
0.2%

Cost of services related to our transitional, skilled and assisted living services increased $44.2 million, or 6.9%, to $680.0
million for the year ended December 31, 2013 compared to $635.8 million for the year ended December 31, 2012. Cost of services
as a percentage of total revenue increased to 79.7% for the year ended December 31, 2013 as compared to 79.5% for the year
ended December 31, 2012. The increase was primarily related to an increase in quality assurance fee of $3.7 million in certain
states where related Medicaid rates were also increased. In addition, we recorded additional costs of $1.5 million related to the
class action staffing lawsuit during the year ended December 31, 2013.

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Home Heath and Hospice Services

Cost of service dollars
Revenue percentage

Year Ended December 31,

2013
2012
(dollars in thousands)

Change

%
Change

33,809

18,636

15,173

85.0%

80.0%

81.4%
5.0%

Cost of services related to our home health and hospice business increased $15.2 million, or 81.4%, to $33.8 million for the
year ended December 31, 2013 compared to $18.6 million for the year ended December 31, 2012. Cost of services as a percentage
of total revenue increased to 85.0% for the year ended December 31, 2013 as compared to 80.0% for the year ended December
31, 2012. The increase of $15.2 million was due to operational growth in the year ended December 31, 2013.

Charge Related to U.S. Government Inquiry. We recorded an additional charge in the amount of $33.0 million during the
year ended December 31, 2013 related to investigation into some of our subsidiaries conducted by the DOJ. During the year ended
December 31, 2012, we accrued an estimated liability of $15.0 million.

Facility Rent — Cost of Services. Facility rent — cost of services increased $0.3 million, or 2.3%, to $13.6 million for the
year ended December 31, 2013 compared to $13.3 million for the year ended December 31, 2012. Facility rent — cost of services
as a percentage of total revenue decreased to 1.5% for the year ended December 31, 2013 from 1.6% for the year ended December
31, 2012.

General and Administrative Expense. General and administrative expense increased $8.3 million, or 26.1%, to $40.1 million
for the year ended December 31, 2013 compared to $31.8 million for the year ended December 31, 2012. General and administrative
expenses increased as a percentage of total revenue to 4.4% for the year ended December 31, 2013 as compared to 3.9% for the
year ended December 31, 2012. The $8.3 million increase was primarily due to costs of $4.1 million incurred in connection with
the Spin-Off and wages and benefits as a result of enhancements made to our internal compliance team.

Depreciation and Amortization. Depreciation and amortization expense increased $5.5 million, or 19.4%, to $33.9 million for
the year ended December 31, 2013 compared to $28.4 million for the year ended December 31, 2012. Depreciation and amortization
expense increased as a percentage of total revenue to 3.8% for the year ended December 31, 2013 as compared to 3.4% for the
year ended December 31, 2012. This increase was primarily related to the additional depreciation of $3.5 million in Recently
Acquired Facilities, as well as an increase of $1.9 million in Same Facilities due to recent renovations and the purchase of the
underlying assets of three of our skilled nursing facilities which we previously operated under long-term lease agreements during
the year ended December 31, 2012. Of the $3.5 million increase in Recently Acquired Facilities, $0.7 million represented
amortization expense of patient base intangible assets which are amortized over four to eight months.

Other Expense, net. Other expense, net increased $0.3 million, or 2.6%, to $12.3 million for the year ended December 31,
2013 compared to $12.0 million for the year ended December 31, 2012. Other expense as a percentage of revenue decreased to
1.4% for the year ended December 31, 2013 as compared to 1.5% for the year ended December 31, 2012.

Provision for Income Taxes. Provision for income taxes decreased $5.1 million, or 20.3%, to $20.0 million for the year ended
December 31, 2013 as compared to $25.1 million for the year ended December 31, 2012. This decrease resulted from the decrease
in income before income taxes. Our effective tax rate was 43.8% for the year ended December 31, 2013 as compared to 37.9%
for the year ended December 31, 2012.

Liquidity and Capital Resources

Our primary sources of liquidity have historically been derived from our cash flows from operations and long-term debt

secured by our real property and our revolving credit facilities.

Historically, we have financed the majority of our acquisitions primarily through financing of facilities mortgage, our
revolving credit facility, and cash generated from operations. Cash paid for business acquisitions was $92.7 million, $45.1 million
and $31.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. Cash paid for asset acquisitions was $7.9
million, $0.0 million, and $11.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. Total capital
expenditures for property and equipment were $53.7 million, $29.8 million and $38.9 million for the years ended December 31,
2014, 2013 and 2012, respectively. We currently have approximately $45.0 million budgeted for renovation projects for 2015.

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We believe our current cash balances, our cash flow from operations and the amounts available under the 2014 Credit
Facility, will be sufficient to cover our operating needs for at least the next 12 months. We may in the future seek to raise additional
capital to fund growth, capital renovations, operations and other business activities, but such additional capital may not be available
on acceptable terms, on a timely basis, or at all.

Our cash and cash equivalents as of December 31, 2014 consisted of bank term deposits, money market funds and U.S.
Treasury bill related investments. In addition, as of December 31, 2014, we held debt security investments of approximately $23.9
million, which were split between AA, A and BBB-rated securities. Our market risk exposure is interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our investments without significantly increasing risk.
Due to the low risk profile of our investment portfolio, an immediate 10% change in interest rates would not have a material effect
on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to
any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

In connection with the Spin-Off, CareTrust assumed the mortgage debt of approximately $48.5 million, and issued
additional mortgage debt of approximately $50.7 million, related to certain of the properties it acquired, and issued $260.0 million
in aggregate principal amount of senior unsecured notes. CareTrust transferred to us $220.8 million of the proceeds from the
issuance of the notes in connection with the contribution of assets to CareTrust prior to the Spin-Off. We used the proceeds to
repay certain outstanding third-party bank debt and other indebtedness and the third and fourth quarter 2014 dividend payments.
We are planing to utilize all the remaining amount of $5.1 million as of December 31, 2014 to make dividend payments during
2015.

The following table presents selected data from our consolidated statement of cash flows for the periods presented:

Net cash provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

2014

2012

Year Ended
December 31,
2013
(In thousands)
$ 37,424
(65,235)
52,881

84,880
(172,851)
72,624
(15,347)
65,755

$ 82,050
(84,496)
13,547

25,070

40,685

11,101

29,584

50,408

$ 65,755

$ 40,685

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

Net cash provided by operations for the year ended December 31, 2014 was $84.9 million compared to $37.4 million for
the year ended December 31, 2013, an increase of $47.5 million. This increase was primarily due to the decrease in prepayment
of income taxes and timing of the payment of accounts payable and accrued expenses, partially offset by increased accounts
receivable.

Net cash used in investing activities for the year ended December 31, 2014 was $172.9 million compared to $65.2 million
for the year ended December 31, 2013, an increase of $107.7 million. The increase was primarily the result of purchases of property
and equipment, business acquisitions and asset acquisitions of $53.7 million, $92.7 million and $7.9 million, respectively, during
the year ended December 31, 2014, compared to $29.8 million, $45.1 million and $0.0 million, respectively, during the year ended
December 31, 2013, an increase of $79.4 million. The increase in purchases of property and equipment during the year ended
December 31, 2014 was in effort to finalize numerous renovation projects in advance of the Spin-Off.

Net cash provided by financing activities for the year ended December 31, 2014 was $72.6 million as compared to $52.9
million for the year ended December 31, 2013, an increase of $19.7 million. This increase in net cash provided by financing
activities was primarily due to the receipt of $90.0 million in borrowing proceeds from our Senior Credit Facility and the 2014
Credit Facility during the year ended December 31, 2014 as compared to $58.7 million during the year ended December 31, 2013,
partially offset by an increase in long-term debt repayments of $25.0 million for the year ended December 31, 2014 as compared
to $7.2 million during the year ended December 31, 2013.

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net cash provided by operations for the year ended December 31, 2013 was $37.4 million compared to $82.1 million for
the year ended December 31, 2012, a decrease of $44.7 million. This decrease was primarily due to the payment of the U.S.
Government investigation settlement of $15.0 million, an increase in accounts receivable of $11.1 million as compared to the year
ended December 31, 2012 and an increase in prepaid income taxes of $8.2 million as compared to the year ended December 31,
2012 due to the timing of payments.

Net cash used in investing activities for the year ended December 31, 2013 was $65.2 million compared to $84.5 million
for the year ended December 31, 2012, a decrease of $19.3 million. The decrease was primarily the result of $71.3 million in cash
paid for business acquisitions, asset acquisitions and purchased property and equipment in the year ended December 31, 2013
compared to $86.2 million in the year ended December 31, 2012, a decrease of $14.9 million. The remainder of this difference
is due to cash proceeds received on the sale of our urgent care franchising business of $3.6 million and equity method investment
of $1.6 million during the year ended December 31, 2013.

Net cash provided by financing activities for the year ended December 31, 2013 was $52.9 million as compared to $13.5
million for the year ended December 31, 2012, an increase of $39.4 million. This increase was primarily due to the receipt of
$58.7 million in borrowing proceeds from our Senior Credit Facility during the year ended December 31, 2013 as compared to
$36.5 million during the year ended December 31, 2012, an increase of $22.2 million, combined with a decrease in long-term debt
repayments of $7.2 million for the year ended December 31, 2013 as compared to $16.8 million for the year ended December 31,
2012, a decrease of $9.6 million.

Principal Debt Obligations and Capital Expenditures

Total long-term debt obligations, net of debt discount, outstanding as of the end of each fiscal year were as follows:

2014 Credit Facility

Senior Credit Facility

Ten Project Note

Six Project Loan

Mortgage Loan and Promissory Notes

Bond payable

Total

December 31,

2010

2011

2012

2013

2014

— $

—

52,229

39,495

49,744

1,038

(in thousands)

— $

65,000

88,125

51,185

—

48,560

—

89,375

50,072

—

68,245

—

144,325

48,864

—

66,117

—

3,390

—

142,506

187,870

207,692

259,306

68,390

The following table represents our cumulative growth from 2008 to the present:

December 31,

2008

2009

2010

2011

2012

2013

2014

Cumulative number of skilled nursing,
assisted and independent living facilities

Cumulative number of home health and
hospice agencies

Cumulative number of urgent care centers

—
—

1
—

3
—

102

7
—

108

10
3

119

16
7

136

23
14

New Credit Facility with a Lending Consortium Arranged by SunTrust (2014 Credit Facility)

On May 30, 2014, we entered into the 2014 Credit Facility in an aggregate principal amount of $150.0 million from a
syndicate of banks and other financial institutions. Under the 2014 Credit Facility, we may seek to obtain incremental revolving
or term loans in an aggregate amount not to exceed $75.0 million. The interest rates applicable to loans under the 2014 Credit
Facility are, at our option, equal to either a base rate plus a margin ranging from 1.25% to 2.25% per annum or LIBOR plus a
margin ranging from 2.25% to 3.25% per annum, based on the debt to Consolidated EBITDA ratio (as defined in the agreement).
In addition, we will pay a commitment fee on the unused portion of the commitments under the 2014 Credit Facility that will
range from 0.30% to 0.50% per annum, depending on the debt to Consolidated EBITDA ratio of the Company and its subsidiaries.
Loans made under the 2014 Credit Facility are not subject to interim amortization. We are not required to repay any loans under

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the 2014 Credit Facility prior to maturity, other than to the extent the outstanding borrowings exceed the aggregate commitments
under the 2014 Credit Facility. We are permitted to prepay all or any portion of the loans under the 2014 Credit Facility prior to
maturity without premium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders. In connection with
the 2014 Credit Facility, we incurred financing costs of approximately $2.0 million, which were capitalized and amortized over
the term of the 2014 Credit Facility. As of December 31, 2014, our subsidiaries had $65.0 million outstanding under the 2014
Credit Facility.

The 2014 Credit Facility is guaranteed, jointly and severally, by certain of our wholly owned subsidiaries, and is secured
by substantially all of our personal property. The 2014 Credit Facility contains customary covenants that, among other things,
restrict, subject to certain exceptions, the ability of the Company and our subsidiaries to grant liens on their assets, incur
indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material agreements
and pay certain dividends and other restricted payments. Under the 2014 Credit Facility, we must comply with financial maintenance
covenants to be tested quarterly, consisting of a maximum debt to consolidated EBITDA ratio, and a minimum interest/rent coverage
ratio. The majority of lenders can require that we and our subsidiaries mortgage certain of our real property assets to secure the
2014 Credit Facility if an event of default occurs, the debt to consolidated EBITDA ratio is above 2.50:1.00 for two consecutive
fiscal quarters, or our liquidity is equal or less than 10% of the Aggregate Revolving Commitment Amount (as defined in the
agreement) for ten consecutive business days, provided that such mortgages will no longer be required if the event of default is
cured, the debt to consolidated EBITDA ratio is below 2.50:1.00 for two consecutive fiscal quarters, or our liquidity is above 10%
of the Aggregate Revolving Commitment Amount (as defined in the agreement) or ninety consecutive days, as applicable. As of
December 31, 2014, we were in compliance with all loan covenants.

Senior Credit Facility with Six-Bank Lending Consortium Arranged by SunTrust and Wells Fargo (Senior Credit Facility)

On July 15, 2011, we entered into the Senior Credit Facility in an aggregate principal amount of up to $150.0 million
comprised of a $75.0 million revolving credit facility and a $75.0 million term loan advanced in one drawing on July 15, 2011.
Borrowings under the term loan portion of the Senior Credit Facility amortize in equal quarterly installments that commenced on
September 30, 2011, in an aggregate annual amount equal to 5.0% per annum of the original principal amount. Amounts borrowed
pursuant to the Senior Credit Facility were guaranteed by certain of our wholly-owned subsidiaries and secured by substantially
all of our personal property. To reduce the risk related to interest rate fluctuations, we, on behalf of the subsidiaries, entered into
an interest rate swap agreement to effectively fix the interest rate on the term loan portion of the Senior Credit Facility. See further
details of the interest rate swap at Note 5, Fair Value Measurements in Notes to Consolidated Financial Statements.

On May 30, 2014, the Senior Credit Facility was paid in full with a portion of the proceeds received from CareTrust in

connection with the Spin-Off and the agreement was terminated at the time of the Spin-Off.

Mortgage Loan with Red Mortgage Capital, LLC

On September 24, 2014, we acquired an assisted living operation in Arizona. The acquisition was purchased with a
combination of cash and the assumption of an existing mortgage loan with Red Mortgage Capital, LLC of approximately $3.4
million. The mortgage loan is insured with the U.S. Department of Housing and Urban Development (HUD), which subjects our
facility to HUD oversight and periodic inspections. The mortgage loan bears interest at the rate of 2.55% per annum. Amounts
borrowed under the mortgage loan may be prepaid starting after the second anniversary of the note subject to prepayment fees of
9.0% of the principal balance on the date of prepayment. These prepayment fees are reduced by 1.0% a year for years three through
11 of the loan. There is no prepayment penalty after year 11. The term of the mortgage loan is for 25 years, with monthly principal
and interest payments commencing on September 12, 2012 and the balance due on October 1, 2037. The mortgage loan is secured
by the real property comprising the facility and the rents, issues and profits thereof, as well as all personal property used in the
operation of the facility. As of December 31, 2014, our subsidiary had $3.4 million outstanding under the mortgage loan, of which
$0.1 million is classified as short-term and the remaining $3.3 million is classified as long-term.

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Promissory Notes with RBS Asset Finance, Inc.

On February 22, 2012, two of our real estate holding subsidiaries as Borrowers executed a promissory note in favor of RBS
Asset Finance, Inc. (RBS) as Lender for an aggregate of $21.5 million (the 2012 RBS Loan). The 2012 RBS Loan was secured
by a Commercial Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filings on the two properties
owned by the two Borrowers, and other related instruments and agreements, including without limitation a promissory note and
a Company guaranty. The 2012 RBS Loan had a fixed interest rate of 4.75%.

On May 30, 2014, the RBS Loan was paid in full with a portion of the proceeds received from CareTrust in connection

with the Spin-Off and the agreement was terminated at the time of the Spin-Off.

Promissory Note with RBS Asset Finance, Inc.

On December 31, 2010, four of our real estate holding subsidiaries as Borrowers executed a promissory note in favor of
RBS as Lender for an aggregate of $35.0 million (2010 RBS Loan). The 2010 RBS Loan was secured by Commercial Deeds of
Trust, Security Agreements, Assignment of Leases and Rents and Fixture Fillings on the four properties owned by the four
Borrowers, and other related instruments and agreements, including without limitation a promissory note and a Company guaranty.
The 2010 RBS Loan had a fixed interest rate of 6.04%.

On May 30, 2014, the RBS Loan was paid in full with a portion of the proceeds received from CareTrust in connection with

the Spin-Off and the agreement was terminated at the time of the Spin-Off.

CareTrust Indebtedness

Immediately before the Spin-Off, on May 30, 2014, while CareTrust was our wholly-owned subsidiary, CareTrust raised
$260.0 million of debt financing, which was part of the net assets contributed to CareTrust as part of the Spin-Off. See Note 2,
Spin-Off of Real Estate Assets Through a Real Estate Investment Trust in the Notes to Consolidated Financial Statements.

Term Loan with General Electric Capital Corporation

On December 29, 2006, a number of our independent real estate holding subsidiaries jointly entered into the Third Amended
and Restated Loan Agreement with General Electric Capital Corporation (GECC), which consisted of an approximately
$55.7 million multiple-advance term loan (Ten Project Note). The Ten Project Note was currently secured by the real and personal
property comprising the ten facilities owned by these subsidiaries.

On May 30, 2014, we entered into the Fifth Amended and Restated Loan Agreement with GECC, which consisted of an
additional loan of $50.7 million to an aggregate principal amount of $99.0 million. The Ten Project Note matures in May 2017.
The initial term loan of $55.7 million was funded in advances, with each advance bearing interest at a separate rate. The interest
rates range from 6.95% to 7.50% per annum. The additional loan of $50.7 million bears interest at a floating rate equal to the
three month LIBOR plus 3.35%, reset monthly and subject to a LIBOR floor of 0.50%, with monthly principal and interest payments
based on a 25 years amortization.

On May 30, 2014, the Ten Project Note was assumed by CareTrust in connection with the Spin-Off.

Promissory Notes with Johnson Land Enterprises, Inc.

On October 1, 2009, four of our subsidiaries entered into four separate promissory notes with Johnson Land Enterprises,

LLC, for an aggregate of $10.0 million, as a part of our acquisition of three skilled nursing facilities in Utah.

On May 30, 2014, we repaid the majority of the four promissory notes with a portion of the proceeds received from CareTrust

in connection with the Spin-Off. The remaining $0.6 million was assumed by CareTrust in connection with the Spin-Off.

Mortgage Loan with Continental Wingate Associates, Inc.

Ensign Southland LLC, one of our operating subsidiaries, entered into a mortgage loan on January 30, 2001 with Continental
Wingate Associates, Inc. The mortgage loan is insured with HUD, which subjected our Southland facility to HUD oversight and
periodic inspections. This mortgage loan was secured by the real property comprising the Southland Care Center facility and the
rents, issues and profits thereof, as well as all personal property used in the operation of the facility.

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On May 30, 2014, the mortgage loan was paid in full with a portion of the proceeds received from CareTrust in connection

with the Spin-Off and the agreement was terminated at the time of the Spin-Off.

In connection with the debt retirements, we incurred losses of $5.8 million, consisting of $4.1 million in repayment penalties
and the write off of unamortized debt discount and deferred financing costs and $1.7 million of recognized loss due to the
discontinuance of cash flow hedge accounting for the related interest-rate swaps.

Contractual Obligations, Commitments and Contingencies

The following table sets forth our principal contractual obligations and commitments as of December 31, 2014, including

the future periods in which payments are expected:

2015

2016

2017

2018

2019

Thereafter

Total

(In thousands)

Operating lease obligations

$ 74,927 $ 74,778 $ 74,270 $ 74,293 $ 73,232

$ 755,212 $1,126,712

Long-term debt obligations

Interest payments on long-term debt

111

2,341

114

2,338

117

2,335

120

2,332

65,123

2,329

2,805

689

68,390

12,364

Total

$ 77,379

$ 77,230

$ 76,722

$ 76,745

$ 140,684

$ 758,706

$1,207,466

Not included in the table above are our actuarially determined self-insured general and professional malpractice liability,
worker's compensation and medical (including prescription drugs) and dental healthcare obligations which are broken out between
current and long-term liabilities in our financial statements included in this Annual Report.

As a result of the Spin-Off, we lease from CareTrust real property associated with 94 affiliated skilled nursing, assisted
living and independent living facilities used in our operations under eight master leases (the Master Leases). The Master Leases
consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography.
Under each master lease, our individual subsidiaries that operate those properties are the tenants and CareTrust's individual
subsidiaries that own the properties subject to the Master Leases are the landlords. The rent structure under the Master Leases
includes a fixed component, subject to annual escalation equal to the lesser of the percentage change in the Consumer Price Index
(but not less than zero) or 2.5%. Annual rent expense under the Master Leases will be approximately $56.0 million during each
of the first two years of the Master Leases.

The Master Leases arrangement is commonly known as a triple-net lease. Accordingly, in addition to rent, we are required
to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on the income
of the lessor), (2) all utilities and other services necessary or appropriate for the leased properties and the business conducted on
the leased properties, (3) all insurance required in connection with the leased properties and the business conducted on the leased
properties, (4) all facility maintenance and repair costs and (5) all fees in connection with any licenses or authorizations necessary
or appropriate for the leased properties and the business conducted on the leased properties. Total rent expense under the Master
Leases was approximately $32.7 million for the year ended December 31, 2014, as a result of the Spin-Off on June 1, 2014. There
was no rent expense under the Master Leases for the years ended December 31, 2013 and 2012.

At our option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial term, on the
same terms and conditions. If we elect to renew the term of a Master Lease, the renewal will be effective as to all, but not less
than all, of the leased property then subject to the Master Lease.

Among other things, under the Master Leases, we must maintain compliance with specified financial covenants measured
on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also include
certain reporting, legal and authorization requirements. As of December 31, 2014, we were in compliance with the Master Leases'
covenants.

We also entered into an Opportunities Agreement with CareTrust, which grants CareTrust the right to match any offer from
a third party to finance the acquisition or development of any healthcare or senior-living facility by us or any of our affiliates for
a period of one year following the Spin-Off. In addition, this agreement requires CareTrust to provide us, subject to certain
exceptions, a right to either purchase and operate, or lease and operate, the facilities included in any portfolio of five or fewer
healthcare or senior living facilities presented to us during the first year following the Spin-Off; provided that the portfolio is not
subject to an existing lease with an operator or manager that has a remaining term of more than one year, and is not presented to
us by or on behalf of another operator seeking lease or other financing. If we elect to lease and operate such a property or portfolio,
the lease would be on substantially the same terms as the Master Leases.

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We also lease certain affiliated facilities and our administrative offices under non-cancelable operating leases, most of which
have initial lease terms ranging from five to 20 years. In addition, we lease certain of our equipment under non-cancelable operating
leases with initial terms ranging from three to five years. Most of these leases contain renewal options, certain of which involve
rent increases. Total rent expense, inclusive of straight-line rent adjustments and rent associated with the Master Leases noted
above, was $48.9 million, $14.1 million, and $13.8 million during the years ended December 31, 2014, 2013 and 2012, respectively.

Six of our affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust, are operated
under two separate three-facility master lease arrangements. Under these master leases, a breach at a single facility could subject
one or more of the other affiliated facilities covered by the same master lease to the same default risk. Failure to comply with
Medicare and Medicaid provider requirements is a default under several of our leases, master lease agreements and debt financing
instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire master lease
portfolio and could trigger cross-default provisions in our outstanding debt arrangements and other leases. With an indivisible
lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord.

In addition, a number of our individual facility leases are held by the same or related landlords, and some of these leases
include cross-default provisions that could cause a default at one facility to trigger a technical default with respect to others,
potentially subjecting certain leases and facilities to the various remedies available to the landlords under separate but cross-
defaulted leases. We are not aware of any defaults as of December 31, 2014.

Internal Revenue Service Examination

During the third quarter of 2014, we received a notification from the IRS that our 2012 tax return will be examined. During
the first quarter of 2012, the State of California initiated an examination of our income tax returns for the 2008 and 2009 income
tax years. The examination was primarily focused on the Captive and the treatment of related insurance matters. The examination
was closed with no adjustments. See Note 15, Income Taxes in the Notes to Consolidated Financial Statements.

U.S. Government Inquiry

In late 2006, we learned that we might be the subject of an on-going criminal and civil investigation by the DOJ. This was
confirmed in March 2007. The investigation was prompted by a whistleblower complaint, and related primarily to claims submitted
to the Medicare program for rehabilitation services provided at skilled nursing facilities in Southern California. We recorded an
initial estimated liability in the amount of $15.0 million in the fourth quarter of 2012 for the resolution of claims connected to the
investigation based on the facts available at the time. In April 2013, we and the government representatives reached an agreement
in principle to resolve the allegations and close the investigation. Based on these discussions, we recorded and announced an
additional charge in the amount of $33.0 million in the first quarter of 2013, increasing the total reserve to resolve the matter to
$48.0 million (the Reserve Amount).

In October 2013, we and the government executed a final settlement agreement in accordance with the April agreement and
we remitted full payment of the Reserve Amount. In addition, we executed a corporate integrity agreement with the Office of
Inspector General HHS as part of the resolution.

See additional description of our contingencies in Notes 18, Debt and 20, Commitments and Contingencies in Notes to

Consolidated Financial Statements.

Inflation

We have historically derived a substantial portion of our revenue from the Medicare program. We also derive revenue from
state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels
that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the
Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the
actual increase in our costs for providing healthcare services.

Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase
in periods of rising inflation and when labor shortages occur in the marketplace. To date, we have generally been able to implement
cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. We may not be successful
in offsetting future cost increases.

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Off-Balance Sheet Arrangements

As of December 31, 2014 and 2013, we had approximately $2.8 million on the 2014 Credit Facility and $2.0 million on the

Senior Credit Facility, respectively, of borrowing capacity pledged as collateral to secure outstanding letters of credit.

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. We are exposed to interest rate changes in connection with the revolving credit facility portion of the
2014 Credit Facility. The 2014 Credit Facility agreement exposes us to variability in interest payments due to changes in LIBOR
interest rates. Historically, we entered into an interest rate swap agreement to reduce risk from volatility in the income statement.
We terminated the swap agreement in May 2014 in connection with our repayment of the Senior Credit Facility. As of December 31,
2014, there was no outstanding interest rate swap contract. We may enter into new a interest rate swap agreement to reduce risk
from volatility in the income statement on the term loan portion of the 2014 Credit Facility. As of December 31, 2014, our
subsidiaries had $65.0 million outstanding under the 2014 Credit Facility.

Our cash and cash equivalents as of December 31, 2014 consisted of bank term deposits, money market funds and U.S.
Treasury bill related investments. In addition, as of December 31, 2014, we held debt security investments of approximately $23.9
million, which were split between AA, A, and BBB-rated securities. Our market risk exposure is interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates. The primary objective of our investment activities is to preserve
principal while at the same time maximizing the income we receive from our investments without significantly increasing risk.
Due to the low risk profile of our investment portfolio, an immediate 10% change in interest rates would not have a material effect
on the fair market value of our portfolio. Accordingly, we would not expect our operating results or cash flows to be affected to
any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

The above only incorporates those exposures that exist as of December 31, 2014 and does not consider those exposures or
positions which could arise after that date. If we diversify our investment portfolio into securities and other investment alternatives,
we may face increased risk and exposures as a result of interest risk and the securities markets in general.

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Item 8. Financial Statements and Supplementary Data

Quarterly Financial Data (Unaudited)

The following table presents our unaudited quarterly consolidated results of operations for each of the eight quarters in the
two-year period ended December 31, 2014. The unaudited quarterly consolidated information has been derived from our unaudited
quarterly financial statements on Forms 10-Q, which were prepared on the same basis as our audited consolidated financial
statements. You should read the following table presenting our quarterly consolidated results of operations in conjunction with
our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The
operating results for any quarter are not necessarily indicative of the operating results for any future period.

Dec. 31,
2014

Sept. 30,
2014

Sept. 30,
June 30,
2014
2013
(In thousands, except per share data)

Mar. 31,
2014

Dec. 31,
2013

June 30,
2013

Mar. 31,
2013

Revenue

$276,869

$260,841

$250,043

$239,653 $237,008

$229,261

$220,086

$218,201

Cost of services (exclusive of facility rent
and depreciation and amortization)

221,137

209,737

202,057

189,738 187,843

186,172

175,913

176,061

Charge related to U.S. Government inquiry

—

33,000

Total expenses

257,229

245,546

236,401

215,306 211,893

208,972

196,794

228,955

Income (loss) from operations(1)

19,640

15,295

13,642

24,347

25,115

20,289

23,292

(10,754)

Income (loss) from continuing operations

$ 10,796

8,371

1,533

$ 13,041

$ 13,349

$ 10,642

$ 12,430

$ (10,763)

Loss from discontinued operations

Net income (loss)

(Loss) income attributable to
noncontrolling interests

Net income (loss) attributable to The
Ensign Group, Inc.

Income (loss) from continuing operations
attributable to the Ensign Group, Inc.

Loss from discontinued operations

Net income (loss) attributable to The
Ensign Group, Inc.

Basic income (loss) per share:

Income (loss) from continuing
operations attributable to The Ensign
Group, Inc.
Loss income from discontinued
operations

Net income (loss) attributable to the
Ensign Group, Inc.

Diluted income (loss) per share:
Income (loss) from continuing
operations attributable to The Ensign
Group, Inc.

—

10,796

—

8,371

—

(30)

(26)

(1,748)

1,533

13,041

13,349

10,612

12,404

(12,511)

(715)

(535)

(474)

(485)

(7)

148

(364)

$ 11,511

8,906

2,007

$ 13,526 $ 13,356

$ 10,464

$ 12,367

$ (12,147)

11,511

—

8,906

—

2,007

13,526

13,356

10,494

12,393

(10,399)

—

(30)

(26)

(1,748)

$ 11,511

8,906

2,007

$ 13,526

$ 13,356

$ 10,464

$ 12,367

$ (12,147)

0.51

0.40

0.09

0.61 $

0.61

0.48

0.57

(0.48)

—

(0.08)

0.51

0.40

0.09

0.61

0.48

0.57

(0.56)

0.49

0.38

0.09

0.60 $

0.59

0.47

0.55

(0.48)

Loss from discontinued operations

—

(0.08)

Net income (loss) attributable to the
Ensign Group, Inc.

Weighted average common shares
outstanding:

Basic

Diluted

(1)

0.49

0.38

0.09

0.60

0.59

0.47

0.55

(0.56)

22,519

23,378

22,415

23,186

22,259

22,960

22,168

22,028

22,582

22,507

21,941

22,409

21,859

22,321

21,768

(1) In the amount of Income (loss) from operations in 2014 includes additional Spin-Off related costs of approximately $5.8 million, consisting of $4.1 million
in repayment penalties and the write-off of unamortized debt discount and deferred financing costs upon retirement of outstanding debt in connection with the
Spin-Off and $1.7 million of recognized loss due to the discontinuance of cash flow hedge accounting for the related interest-rate swap; $9.0 million of transaction
costs associated with the Spin-Off. In addition, as part of the Spin-Off, we transferred real properties and entered into new lease agreements with CareTrust, which
resulted in additional rent expense of $32.7 million during the year ended 2014 and a reduction in depreciation expense.

The additional information required by this Item 8 is incorporated herein by reference to the financial statements set forth

in Item 15 of this report, Exhibits, Financial Statements and Schedules.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A. Controls and Procedures

(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. In designing and evaluating our disclosure controls
and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with the preparation of this Annual Report on Form 10-K our management evaluated, with the participation
of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, and to ensure that information required to be
disclosed is accumulated and communicated to our management, including our principal executive and financial officers, as
appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period
covered by this Annual Report on Form 10-K.

(b) Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined
in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is designed 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. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on our evaluation, our
management concluded that our internal control over financial reporting was effective as of the end of the period covered by this
Annual Report on Form 10-K.

Our independent registered public accounting firm, Deloitte & Touche LLP, has audited the consolidated financial statements
included in this Annual Report on Form 10-K and, as part of their audit, has issued an audit report, included herein, on the
effectiveness of our internal control over financial reporting. Their report is set forth below.

There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the
Exchange Act, that occurred during the fourth quarter of fiscal 2014 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

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(d) Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
The Ensign Group, Inc.
Mission Viejo, California

We have audited the internal control over financial reporting of The Ensign Group, Inc. and subsidiaries (the “Company”)
as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's
principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board
of directors, management, and other personnel 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. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material
effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2014, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2014 of the
Company and our report dated February 9, 2015 expressed an unqualified opinion on those financial statements and financial
statement schedule.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
February 9, 2015

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Item 9B.

Other Information

None.

Item 10. Directors, Executive Officers and Corporate Governance

Information Regarding Our Board of Directors

PART III.

Our amended and restated certificate of incorporation provides for a classified Board of Directors consisting of three classes
of directors, each serving staggered three-year terms and each class as nearly equal in number as possible as determined by our
Board of Directors. Accordingly, a portion of our Board of Directors is elected each year.

The following table and biographical information sets forth certain information with respect to our Board of Directors as of
February 2, 2015. The information presented below for each director includes the specific experience, qualifications, attributes
and skills that led us to the conclusion that such director should be nominated to serve on our Board of Directors in light of our
business.

Name

Position with the Company

Age

Roy E. Christensen

Co-founder, Chairman of the Board

Christopher R. Christensen
Lee A. Daniels
Dr. Antoinette T. Hubenette
Dr. John G. Nackel
Daren J. Shaw
Barry M. Smith

Co-founder, President, Chief Executive Officer and
Director
Director
Director
Director
Director
Director

46
58
66
63
58
62

Director
Since

Term
Expires

1999

1999
2013
2003
2008
2012
2014

2017

2015
2016
2016
2017
2015
2017

Roy E. Christensen has served as our Chairman of the Board since 1999 and currently serves on the Board’s quality assurance
and compliance committee. He served as our Chief Executive Officer from 1999 to April 2006. He is a 50-year veteran of the
long-term care industry, and was founder and Chairman of both Beverly Enterprises, Inc., a healthcare company, and GranCare,
Inc. (which later merged into Mariner Post-Acute Network, Inc.) a healthcare company. In 1994, he founded Covenant Care, Inc.,
a successful long-term care company, and served as its Chairman and Chief Executive Officer from 1994 to 1997. He was Chairman
of GranCare, Inc. from 1988 to 1993, and Chief Executive Officer of GranCare, Inc. from 1988 to 1991. He was a member of
President Nixon’s Healthcare Advisory Task Force on Medicare and Medicaid, and spent four years as a member of the Secretary
of Health, Education and Welfare’s Advisory Task Force during the Nixon Administration. We believe that Mr. Christensen’s
extensive experience in the skilled nursing industry and his proven leadership and business skills support the conclusion that he
should serve as one of our directors. Mr. Christensen is the father of our Chief Executive Officer, Christopher R. Christensen.

Christopher R. Christensen has served as our President since 1999 and our Chief Executive Officer since April 2006. Mr.
Christensen has concurrently served as a member of our Board of Directors since forming the Company in 1999 and currently sits
on the Board’s quality assurance and compliance committee. Prior to forming Ensign, Mr. Christensen served as acting Chief
Operating Officer of Covenant Care, Inc., a California-based provider of long-term care. Mr. Christensen has overseen our company
and its growth since our inception in 1999. We believe that Mr. Christensen’s important role in the history and management of
our company and its affiliates and his leadership and business skills, including his current position as Chief Executive Officer,
support the conclusion that he should serve as one of our directors. Mr. Christensen is the son of our Chairman of the Board, Mr.
Roy E. Christensen.

Lee A. Daniels is currently a professor of International Business and Marketing at the Marriott School of Management at
Brigham Young University where he has been teaching since 2004. Prior to joining the faculty at BYU, Mr. Daniels spent 25 years
in international business where he worked in over 30 countries. Mr. Daniels served as the Chief Executive Officer and Managing
Partner of Daniels Capital, LLC, an investment company that made private equity investments and other investments. Mr. Daniels
has also served as the Chief Executive Officer of Telecom 5, a Utah-based telecommunications company from 2004 to 2005,
President of Newbridge Capital, Japan from 2001 to 2004, President and Representative Director of Jupiter Telecommunications
Co., Ltd. from its merger with Titus Communications to 2000 and Titus Communications from 1998 to 2000. Mr. Daniels spent

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the majority of his career at AT&T where he served as President and Chief Executive Officer of AT&T Japan Ltd. from 1994 to
1998 and concurrently served as the Chairman of JENS, one of the first Internet Service Providers in Japan. Mr. Daniels has also
served on numerous boards in Japan and the United States, including Raser Technologies and Pro Image. Mr. Daniels received a
B.S. degree in Business Management from Brigham Young University, a Masters Degree in International Business from Sophia
University in Japan and completed the Executive Development Program at the J.L. Kellogg School of Management at Northwestern
University. We believe that Mr. Daniels’ extensive management and board experience and his proven leadership and business
capabilities support the conclusion that he should serve as one of our directors.

Antoinette T. Hubenette, M.D. has served as a member of our Board of Directors since June 2003. She currently serves as
Chairperson of the Board’s quality assurance and compliance committee, and also serves on the Board’s compensation and special
investigation committees. Dr. Hubenette is a practicing physician and the former President of Cedars-Sinai Medical Group in
Beverly Hills, California. She has been on the staff at Cedars-Sinai Medical Center since 1982. She has served as a director of
First California Bank, and its predecessor, Mercantile National Bank, since 1998, and she has served on the board of directors of
Cedars-Sinai Medical Care Foundation and GranCare, Inc. (which was later merged into Mariner Post-Acute Network, Inc.). She
is a member of numerous medical associations and organizations. We believe that Dr. Hubenette’s extensive board experience,
management experience in the healthcare industry and her proven leadership and business capabilities support the conclusion that
she should serve as one of our directors.

John G. Nackel, Ph.D. has served as a member of our Board of Directors since his election to the Board in June 2008. He
currently serves as Chairman of the Board's compensation committee, Chairman of the Special Investigation Committee, and also
serves on the Board's Audit and Quality Committees. Dr. Nackel is currently the Chairman and Chief Executive Officer of Three-
Sixty Advisory Group, LLC. Founded in 2007 by Dr. Nackel, Three-Sixty consults with leading health systems, payers, physicians,
medical technology companies, and other providers. Dr. Nackel is a 25-year veteran of Ernst & Young where he advised health
care companies in his role as a Global Managing Director of Health Care. Dr. Nackel served as President and Chief Executive
Officer of Salick Cardiovascular Centers, Inc. from January 2006 to February 2007 and Executive Vice President of U.S. Technology
from November 2003 to May 2005. During his career, Dr. Nackel has also served as a board member or chairman of several
privately held start-ups and emerging companies, including Visual Health Solutions, HealthTask, ConnectedHealth, NetStrike,
and Sertan, Inc. He earned his bachelor's degree at Tufts University, master's degrees in public health and industrial engineering
at the University of Missouri, and a Ph.D. in industrial engineering (health systems design) at the University of Missouri. He is a
fellow of the American College of Healthcare Executives (FACHE) and the Healthcare Information and Management Systems
Society (HIMSS). He is a senior member of the Institute of Industrial Engineers (IIE). We believe that Dr. Nackel’s extensive
experience as a consultant and an advisor to healthcare companies, his extensive board and management experience and his valuable
leadership and management insights support the conclusion that he should serve as one of our directors.

Daren J. Shaw has served as a member of our Board of Directors since March 2012. He currently serves as Chairman of the
Board’s audit committee and also serves on the Board’s nominating special committee and corporate governance and compensation
committees. Mr. Shaw has served for more than 33 years in leadership capacities with several financial services firms. He currently
serves in the Investment Banking Group at D.A. Davidson & Co., a middle-market full-service investment banking firm as a
Managing Director. During his term as Managing Director at D.A. Davidson & Co., Mr. Shaw has served on the Senior Management
Committee and Board of Directors and as the lead investment banker in a wide variety of transactions including public stock
offerings, private placements, and mergers and acquisitions. Mr. Shaw also served for 12 years with Pacific Crest Securities
(formerly known as Gallagher Capital Corp.), in various roles, including Managing Director. Mr. Shaw is also serving as a member
of the board of directors of Profire Energy, Inc., a NASDAQ company, and Cadet Manufacturing. We believe that Mr. Shaw’s
extensive experience and leadership in the financial services industry supports the conclusion that he should serve as one of our
directors.

Barry M. Smith has served as a member of our Board of Directors since 2014. He currently serves on the Board’s nominating
and corporate governance committee. Mr. Smith has served as Chairman and Chief Executive Officer of Magellan Health Services,
Inc., the nation’s largest provider of behavioral health services and a leading national provider of radiology benefit management
services, specialty pharmacy and prescription benefit management services, since 2013. He founded and served as chairman,
president and Chief Executive Officer of VistaCare, Inc., a national provider of hospice services, from 1996 to 2002, and he served
as chairman of VistaCare in 2003. From 1990 through 1995, Mr. Smith served as Chairman and Chief Executive Officer of Value
Rx, Inc., which was then one of the country’s largest pharmacy benefit management companies, and, prior to that, served as vice
president of operations for PCS Health Systems, also a pharmacy benefit management firm. Within the past five years Mr. Smith
also served on the board of directors of Inpatient Consultants, Inc., the nation’s largest provider of hospital services delivering
patient are in acute care hospitals. We believe Mr. Smith’s extensive experience as a proven and experienced leader in many
healthcare businesses that are closely related to our businesses as well as his valuable strategic and other management insights
support the conclusion that he should serve as one of our directors.

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Executive Officers

The following table presents information regarding our current executive officers. The information is current as of February

2, 2015:

Name

Christopher R. Christensen

Barry R. Port

Beverly B. Wittekind

Chad A. Keetch

Suzanne D. Snapper

Age

Position

46 President, Chief Executive Officer and Director

40 Chief Operating Officer, Ensign Services, Inc.

50 Vice President and General Counsel

37 Executive Vice President and Secretary

41 Chief Financial Officer

Information on the business background of Christopher Christensen is set forth above under “Information Regarding Our

Board of Directors.”

Barry R. Port has served as the Chief Operating Officer of our wholly-owned subsidiary, Ensign Services, Inc., which oversees
our skilled nursing and assisted living services, since January 2012. He previously served as the President of our subsidiary,
Keystone Care, Inc., which supervised the operations of facilities in Texas, from March 2006 to December 2011. Prior to 2006,
he served as the Executive Director and in other capacities at our Bella Vita Health and Rehabilitation Center (formerly Desert
Sky Health and Rehabilitation Center) skilled nursing and assisted living campus in Glendale, Arizona, from March 2004 to March
2006. Before joining Ensign in March 2004, Mr. Port served as Manager of Corporate Agreements for Sprint Corporation, a
telecommunications company, from 2001 to March 2004.

Beverly B. Wittekind has served as our Vice President and General Counsel since November 2009 and previously served as
our Corporate Compliance Officer and as Vice President and General Counsel of our wholly-owned subsidiary, Ensign Services,
Inc., which operates our Service Center, since 2002. Prior to joining the Company, she worked at Vista Hospital Systems, a non-
profit hospital system based in Corona, California, where she served as General Counsel, Chief Compliance Officer and Vice-
President of Risk and Litigation Management. Ms. Wittekind is a graduate of the University of Notre Dame Law School and began
her career in private practice at Snell & Wilmer and was a partner in the firm of Doyle, Winthrop, Oberbillig and West, both in
Phoenix, Arizona, where she specialized in the defense of healthcare providers in medical malpractice litigation.

Chad A. Keetch was appointed as our Executive Vice President and Secretary on June 1, 2014. Prior to 2014, he served as
our Vice President of Acquisitions and Business Legal Affairs and Assistant Secretary, where he was responsible for our acquisitions,
real estate matters, securities transactions and investor relations. Prior to joining the Company, Mr. Keetch was an attorney at Stoel
Rives LLP from September 2008 to March 2010 and Kirkland & Ellis LLP from September 2005 through September 2008, where
his practice emphasized mergers and acquisitions, leveraged buyouts, capital markets transactions and corporate governance issues.

Suzanne D. Snapper has served as our Chief Financial Officer since August 2009, and previously served as our Vice President
of Finance since joining Ensign in 2007. As Vice President of Finance, Ms. Snapper played a key role in taking the Company
public in 2007. She also oversaw the implementation of our internal controls over financial reporting. Prior to joining the Company,
she worked from 1996 to April 2007 as an accountant with KPMG LLP, where her practice included providing audit services for
public companies in the technology, transportation and quick serve restaurant industries. Ms. Snapper is a certified public
accountant.

Corporate Governance

Identification of Our Audit Committee

We have a separately designated standing audit committee established in accordance with the Exchange Act. Our audit
committee currently consists of Mr. Daren J. Shaw, Dr. John G. Nackel and Mr. Lee A. Daniels. Mr. Shaw serves as chairman of
the audit committee. Our Board of Directors has determined that all members of the audit committee are independent directors,
as defined in the NASDAQ listing standards and Rule 10A-3 of the Exchange Act. Each member of our audit committee can read,
and has an understanding of, fundamental financial statements. Our Board of Directors has determined that Mr. Shaw qualifies as
an “audit committee financial expert” as that term is defined in the rules and regulations established by the SEC. This designation
is a disclosure requirement of the SEC related to Mr. Shaw’s experience and understanding with respect to certain accounting and
auditing matters. The designation does not impose on Mr. Shaw any duties, obligations or liability that are greater than those

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generally imposed on him as a member of our audit committee and our Board of Directors, and his designation as an audit committee
financial expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of our
audit committee or board of directors.

Code of Conduct and Ethics

We have adopted a code of ethics and business conduct that applies to all employees, including employees of our
subsidiaries, as well as each member of our Board of Directors. The code of ethics and business conduct is available at our website
at www.ensigngroup.net under the Investor Relations section. We intend to satisfy any disclosure requirement under Item 5.05 of
Form 8-K regarding an amendment to, or waiver from, a provision of the code of ethics by posting such information on our website,
at the address specified above.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and officers, and persons who own more than ten percent of a
registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of
our equity securities. Officers, directors, and greater than ten percent stockholders are required to furnish us with copies of all
Section 16(a) forms they file. Based on our review of the copies of such forms we have received and written representations from
certain reporting persons that they filed all required reports, we believe that all of our officers, directors and greater than ten percent
shareholders complied with all Section 16(a) filing requirements applicable to them with respect to transactions during fiscal year
2014, with the exception of late filings by Ms. Wittekind reporting one transaction, which was subsequently reported on a Form
4 shortly after the occurrence of such transaction.

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Item 11. Executive Compensation

Compensation Discussion and Analysis

The following discussion and analysis provides information regarding our executive compensation objectives and principles,
procedures, practices and decisions, and is provided to help give perspective to the numbers and narratives that follow in the tables
in this section. This discussion will focus on our objectives, principles, practices and decisions with regards to the compensation
of Christopher R. Christensen, Suzanne D. Snapper, Chad A. Keetch, Beverly B. Wittekind and Barry R. Port(Named Executive
Officers).

Say on Pay

In 2014, we submitted our executive compensation program to a vote, on an advisory basis, of our stockholders and received
the support of approximately 90% of the shares of common stock present and eligible to vote at our 2014 annual meeting of
stockholders. The compensation committee considered the results of this stockholder advisory vote as one of many factors in
structuring its compensation practices in 2014. We pay careful attention to any feedback we received from our stockholders
regarding our executive compensation, including the say on pay vote. Given the support for the advisory vote on 2013 executive
compensation, the compensation committee determined the fundamental characteristics of the program should remain intact for
2014.

In consideration of the stockholder vote at our 2011 annual meeting, the Board of Directors has determined that the Company
will hold an advisory vote on executive compensation every year in connection with its annual meeting of stockholders. Accordingly,
we will conduct an advisory vote on executive compensation each year through 2017, when the next stockholder vote on the
frequency of say on pay votes is required under the Exchange Act, or until the Board of Directors otherwise determines that a
different frequency for such votes is in the best interests of our stockholders.

Compensation Policy and Objectives

We believe that compensation paid to our executive officers should be closely aligned with our performance and the performance
of each individual executive officer on both a short-term and a long-term basis, should be based upon the value each executive
officer provides to our company, and should be designed to assist us in attracting and retaining the best possible executive talent,
which we believe is critical to our long-term success. Because we believe that compensation should be structured to ensure that a
significant portion of compensation earned by executives will be directly related to factors that directly and indirectly influence
stockholder value, the “at risk” compensation of our executive officers generally constitutes a large portion of their total
compensation potential. In addition, commensurate with our belief that those of our employees who act like owners should have
the opportunity to become owners, many of our executive officers have a significant level of stock ownership, which we believe
aligns the incentives of the executive officers with the priorities of our stockholders. To that end, it is the view of our Board of
Directors and compensation committee that the total compensation program for executive officers should consist of the following:

• Base salary;

• Annual and other short-term cash bonuses;

• Long-term incentive compensation; and

• Certain other benefits.

The compensation committee believes that our executive compensation program has been appropriately designed to provide
a level of incentives that do not encourage our Named Executive Officers to take unnecessary risks in managing their respective
functions. As discussed above, a substantial portion of our Named Executive Officers' compensation is performance-based,
consistent with our approach to executive compensation. Our annual incentive compensation program is designed to reward annual
financial and/or strategic performance in areas considered critical to our short- and long-term success. In addition, we measure
performance on a variety of bonus criteria other than our profit to determine an executive's annual incentive compensation award,
such as positive survey results, clinical quality standards, positive patient feedback and feedback from other employees regarding
such executives' performance. We believe this discourages risk-taking that focuses excessively on short-term profits at the sacrifice
of our long-term health. Likewise, our long-term equity incentive awards are directly aligned with long-term stockholder interests
through their link to our stock price and multi-year ratable vesting schedules. In combination, the compensation committee believes
that the various elements of our executive compensation program sufficiently tie our executives' compensation opportunities to
our focus on sustained long-term growth and performance.

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In establishing our executive compensation packages, the compensation committee has historically reviewed compensation
packages of executives of companies in the skilled nursing industry based on publicly available information. Our compensation
committee has the sole authority to retain and terminate the services of a compensation consultant who reports to the compensation
committee. In 2009, our compensation committee engaged Steven Hall & Partners, a national consulting firm, to assist it in assessing
industry comparability and competitiveness of our executive compensation packages to assist the compensation committee in
establishing, developing and validating our executive compensation and incentive programs. The compensation committee
determined that it had sufficient information to make its own assessments regarding industry comparability and competitiveness
of our executive compensation packages for 2014 and elected not to engage a compensation consultant in 2014. The compensation
committee may determine to engage a compensation consultant in the future.

Principal Economic Elements of Executive Compensation

Base Salary. We believe it is important to pay our executives' salaries within a competitive market range in order to attract
and retain highly talented executives. Although historically we have not set executive salaries based upon any particular benchmarks,
we may from time to time generally review relevant market data to assist us in our compensation decision process. We have
historically validated our compensation decisions by comparing the compensation of executives at other public companies in the
skilled nursing industry to the compensation of our executives. Our compensation committee reviewed the published compensation
of the named executive officers of National Healthcare Corporation, Kindred Healthcare, Inc., Five Star Quality Care, Inc.,
Amedisys, Inc., Brookdale Senior Living Inc., Capital Senior Living Corp. and Skilled Healthcare Group, Inc. We believe that the
base salaries and the total compensation of our executives are comparable to the lower end of base salaries and median total
compensation of executives with similar positions at comparable companies. Each of our executive's base salary is generally
determined based upon job responsibilities, individual experience and the value the executive provides to our company. The
compensation committee considered each of these factors in determining the compensation each executive would be paid in 2014.
We may elect to change this practice in future years, and periodically in the past, the compensation committee has elected to employ
a compensation consultant to examine our compensation practices. The decision, if any, to materially increase or decrease an
executive's base salary in subsequent years will likely be based upon these same factors and others recommended by a compensation
consultant, if any. Our compensation committee makes decisions regarding base salary at the time the executive is hired, and makes
decisions regarding any changes to base salary on an annual basis.

Annual Cash Bonuses. We establish an executive incentive program each year, pursuant to which certain executives may
earn annual bonuses based upon our performance. Historically, in the first quarter of each year, our compensation committee
identifies the plan's participants for the year and establishes an objective formula by which the amount, if any, of the plan's bonus
pool will be determined. The committee also has the discretion to allocate the bonus pool among the individual executives prior
to the end of the year and any such early allocation will remain subject to further adjustments upon the final determination of the
bonus pool calculations during the first quarter of each year. This formula is based upon adjusted annual income before provision
for income taxes. Our compensation committee established the following formula for the 2014 bonus pool:

Adjusted Annual Income Before Provision for Income
Taxes (EBT) in 2014

Bonus Pool

For EBT up to $37.0 million

$—

For EBT greater than $37.0 million, but less than
$42.0 million
For EBT greater than $42.0 million, but less than
$47.0 million
For EBT greater than $47.0 million, but less than
$52.0 million
For EBT greater than $52.0 million, but less than
$62.0 million
For EBT greater than $62.0 million, but less than
$85.0 million
For EBT greater than $85.0 million

EBT between $37.0 million and $42.0 million * 2.5%

$0.125 million + (amount of EBT between $42.0 million
and $47.0 million * 5.0%)
$0.375 million + (amount of EBT between $47.0 million
and $52.0 million * 7.5%)
$0.750 million + (amount of EBT between $52.0 million
and $62.0 million * 10.0%)
$1.750 million + (amount of EBT between $62.0 million
and $85.0 million * 12.5%)
$4.625 million + (amount of EBT over $85 million * 15.0%)

Historically, in the first quarter of the subsequent year, our compensation committee subjectively allocates the bonus pool
among the individual executives based upon the recommendations of our Chief Executive Officer and the compensation committee's
perceptions of each participating executive's contribution to our financial, clinical and governance performance during the preceding

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year, and value to the organization going forward. The committee also has the discretion to allocate the bonus pool among the
individual executives prior to the end of the year and any such early allocation will remain subject to further adjustments upon the
final determination of the bonus pool calculations during the first quarter of each year. The financial measure that our compensation
committee considers is our adjusted annual income before provision for income taxes. The clinical measures that our compensation
committee considers include our success in achieving positive survey results and the five star performance. The governance
measure that our compensation committee considers includes succession planning and establishing a team made up of members
of the Board of Directors and management with the goal of creating a strategy for the Board of Directors which emulates the
culture of the organization. Our compensation committee also reviews and considers feedback from other employees regarding
the executive's performance. Our compensation committee exercises discretion in the allocation of the bonus pool among the
individual executives and has, at times, awarded bonuses that, collectively, were less than the bonus pool resulting from the
predetermined formula. For 2014, the compensation committee did not cap the executive bonus pool. Based upon the predetermined
formula, taking into account negative adjustments of $652,589 for the Company's clinical and governance performance, the bonus
pool for 2014 was $5,873,305. Bonuses for 2014 performance were allocated to the Named Executive Officers who participated
in the executive incentive program as follows: Christopher Christensen,1,354,372 , Suzanne Snapper, $1,014,571, Barry Port,
$1,104,882 and Chad Keetch, $712,827. Beginning in 2011, we implemented a policy for allocating executive bonus compensation
between cash and non-cash compensation, such that if the total executive pool is greater than $2.0 million, for every dollar greater
than $2.0 million, half of the incentive will be paid in cash and half will be paid in fully vested restricted stock awards. This
amount increased to $2.5 million in 2013. As the bonus pool was greater than $2.5 million in 2014, fully vested restricted bonus
stock awards were granted to the participating Named Executive Officers as follows: Christopher Christensen, $545,628, Suzanne
Snapper, $408,734, Barry Port, $445,118 and Chad Keetch, $287,173.

Each year, our compensation committee reviews our financial performance goals and may adjust the bonus pool formula at
its discretion to better align the amount available for annual executive bonuses with our objectives. Historically, the compensation
committee has increased the amount of adjusted annual income before provision for income taxes that must be achieved in order
to create the same bonus pool as the preceding year in order to increase the difficulty of receiving the same bonus. The allocation
of this bonus pool to the participating executives remains discretionary based upon the compensation committee's determination
of each participating executive's contribution to our annual performance and value to the organization going forward. The 2015
financial performance goals and bonus pool formula have been established by the compensation committee consistent with historical
practices. The 2015 plan includes specific governance performance goals, which include succession planning and establishing a
capital market strategy. In addition, the compensation committee has continued the “clawback” policy previously established,
which allows our Board to recover performance-based compensation paid to our executives under our executive incentive plan in
certain circumstances where there has been a restatement of the Company's financial results or where subsequent events diminish
the performance metrics, including clinical results, upon which the prior incentive payments were based.

Long-Term Incentive Compensation. We believe that long-term performance is achieved through an ownership culture.
Accordingly, we encourage long-term performance by our executives and other key personnel throughout the organization through
the use of stock-based awards, and to this end, our compensation committee has in the past administered our incentive plans
consistently in terms of frequency and number of grants. We have adopted the 2001 Stock Option, Deferred Stock and Restricted
Stock Plan, the 2005 Stock Incentive Plan and the 2007 Omnibus Incentive Plan. These plans permit the grant of stock, stock
options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other stock-based awards.
Historically, we have generally issued stock options and restricted stock under these plans.

Although we do not have formal stock ownership guidelines for our executives, in order to preserve the linkage between the
interests of executives and other key personnel and those of stockholders, we focus on granting stock options to those executives
and others who do not already have a significant level of stock ownership. Our executives who have significant levels of stock
ownership are not permitted to hedge the economic risk of such ownership. We intend to continue to provide long-term awards
through the granting of stock based awards. Beginning in 2011, we implemented a policy for allocating executive bonus
compensation between cash and non-cash compensation. Under this policy, if the total executive pool is greater than $2.0 million,
for every dollar greater than $2.0 million, half of the incentive will be paid in cash and half will be paid in fully vested restricted
stock awards. This amount increased to $2.2 million in 2012, to $2.5 million in 2013 and $2.75 million in 2014. The individuals
receiving these awards will be required to hold them for two years from the end of the calendar year for which they are earned.
The ownership and restriction on the restricted stock awards will not terminate upon separation of the individual from the Company.

Except with respect to grants to our directors and other stock grants issued pursuant to the executive incentive plan, the stock
options and restricted stock awards that we grant generally vest as to 20% of the shares of common stock underlying the option
or restricted stock award on each anniversary of the grant date. If a recipient’s employment with us terminates, then the restricted
stock that remains unvested as of the date of the termination of the recipient’s employment will be forfeited without compensation.
Until vested, the restricted stock may not be transferred, and vested shares shall be subject to our insider trading policy. Stock

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options generally have a maximum term of ten years. The grant dates of our stock options and restricted stock awards are generally
the date our Board of Directors or compensation committee meets to approve such stock option grants or restricted stock awards.
Our Board of Directors or compensation committee historically has approved stock-based awards at regularly scheduled meetings.
Our Board of Directors and compensation committee intend to continue this practice of approving the majority of stock-based
awards at regularly scheduled meetings on a quarterly basis, unless earlier approval is required for a new-hire inducement or
position change grant; regardless of whether or not our Board of Directors or compensation committee knows material non-public
information on such date. The exercise price of our stock options is the fair market value of our common stock on the date of grant
as determined by the closing price of our common stock on the NASDAQ Global Select Market on the date of grant. Prior to the
exercise of an option, the holder has no rights as a stockholder with respect to the shares of common stock underlying the option,
including voting rights and the right to receive dividends or dividend equivalents. However, the recipients of restricted stock will
have the right to vote and to receive any dividends or other distributions paid with respect to their shares of restricted stock, whether
vested or unvested.

Mr. Christopher Christensen historically has made recommendations to our compensation committee and Board of Directors
regarding the amount of stock options and other compensation to grant to our other executives based upon his assessment of their
performance, and may continue to do so in the future. Our executive officers, however, do not have any role in determining the
timing of our stock option grants.

Although we do not have any formal policy for determining the amount of stock-based awards or the timing of our stock-
based awards, we have historically granted stock options or restricted stock to high-performing employees (i) in recognition of
their individual achievements and contributions to our company, and (ii) in anticipation of their future service and achievements.

Other Compensation. Our executives are eligible to receive the same benefits that are available to all employees. In addition,
we pay the premiums to provide life insurance equal to each executive's annual salary and the premiums to provide accidental
death and dismemberment insurance. For 2014, Christopher Christensen and Barry Port received automobile allowances of $15,900
and $11,000, respectively, and third-party tax service payments of $11,553 and $2,981, respectively.

Special Bonus. On June 1, 2014, we completed the separation of our healthcare business and our real estate business into two
separate and independent publicly traded companies through the distribution of all of the outstanding shares of common stock of
CareTrust. As a result, the compensation committee made approximately $3.9 million of special bonus awards, consisting of cash
and unvested option awards, to certain of the Named Executive Officers in 2014 as follows: Christopher Christensen,$1.2 million,
Suzanne Snapper, $1.3 million, Barry Port, $0.4 million, Chad Keetch, $0.8 million and Beverly Wittekind, $0.1 million. These
awards were made by the compensation committee primarily in recognition of the successful completion of the Spin-Off.

Tax Treatment of Compensation

Internal Revenue Code Section 162(m) limits the amount that we may deduct for compensation paid to our principal executive
officer and to each of our three most highly compensated officers (other than our principal financial officer) to $1.0 million per
person, unless certain exemption requirements are met. Exemptions to this deductibility limit may be made for various forms of
performance-based compensation. The compensation committee believes that in certain circumstances factors other than tax
deductibility take precedence when determining the forms and levels of executive compensation most appropriate and in the best
interests of us and our stockholders. Given our changing industry and business, as well as the competitive market for outstanding
executives, the compensation committee believes that it is important to retain the flexibility to design compensation programs
consistent with its overall executive compensation philosophy even if some executive compensation is not fully deductible. We
believe the majority of our payments in fiscal 2014 would be considered qualified performance-based compensation under Section
162(m). In 2014, Mr. Port was paid compensation subject to Section 162(m) of approximately $1.05 million.

In addition to salary and bonus compensation, upon the exercise of stock options that are not treated as incentive stock options,
the excess of the current market price over the option price, or option spread, is treated as compensation and, accordingly, in any
year, such exercise may cause an officer's total compensation to exceed $1.0 million. Under certain regulations, option spread
compensation from options that meet certain requirements will not be subject to the $1.0 million cap on deductibility. While the
compensation committee cannot predict how the deductibility limit may impact our compensation program in future years, the
compensation committee intends to maintain an approach to executive compensation that strongly links pay to performance.

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COMPENSATION COMMITTEE REPORT

Our compensation committee has reviewed the foregoing Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K and discussed the Compensation Discussion and Analysis with our management. Based on such review and
discussions with management, the compensation committee recommended to our Board that the foregoing Compensation
Discussion and Analysis be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Submitted by:

Dr. John G. Nackel (Chair)
Daren J. Shaw
Lee A. Daniels
Dr. Antoinette T. Hubenette
Members of the Compensation Committee

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Executive Compensation

The following table shows information regarding the compensation earned during the fiscal year ended December 31, 2014

by our Named Executive Officers.

Summary Compensation Table

Name and Principal Position

Year

Salary
($)

Bonus
($)(1)

Option
Awards
($)(2)

Stock
Awards
($)(3)

Non-Equity
Incentive Plan
Compensation
($)(4)

Other
Compensation
($)

Total ($)

Christopher R. Christensen

2014

452,840

500,000

738,301 (1)

545,595

1,354,405

36,670 (5)

3,627,811

Chief Executive Officer
and President

Suzanne D. Snapper

Chief Financial Officer

2013
2012

2014
2013
2012

437,914
425,159

295,485
265,225
257,500

—
—

500,000

843,773 (1)

— 114,264
— 28,440

—
126,280

408,691
91,402
100,951

441,446
848,500

18,242
18,000

1,014,614
275,000
521,565

5,419 (6)
1,352
2,113

897,602
1,417,939

3,067,982
747,243
910,569

Chad A. Keetch(a)

2014

246,033

300,000

527,358 (1)

287,169

712,831

1,720 (7)

2,075,111

Executive Vice President
and Secretary

Beverly B. Wittekind
Vice President and
General Counsel

Barry R. Port

Chief Operating Officer,
Ensign Services, Inc.

2014
2013
2012

391,006
382,890
319,300

312,658
309,000
300,000

300,000
110,000
100,000

52,730 (1)
21,530
34,980

350,000

—
— 403,141
— 98,340

—
16,852
28,848

445,082
821,250
189,086

—
—
—

3,707 (8)
2,557
2,896

747,443
533,829
486,024

1,104,918
375,000
726,464

18,354 (9)
12,417
12,413

2,231,012
1,920,808
1,326,303

(a) Mr. Keetch was designated as an executive officer on June 1, 2014 when he became Executive Vice President and Secretary.

(1) For 2014, the compensation committee made approximately $3.9 million of special bonus awards, consisting of cash
and option awards, to the Named Executive Officers partially in recognition of the successful completion of the Spin-
Off. Including in Beverly Wittekind's amount is a $50,000 of special bonus related to the Spin-off and an annual
discretionary bonus of $250,000. See further description under the heading "Compensation Discussion and Analysis--
Principal Economic Elements of Executive Compensation--Special Bonus." The special Spin-Off bonus awards were
as follows:

Name

Christopher R. Christensen

Suzanne D. Snapper

Chad A. Keetch

Beverly B. Wittekind

Barry R. Port

Special Cash
Bonus ($)

Special
Option
Awards

Total Special
Bonus ($)

500,000

300,000

50,000

350,000

738,301

843,773

527,358

52,730

—

1,238,301

1,343,773

827,358

102,730

350,000

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(2) The amounts shown are the amounts of total compensation cost to be recognized by us over the vesting period related
to options to purchase common stock which were granted during fiscal year 2014, as a result of the adoption of ASC
718. These amounts disregard the estimated forfeiture rate which is considered when recognizing the ASC 718 expense
in the consolidated financial statements. These awards are not immediately exercisable and vest over five years. For
a discussion of valuation and forfeiture assumptions, see Note 19, Options and Awards in the Notes to Consolidated
Financial Statements.

(3) The amounts shown are the amounts of compensation cost to be recognized by us related to restricted stock awards
which were granted during fiscal year 2013 and 2012, as a result of the adoption of ASC 718. These amounts disregard
the estimated forfeiture rate which is considered when recognizing the ASC 718 expense in the consolidated financial
statements. For a discussion of valuation and forfeiture assumptions, see Note 19, Options and Awards in the Notes
to Consolidated Financial Statements. In addition, a portion of the bonuses paid under the executive incentive plan
to Christopher Christensen in 2014 and 2012, Suzanne Snapper in 2014 and 2012, Chad Keetch in 2014 and Barry
Port in 2014 and 2012, was in the form of fully vested stock awards. See further discussion under the heading
"Compensation Discussion and Analysis--Principal Economic Elements of Executive Compensation."

(4) The amounts shown in this column constitute the cash bonuses made to certain Named Executive Officers. Christopher
Christensen, Suzanne Snapper, Chad A. Keetch and Barry Port participated in our executive incentive program. These
awards are discussed in further detail under the heading "Compensation Discussion and Analysis--Principal Economic
Elements of Executive Compensation."

(5) Consists of term life insurance and accidental death and dismemberment insurance payments of $747, a matching
contribution to The Ensign Group, Inc. 401(k) retirement plan of $8,470, third-party tax service payments of $11,553
and a car allowance of $15,900.

(6) Consists of term life insurance and accidental death and dismemberment insurance payments of $304 and a matching

contribution to The Ensign Group, Inc. 401(k) retirement plan of $5,116.

(7) Consists of term life and accidental death and dismemberment insurance payments of $220 and a matching contribution

to The Ensign Group, Inc. 401(k) retirement plan of $1,500.

(8) Consists of term life insurance and accidental death and dismemberment insurance payments of $944 and a matching

contribution to The Ensign Group, Inc. 401(k) retirement plan of $2,763.

(9) Consists of term life insurance and accidental death and dismemberment insurance payments of $332, a matching
contribution to The Ensign Group, Inc. 401(k) retirement plan of $4,040, third-party tax service payments of $2,981
and a car allowance of $11,000.

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Table of Contents

Grants of Plan-Based Awards - 2014

The following table sets forth information regarding grants of plan-based awards made to our Named Executive Officers

during 2014.

Name

Christopher R. Christensen

Suzanne D. Snapper

Chad A. Keetch

Beverly B. Wittekind

All Other Option
Awards: Number
of Securities
Underlying
Options (#)

Exercise
or Base
Price of
Option
Awards
($/Sh)

Grant Date
Fair Value
of Options
or Stock
Awards ($)

64,155 (1) $ 25.70

738,301 (2)

73,320 (1) $ 25.70

843,773 (2)

45,825 (1) $ 25.70

527,358 (2)

4,582 (1) $ 25.70

52,730 (2)

Grant Date

5/29/2014

(1) Represents stock option awards granted as part of the special bonus related to the Spin-Off.

(2) The amounts shown are the aggregate fair value of the stock option awards which were granted in fiscal year 2014,
which will be recognized over the five year vesting period, as a result of adoption of ASC 718. These amounts
disregard the estimated forfeiture rate which is considered when recognizing the ASC 718 expense in the
consolidated financial statements. For a discussion of valuation and forfeiture assumptions, see Note 19, Options
and Awards in the Notes to Consolidated Financial Statements.

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Table of Contents

Outstanding Equity Awards at Fiscal Year-End - 2014

The following table lists the outstanding equity incentive awards held by our Named Executive Officers as of

December 31, 2014.

Option Awards

Stock Awards

Number
of
Options
Awards
Granted

(4)

Number
of
Options
Awards

Vested

Number of
Securities
Underlying
Unexercised
Options
Exercisable

Number of
Securities
Underlying
Unexercised
Options
Unexercisable

(#)(1)(2)

(#)(2)

Option
Exercise
Price

($)(4)

Grant

Date

Number of
Shares or
Units of
Stock
That Have
Not Vested

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested

Number of
Shares or
Units of
Stock That
Have Vested

Option
Expiration

Date

(#)

($)(3)

(#)

Name

Christopher R.
Christensen

Suzanne D. Snapper

Chad A. Keetch

2/15/2012

3/14/2013

—

5/29/14

64,155

(6)

1/22/2008

10/29/2008

1/29/2009

4/30/2009

7/23/2009

12/17/2009

5/25/2010

10/14/2010

2/2/2011

3/5/2011

8/11/2011

10/27/2011

2/15/2012

10/31/2012

3/4/2013

6/12/2013

8/1/2013

10/29/2013

32,077

10,998

27,495

10,998

18,330

—

4,582

—

3,666

—

4,582

1,833

5/29/2014

73,320

(6)

5/25/2010

2/2/2011

8/11/2011

10/27/2011

2/8/2012

7/6/2012

10/31/2012

6/12/2013

10/29/2013

—

916

9,165

3,666

4,582

1,833

5/29/2014

45,825

(6)

—

9,900

10,998

27,495

10,998

18,330

—

2,749

—

916

366

—

549

3,666

1,466

916

366

—

9,900

3,300

10,998

27,495

10,998

18,330

—

2,749

—

2,200

—

916

366

—

549

3,666

1,466

916

366

—

Beverly B. Wittekind

11/1/2006

18,330

Barry R. Port

7/26/2006

1/22/2008

1/29/2009

7/23/2009

5/25/2010

10/27/2011

5/15/2013

10/29/2013

5/29/2014

12/17/2009

3/11/2010

5/25/2010

7/29/2010

10/14/2010

2/2/2011

5/26/2011

9,165

7,332

5,499

7,332

—

3,666

5,499

1,833

4,582

14,664

10,998

—

9,165

7,332

5,499

7,332

—

2,199

366

—

14,664

8,798

—

9,165

7,332

5,499

7,332

—

2,199

366

—

14,664

8,798

—

111

—

64,155 $

25.70

5/29/2024

— $

—

1,833

—

1,466

—

3,666

1,467

73,320

—

367

5,499

2,200

3,666

1,467

45,825

— $

—

1,467

3,300

1,467

4,582

—

2,200

—

6.02

8.11

9.11

8.46

8.69

8.12

—

1/22/2018

10/29/2018

1/29/2019

4/30/2019

7/23/2019

12/17/2019

—

12.83

10/27/2021

—

15.91

10/31/2022

—

19.49

21.18

22.98

25.70

—

12.83

14.76

15.72

15.91

19.49

22.98

25.70

3.14

4.09

6.02

9.11

8.69

—

12.83

13.12

22.98

25.70

8.12

9.53

—

6/12/2023

8/1/2023

10/29/2023

5/29/2024

—

10/27/2021

2/8/2022

7/6/2022

10/31/2022

6/12/2023

10/29/2023

5/29/2024

11/1/2015

7/26/2016

1/22/2018

1/29/2019

7/23/2019

—

10/27/2021

5/15/2022

10/29/2023

5/29/2024

12/17/2019

3/11/2020

—

400

800

600

—

800

400

—

480

—

800

320

—

200

600

800

1,200

480

800

320

—

300

320

720

320

—

400

1,600

800

—

17,756

35,512

26,634

—

35,512

17,756

—

21,307

—

35,512

14,205

—

8,878

26,634

35,512

3,551

53,268

21,307

35,512

14,205

—

9,075

3,844

(5)

—

1,600

3,200

900

8,695

(5)

1,200

600

6,044

(5)

320

2,363

(5)

200

—

800

900

1,200

120

800

320

200

—

13,317

1,200

14,205

31,961

14,205

—

17,756

71,024

35,512

480

—

1,600

2,400

1,200

Table of Contents

10/27/2011

2/15/2012

7/6/2012

10/31/2012

9,165

—

9,165

3,666

3/4/2013

45,825

3/14/2013

—

5,499

—

3,666

1,466

9,165

—

5,499

—

3,666

1,466

9,165

—

3,666

—

5,499

2,200

36,660

—

12.83

10/27/2021

—

15.72

15.91

17.92

—

7/6/2022

10/31/2022

3/4/2023

—

800

—

1,200

480

—

35,512

—

53,268

21,307

—

20,000

887,800

1,200

19,341

800

320

—

3,291

5,000

(1) All options granted under the Company's 2001 and 2005 Plans held by our Named Executive Officers may be early

exercised.

(2) Options vest in equal annual installments (20% each year) on the anniversary of the date of grant with the exercised

portion of partially exercised options vesting prior to the unexercised portion of such options.

(3) The market value of these shares at December 31, 2014 was $44.39.

(4) Effective with the Spin-Off, the holders of our stock options on the record date for the Spin-Off received stock options
consistent with a conversion ratio that was necessary to maintain the pre Spin-Off intrinsic value of the options. In order
to preserve the aggregate intrinsic value of our stock options held by such persons, the exercise prices and number of
options outstanding of such awards were adjusted by using the proportion of the CareTrust when-issued closing stock
price to the total Company closing stock price on the distribution date for the Spin-Off.

(5) Represents the number of shares of our common stock awarded in lieu of a cash bonus payable under our executive

incentive plan. These shares were fully vested on the grant date.

(6) These were stock option awards granted as part of the special bonus related to the Spin-Off.

(7) The restricted stock awards do not expire.

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Table of Contents

Option Exercises and Stock Vested - 2014

The following table provides information for our Named Executive Officers about options that were exercised

and restricted stock that vested in 2014.

Option Awards

Stock Awards

Number
of
Options
Awards
Granted

Number
of
Options
Awards
Vested

(3)

(#)

Number
of Shares
Acquired
on
Exercise

Stock
Price on
Exercise
Date

Value
Realized
on
Exercise

Number
of Shares
or Units
of Stock
Granted

(#)

($)(2)

($)

(#)

Number
of Shares
Acquired
on
Vesting

Stock
Price
on
Vest
Date

Value
Realized
on
Vesting

(#)

($)(1)

($)

Vest

Date

Exercise

Date

—

Name

Christopher R.
Christensen

Suzanne D.

Snapper

Chad A. Keetch

Beverly B.
Wittekind

Barry R. Port

Grant

Date

—

5/25/2010

2/2/2011

6/12/2013

8/1/2013

8/11/2011

10/14/2010

10/27/2011

10/29/2013

10/31/2012

1/22/2008

10/29/2008

7/31/2008

10/29/2008

7/31/2008

1/22/2008

—

32,077

10,998

12,831

10,998

12,831

32,077

—

32,077

10,998

12,831

10,998

12,831

4,500

—

6/9/2014

6/10/2014

6/11/2014

6/12/2014

6/13/2014

5,598

7,598

7,710

100

5,121

6,079

6,000

4,500

30.23

29.64

29.50

29.17

28.52

28.56

169,228

225,205

228,524

2,950

149,380

177,324

171,120

128,520

—

2,000

1,500

1,000

2,000

5/25/2014

2/2/2014

6/12/2014

8/1/2014

8/11/2014

4,000

10/14/2014

1,000

10/27/2014

400

800

10/29/2014

10/31/2014

—

1,500

2,000

1,000

2,000

200

400

800

1,200

1,500

800

400

—

2/2/2014

2/8/2014

5/25/2014

6/12/2014

7/26/2014

8/11/2014

10/27/2014

10/29/2014

10/31/2014

5/15/2014

5/25/2014

10/27/2014

10/29/2014

2,000

5/25/2014

5/26/2014

7/26/2014

7/29/2014

10/14/2014

10/27/2014

800

10/31/2014

7/26/2006

10/29/2008

7/26/2006

10/29/2008

107,147

18,330

107,147

18,330

107,147

11/12/2014

11,623

11/13/2014

11/17/2014

7,384

6,800

40.24

40.49

39.62

467,710

298,978

269,416

18,330

11/19/2014

12,200 $

38.65

471,530

107,147

11/14/2014

11/18/2014

9,215

4,570

40.22

39.27

370,627

179,464

18,330

11/18/2014

6,130 $

39.27

240,725

—

113

400

300

200

400

800

200

$23.94

$22.87

$28.60

$32.82

$34.60

$34.19

$35.81

$37.61

160

$38.72

—

300

400

200

400

—

$22.87

$21.09

$23.94

$28.60

$32.63

$34.60

$35.81

$37.61

160

$38.72

240 $22.74

300 $23.94

160 $35.81

80 $37.61

—

9,576

6,861

5,720

6,564

13,840

27,352

7,162

3,009

6,195

—

6,861

8,436

4,788

5,720

13,052

13,840

1,432

3,009

6,195

5,458

7,182

5,730

3,009

400 $23.94

9,576

400

160

—

$32.63

$32.96

$34.19

$35.81

$38.72

13,052

13,184

13,676

14,324

6,195

—

4,000

2/2/2014

800 $22.87

18,296

25,000

3/14/2014

5,000 $22.29

111,450

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(1) The aggregate value realized upon the vesting of the stock award is based upon the aggregate market value of the vested

shares of our common stock on the vesting date.

(2) The aggregate value realized upon the exercise of the stock option award is based upon the aggregate market value of

the exercised shares of our common stock on the exercise date.

(3) Effective with the Spin-Off, the holders of our stock options on the record date for the Spin-Off received stock options
consistent with a conversion ratio that was necessary to maintain the pre Spin-Off intrinsic value of the options. In order
to preserve the aggregate intrinsic value of our stock options held by such persons, the exercise prices and number of
options outstanding of such awards were adjusted by using the proportion of the CareTrust when-issued closing stock
price to the total Company closing stock price on the distribution date for the Spin-Off.

Change-in-Control and Severance Disclosure

We have not entered into any arrangements providing for payments or benefits in connection with the resignation, severance,
retirement or other termination of any of our Named Executive Officers, changes in their compensation or a change in control.
However, the administrator of our equity incentive plans has the authority to accelerate the vesting of options and restricted stock,
in certain circumstances, subject to the terms of the plans.

Director Compensation - 2014

We do not compensate our non-employee directors other than for their service on our Board of Directors or its committees.
Historically, we have compensated our non-employee board members based upon what we considered to be fair compensation.
Compensation for board and committee service is now partially based upon relevant market data that we obtain by reviewing
director compensation by public companies in the skilled nursing industry. To establish board compensation, our compensation
committee reviews the published director compensation information of other skilled nursing companies, including National
Healthcare Corporation, Kindred Healthcare, Inc., Five Star Quality Care, Inc., Amedisys, Inc., Brookdale Senior Living Inc.,
Capital Senior Living Corp. and Skilled Healthcare Group, Inc. Based on these reviews, the compensation committee sets its
annual retainers for outside directors and the chairman of the board and retainers to the chairpersons of each committee at levels
that we believe are comparable to the median cash compensation paid to directors of these companies and the cash compensation
payable to the chairman of our board is approximately equal to or less than the median cash compensation paid to the chairpersons
of the boards of directors of these other companies who receive compensation for their role as chairpersons of the board and who
are not also serving as the chief executive officers of such companies. We have employed this methodology to set compensation
for our non-employee directors for 2014.

Prior to completing our initial public offering in 2007, we made only two stock option grants to our non-employee directors,
which vested immediately upon the grant date. Our 2007 Omnibus Incentive Plan contains an automatic stock grant program for
our directors. Each non-employee director first elected to a three-year term prior to March 1, 2012 received an automatic stock
grant for 900 shares of common stock, on the date he or she was appointed, elected or re-elected (Automatic Stock Grant Program).
In addition, on a quarterly basis, each non-employee director first elected to a three-year term prior to March 1, 2012 received an
automatic stock grant of 900 shares on the 15th day of the month subsequent to quarter end. Further, under the terms of our 2007
Omnibus Incentive Plan, each non-employee director first elected to a three-year term subsequent to March 1, 2012 will receive
a restricted stock grant of 750 shares on the 15th day of the month subsequent to quarter end, which vest over a three-year period,
beginning with the first anniversary of the grant date. Directors elected to fill less than a three-year term will receive a pro rata
stock award. All unvested restricted stock grants will become fully vested on the date any such non-employee directors ceases
serving on the board unless such director is removed for cause. Pursuant to the Automatic Stock Grant Program, Board members
receiving stock grants must maintain ownership of a minimum of thirty-three percent (33%) of the cumulative shares granted to
him or her. Our Board of Directors and compensation committee considered the total compensation paid to directors of the
companies named above in deciding to award these automatic stock awards. However, our Board of Directors and compensation
committee determined the amount of stock awards based upon what they considered to be an appropriate incentive for board
service to our company, and they did not attempt to base this number upon the amount awarded to directors of these other companies.
Our Board has also determined that it may be necessary to provide additional incentives to prospective directors in order to recruit
talented leaders to serve on the Board.

Starting in 2015, each non-employee director first elected prior to March 1, 2012 that is currently serving a three-year term
will begin receiving an automatic stock grant of 750 shares on the 15th day of the month in the subsequent quarter after their
current term expires and upon re-election to a new three-year term.

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The following table sets forth a summary of the compensation earned by our non-employee directors and Chairman in 2014.
Our Chief Executive Officer, who currently serves as a director, does not receive any additional compensation for such service.

Name

Roy E. Christensen
Antoinette T. Hubenette
John G. Nackel
Daren J. Shaw
Barry M. Smith
Lee A. Daniels

Fees

Stock

Earned

Awards

Option
Awards

All Other
Compensation

($)

($)(1)

($)(2)

($)

Total

($)

—

101,236
—
67,000 136,953 105,472
63,000 136,953 105,472
105,472
114,128
48,630
—
52,730
114,128

68,500
31,500
47,500

1,236 (3)
—
—
—
—
—

102,472
309,425
305,425
288,100
80,130
214,358

(1) This column reflects the total dollar amount to be recognized for financial statement reporting purposes with respect to
the fair value of the stock awards granted to each of the directors during the 2014 fiscal year in accordance with Accounting
Standard Codification (ASC) 718, Stock Compensation. Dr. John G. Nackel and Dr. Antoinette T. Hubenette each received
grants of 900 stock awards on January 15, 2014, April 15, 2014, July 15, 2014 and October 15, 2014. Messrs. Daren J.
Shaw and Lee A. Daniels received grants of 750 restricted awards on January 15, 2014, April 15, 2014, July 15, 2014
and October 15, 2014. Mr. Barry M. Smith received grants of 750 restricted awards on July 15, 2014 and October 15,
2014. The fair value of these stock awards on the grant dates was $44.71 on January 15, 2014, $42.62 on April 15, 2014,
$30.751 on July 15, 2014 and $34.09 on October 15, 2014. Stock awards granted to Dr. Nackel and Dr. Hubenette are
immediately vested upon the grant date and therefore, compensation expense was recognized in full on the date these
awards were granted. Awards granted to Messrs. Shaw, Smith and Daniels vest over a three-year period beginning on
the first anniversary of the grant date and therefore, compensation expense is recognized ratably over the vesting period.
As of December 31, 2014, Mr. Shaw, Mr. Smith and Mr. Daniels held 5,500, 1,500 and 3,000 unvested restricted awards,
respectively.

(2) On May 29, 2014, Dr. John G. Nackel received unvested stock option awards of 9,165; Dr. Antoinette T. Hubenette
received unvested stock option awards of 9,165; and Mr. Lee Daniels received unvested stock option awards of 4,582 as
a result of the successful completion of the Spin-Off. This column reflects the total dollar amount to be recognized for
financial statement reporting purposes with respect to the fair value of the stock awards granted to each of the directors
during the 2014 fiscal year in accordance with Accounting Standard Codification (ASC) 718, Stock Compensation. These
amounts disregard the estimated forfeiture rate which is considered when recognizing the ASC 718 expense in the
consolidated financial statements. For a discussion of valuation and forfeiture assumptions, see Note 19, Options and
Awards in the Notes to Consolidated Financial Statements. The stock option awards vest over a three-year period and
therefore, compensation expense is recognized ratably over the vesting period. As of December 31, 2014, Dr. Hubenette
held options to purchase 12,831 shares of common stock, Dr. Nackel held options to purchase 9,165 shares of common
stock and Mr. Lee Daniels held options to purchase 4,582 shares of common stock.

(3) Consists of term life insurance and accidental death and dismemberment insurance payments of $1,236.

Compensation Committee Interlocks and Insider Participation

Our compensation committee currently consists of Dr. John G. Nackel, Messrs. Daren J. Shaw, and Lee A. Daniels and
Dr. Antoinette T. Hubenette. None of the members of our compensation committee at any time has been one of our officers or
employees. None of our executive officers currently serves, or during 2014 has served, as a member of the Board of Directors or
compensation committee of any entity that has one or more executive officers on our Board of Directors or compensation committee.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information known to us with respect to beneficial ownership of our common stock as of
December 31, 2014 for (i) each director, (ii) each holder of 5.0% or greater of our common stock, (iii) our Named Executive
Officers, and (iv) all executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules and regulations of the SEC. Shares subject to options that
are exercisable within 60 days following December 31, 2014 are deemed to be outstanding and beneficially owned by the optionee
for the purpose of computing share and percentage ownership of that optionee, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person. The percentage of shares beneficially owned is based on 22,591,099
shares of common stock outstanding as of December 31, 2014. Except as affected by applicable community property laws, all
persons listed have sole voting and investment power for all shares shown as beneficially owned by them.

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Name of Beneficial Owner

Named Executive Officers And Directors:
Christopher R. Christensen(2)
Suzanne D. Snapper(3)
Chad A. Keetch(4)
Beverly B. Wittekind(5)
Barry R. Port(6)
Roy E. Christensen(7)
Antoinette T. Hubenette(8)
John G. Nackel(9)
Daren J. Shaw(10)
Lee A. Daniels(11)
Barry M. Smith

All Executive Officers and Directors as a Group (11 Persons)(12)

Five Percent Stockholders:
FMR LLC(13)
Blackrock, Inc.(14)
Wasatch Advisors, Inc.(15)
The Vanguard Group(16)

* Means less than 1%.

Number of Shares
Beneficially
Owned(1)

Percentage
of Class

1,058,090
117,462
20,764
72,146
93,270
614,706
20,079
42,800
8,000
4,584
1,500
2,053,401

1,983,700
1,859,809
1,551,556
1,279,222

4.7%
*
*
*
*
2.7%
*
*
*
*
*
9.0%

8.8%
8.2%
6.9%
5.7%

(1)

Includes shares of restricted stock that have vested. Restricted stock may not be disposed of until vested and is subject
to repurchase by us upon termination of service to us. We do not treat restricted stock awards as outstanding until such
shares have vested.

(2) Represents 1,039,000 shares held by Hobble Creek Investments, of which Christopher Christensen is the sole member,
12,919 shares held by Mr. Christensen directly, 2,171 shares held by Christopher Christensen's spouse, and 4,000 shares
held by Mr. Christensen's former spouse as custodian for their minor children under the California Uniform Transfers
to Minors Act. Mr. Christensen's former spouse holds voting and investment power over the shares held for their children.

(3) Represents 24,328 shares and 5,400 restricted shares, each held by Ms. Snapper directly and includes stock options to
purchase 87,434 shares of common stock that are currently exercisable or exercisable within 60 days after December
31, 2014 and 300 restricted stock awards that will vest within 60 days after December 31, 2014.

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(4) Represents 1,922 shares and 5,680 restricted shares, each held by Mr. Keetch directly and includes stock options to
purchase 12,462 shares of common stock that are currently exercisable or exercisable within 60 days after December
31, 2014 and 700 restricted stock awards that will vest within 60 days after December 31, 2014.

(5) Represents 18,064 shares and 1,660 restricted shares, each held by Ms. Wittekind directly and includes stock options
to purchase 52,422 shares of common stock that are currently exercisable or exercisable within 60 days after December
31, 2014.

(6) Represents 23,132 shares and 26,080 restricted shares held by Mr. Port directly and includes stock options to purchase
43,258 shares of common stock that are currently exercisable or exercisable within 60 days after December 31, 2014
and 800 restricted stock awards that will vest within 60 days after December 31, 2014.

(7) Represents 614,706 shares held by the Christensen Family Trust dated August 17, 1992. Mr. Christensen and his spouse

share voting and investment power over the Christensen Family Trust.

(8)

(9)

Includes stock options to purchase 3,666 shares of common stock that are currently exercisable or exercisable within
60 days after December 31, 2014.

Includes 8,634 shares held by the Nackel Family Trust dated June 30, 1997. Dr. Nackel and his spouse share voting
power and investment power over the shares held by the Nackel Family Trust.

(10)

Includes 500 restricted stock awards that will vest within 60 days after December 31, 2014.

(11)

Includes 250 restricted stock awards that will vest within 60 days after December 31, 2014.

(12)

Includes stock options to purchase an aggregate of 207,846 shares of common stock that are currently exercisable or
exercisable within 60 days after December 31, 2014 and an aggregate of 2,550 restricted stock awards that will vest
within 60 days after December 31, 2014.

(13) Represents beneficial ownership as of December 31, 2013 as reported on Schedule 13G filed by FMR LLC on
February 14, 2014, which indicates that FMR LLC held 1,983,700 shares. The business address of FMR LLC is 245
Summer Street, Boston, Massachusetts, 02210.

(14) Represents beneficial ownership as of December 31, 2014 as reported on Schedule 13G filed by Blackrock, Inc. on
January 23, 2015, which indicates that Blackrock, Inc. held 1,859,809 shares. The business address of Blackrock, Inc.
is 55 East 52nd Street, New York, NY 10022.

(15) Represents beneficial ownership as of December 31, 2013 as reported on Schedule 13G filed by Wasatch Advisors, Inc.
on February 13, 2014, which indicates that Wasatch Advisors, Inc. held 1,551,556 shares. The business address of
Wasatch Advisors, Inc. is 150 Wakara Way, Salt Lake City, Utah 84108.

(16) Represents beneficial ownership as of December 31, 2013 as reported on Schedule 13G filed by The Vanguard Group
on February 12, 2014, which indicates that The Vanguard Group held 1,279,222 shares. The business address of The
Vanguard Group is 100 Vanguard Blvd., Malvern PA 19355.

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Equity Compensation Plan Information

We maintain our 2001 Stock Option, Deferred Stock and Restricted Stock Plan, our 2005 Stock Incentive Plan and our 2007

Omnibus Incentive Plan.

The following table provides information about equity awards under all of our equity compensation plans as of December 31,

2014:

Plan Category

Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights

Weighted-
Average
Exercise Price
of Outstanding
Options,
Warrants and
Rights

Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities
Reflected in the
First Column)

Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total

2,765,301

—

2,765,301 $

17.02

—
17.02

1,232,418 (1)

—
1,232,418

(1) The 2007 Omnibus Incentive Plan (the 2007 Plan) incorporates an evergreen formula pursuant to which on each January 1,
the aggregate number of shares reserved for issuance under the 2007 Plan will increase by a number of shares equal
to the lesser of (i) 1,000,000 shares of common stock or (ii) 2% of the number of shares outstanding as of the last day
of the immediately preceding fiscal year, or such lesser number as determined by our Board of Directors.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Since January 1, 2014, there has not been, nor is there any proposed transaction in which we were or will be a party or in
which we were or will be a participant, involving an amount that exceeded or will exceed $120,000 and in which any director,
executive officer, beneficial owner of more than 5% of any class of our voting securities, or any member of the immediate family
of any of the foregoing persons had or will have a direct or indirect material interest, other than the compensation arrangements
and other agreements and transactions which are described in Item 11. Executive Compensation and the transactions described
below.

Indemnification Provisions

We have entered into indemnification agreements with each of our directors, officers and certain key employees. These
indemnification agreements, along with our amended and restated certificate of incorporation and amended and restated bylaws,
require us to indemnify such persons to the fullest extent permitted by Delaware law.

Policies and Procedures for Transactions with Related Persons

We expect our audit committee will review potential conflict of interest situations, on an ongoing basis, any future proposed
transaction, or series of transactions, with related persons, and either approve or disapprove each reviewed transaction or series
of related transactions with related persons. On August 14, 2007, we adopted a written policy and procedures with respect to
related person transactions, which includes specific provisions for the approval of related person transactions. Pursuant to this
policy, related person transactions include a transaction, arrangement or relationship or series of similar transactions, arrangements
or relationships, in which we and certain enumerated related persons participate, the amount involved exceeds $120,000 and the
related person has a direct or indirect material interest.

In the event that a related person transaction is identified, such transaction must be reviewed and approved or ratified by our
audit committee. If it is impracticable for our audit committee to review such transaction, pursuant to the policy, the transaction
will be reviewed by the chair of our audit committee, whereupon the chair of our audit committee will report to the audit committee
the approval or disapproval of such transaction.

In reviewing and approving related person transactions, pursuant to the policy, the audit committee, or its chair, shall consider
all information that the audit committee, or its chair, believes to be relevant and important to a review of the transaction and shall

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approve only those related person transactions that are determined to be in, or not inconsistent with, our best interests and that of
our stockholders, taking into account all available relevant facts and circumstances available to the audit committee or its chair.
Pursuant to the policy, these facts and circumstances will typically include, but not be limited to, the benefits of the transaction to
us; the impact on a director's independence in the event the related person is a director, an immediate family member of a director
or an entity in which a director is a partner, stockholder or executive officer; the availability of other sources for comparable
products or services; the terms of the transaction; and the terms of comparable transactions that would be available to unrelated
third parties or to employees generally. Pursuant to the policy, no member of the audit committee shall participate in any review,
consideration or approval of any related person transaction with respect to which the member or any of his or her immediate family
members is the related person.

Director Independence

NASDAQ listing standards require that a majority of the members of a listed company’s board of directors qualify as
“independent,” as affirmatively determined by the board of directors. After review of all of the relevant transactions or relationships
between each director (and his family members) and us, our senior management and our independent registered public accounting
firm, our Board of Directors has affirmatively determined that each of Drs. Antoinette T. Hubenette and John G. Nackel and Messrs.
Daren J. Shaw, Lee A. Daniels and Barry M. Smith is "independent" within the meaning of the applicable NASDAQ listing
standards. The Board of Directors has also determined that Clayton M. Christensen who served as a director prior to the 2014
annual meeting of stockholders met those independence requirements.

Each member of our Board of Directors serving on our Audit, Compensation and Nomination and Corporate Governance
committees is “independent” within the meaning of the applicable NASDAQ listing standards and, as applicable, the Exchange
Act.

Item 14. Principal Accountant Fees and Services

The following table presents fees for professional services rendered by Deloitte & Touche LLP for the years ended December 31,

2014 and 2013:

Audit Fees(1)
Audit Related Fees
Tax Fees
All Other Fees(2)
Total

2014

2013

$ 1,236,000

$ 1,548,761
—
—
2,200
$ 1,238,200 $ 1,550,961

—
—

2,200

(1) Audit Fees consist principally of fees for the audit of our financial statements and internal controls under the Sarbanes-
Oxley Act of 2002, and review of our financial statements included in our Quarterly Reports on Form 10-Q, as well as
fees incurred in connection with the preparation and filing of registration statements with the Securities and Exchange
Commission. Included in this amount in 2014 are fees of $319,600 related to reviews of registration statements and
matters related to the Spin-Off transaction and other matters related to the audit of the Company's consolidated financial
statements. Included in this amount in 2013 are fees of $619,411 related to the audit of annual financial statements,
reviews of quarterly financial information and reviews of registration statements and matters related to the Spin-Off
transaction.

(2) This amount represent subscription fees paid to Deloitte & Touche LLP for use of an accounting research tool during the

years ended December 31, 2014 and 2013.

Pre-Approval Policies

Our audit committee approved all audit, audit-related, tax and other fees for services performed by our independent registered
public accounting firm during the years presented. The audit committee has adopted an Audit and Non-Audit Services Pre-Approval
Policy. This policy provides for general pre-approval for a specified range of fees for certain categories of routine services to be
provided during a given calendar year. This general pre-approval is automatically renewed at the beginning of each calendar year,
unless otherwise determined by the audit committee. If the cost of any proposed service exceeds the amount for which general
pre-approval has been established, specific pre-approval by the audit committee is required. Specific pre-approval of services is
considered at the regular meetings of the audit committee. The policy delegates authority to the Chairman of the audit committee
to grant specific pre-approval between regularly scheduled audit committee meetings for audit services not to exceed $200,000
and non-audit services not to exceed $100,000. The policy also establishes a list of prohibited non-audit services. In making all
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of its pre-approval determinations, the audit committee considers, among other things, whether such services are consistent with
the rules promulgated by the PCAOB and the SEC regarding auditor independence, whether the independent auditor is best
positioned to provide the most effective and efficient service, and whether the service might enhance the Company's ability to
manage and control risk or improve audit quality. These and other factors are considered as a whole and no one factor is necessarily
determinative.

PART IV.

Item 15. Exhibits, Financial Statements and Schedules

The following documents are filed as a part of this report:

(a) (1) Financial Statements:

The Financial Statements described in Part II. Item 8 and beginning on page 122 are filed as part of this

report.

(a) (2) Financial Statement Schedule:

Schedule II: Valuation and Qualifying Accounts, immediately following the financial statements included in

this Annual Report.

(a) (3) Exhibits: An “Exhibit Index” has been filed as a part of this Annual Report on Form 10-K and is incorporated

herein by reference.

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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.

SIGNATURES

February 9, 2015

THE ENSIGN GROUP, INC.

BY:

/s/ SUZANNE D. SNAPPER

Suzanne D. Snapper

Chief Financial Officer (Principal Financial Officer
and Duly Authorized Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following

persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature

Title

Date

/s/ CHRISTOPHER R. CHRISTENSEN

Christopher R. Christensen

/s/ SUZANNE D. SNAPPER

Suzanne D. Snapper

/s/ ROY E. CHRISTENSEN

Roy E. Christensen

/s/ ANTOINETTE T. HUBENETTE

Antoinette T. Hubenette

/s/ JOHN G. NACKEL

John G. Nackel

/s/ DAREN J. SHAW

Daren J. Shaw

/s/ LEE A. DANIELS

Lee A. Daniels

/s/ BARRY M. SMITH

Barry M. Smith

Chief Executive Officer, President and Director (principal
executive officer)

February 9, 2015

Chief Financial Officer (principal financial and accounting
officer)

February 9, 2015

Chairman of the Board

February 9, 2015

Director

February 9, 2015

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THE ENSIGN GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2014 and 2013

Consolidated Statements of Income for the Years Ended December 31, 2014, 2013 and 2012

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2014, 2013 and 2012

Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012

Notes to Consolidated Financial Statements

123

124

125

126

127

128

130

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
The Ensign Group, Inc.
Mission Viejo, California

We have audited the accompanying consolidated balance sheets of The Ensign Group, Inc. and subsidiaries (the “Company”)
as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial
statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The
Ensign Group, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and
our report dated February 9, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
February 9, 2015

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Assets
Current assets:

THE ENSIGN GROUP, INC.
CONSOLIDATED BALANCE SHEETS

December 31,
2014

2014

2013

(In thousands, except par values)

50,408
5,082

Cash and cash equivalents
Restricted cash—current
Accounts receivable—less allowance for doubtful accounts of $20,438 and $16,540 at December
31, 2014 and 2013, respectively
Investments—current
Prepaid income taxes
Prepaid expenses and other current assets
Deferred tax asset—current

Total current assets
Property and equipment, net
Insurance subsidiary deposits and investments
Escrow deposits
Deferred tax asset
Restricted and other assets
Intangible assets, net
Goodwill
Other indefinite-lived intangibles

Total assets

Liabilities and equity
Current liabilities:

Accounts payable
Accrued wages and related liabilities
Accrued self-insurance liabilities—current
Other accrued liabilities
Current maturities of long-term debt
Total current liabilities

Long-term debt—less current maturities
Accrued self-insurance liabilities—less current portion
Fair value of interest rate swap
Deferred rent and other long-term liabilities
Total liabilities

Commitments and contingencies (Note 16, 17, 18, and 20)
Equity:

Ensign Group, Inc. stockholders' equity:
Common stock; $0.001 par value; 75,000 shares authorized; 22,924 and 22,591 shares issued
and outstanding at December 31, 2014, respectively, and 22,580 and 22,113 shares issued and
outstanding at December 31, 2013, respectively
Additional paid-in capital
Retained earnings (Note 2)
Common stock in treasury, at cost, 150 and 237 shares at December 31, 2014 and 2013,
respectively
Accumulated other comprehensive loss

Total Ensign Group, Inc. stockholders' equity
Non-controlling interest
Total equity

Total liabilities and equity

$
See accompanying notes to consolidated financial statements.

124

65,755
—

111,370
5,511
9,915
9,213
9,232
210,996
479,770
16,888
1,000
4,464
9,804
5,718
23,935
7,740
760,315

23,793
40,093
15,461
25,698
7,411
112,456
251,895
33,642
1,828
3,237
403,058

22
101,364
257,502

(1,680)
(1,112)
356,096
1,161
357,257
760,315

130,051
6,060
2,992
8,434
10,615
213,642
149,708
17,873
16,153
11,509
6,833
35,568
30,269
12,361
493,916

33,186
56,712
15,794
24,630
111
130,433
68,279
34,166
—
3,235
236,113

22
114,293
145,846

(1,310)
—
258,851
(1,048)
257,803
493,916

Table of Contents

THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME

Revenue

Expense:

Cost of services (exclusive of facility rent, general and administrative and
depreciation and amortization expenses shown separately below)

U.S. Government inquiry settlement (Note 20)

Facility rent—cost of services (Note 2 and 16)

General and administrative expense

Depreciation and amortization

Total expenses

Income from operations

Other income (expense):

Interest expense

Interest income

Other expense, net

Income before provision for income taxes

Provision for income taxes

Income from continuing operations

Loss from discontinued operations, net of income tax benefit (Note 22)

Net income

Less: net loss attributable to noncontrolling interests

Net income attributable to The Ensign Group, Inc.

Amounts attributable to The Ensign Group, Inc.:

Income from continuing operations attributable to The Ensign Group, Inc.

Loss from discontinued operations, net of income tax

Net income attributable to The Ensign Group, Inc.

Net income per share:

Basic:

Income from continuing operations attributable to The Ensign Group, Inc.

Loss from discontinued operations

Net income attributable to The Ensign Group, Inc.

Diluted:

Income from continuing operations attributable to The Ensign Group, Inc.

Loss from discontinued operations

Net income attributable to The Ensign Group, Inc.

Weighted average common shares outstanding:

Basic

Diluted

Dividends per share

Year Ended December 31,

2014

2013

2012

(In thousands, except per share data)

1,027,406

904,556

823,155

822,669

725,989

656,424

—

48,488

56,895

26,430

954,482

72,924

33,000

13,613

40,103

33,909

846,614

57,942

15,000

13,281

31,819

28,358

744,882

78,273

(12,976)

(12,787)

(12,229)

594

506

255

(12,382)

(12,281)

(11,974)

60,542

26,801

33,741

—

33,741

(2,209)

35,950

—

35,950

1.61

—

1.61

1.56

—

1.56

45,661

20,003

25,658

(1,804)

23,854

(186)

24,040

25,844

(1,804)

24,040

1.18

(0.08)

1.10

1.16

(0.09)

1.07

66,299

25,134

41,165

(1,357)

39,808

(783)

40,591

41,948

(1,357)

40,591

1.96

(0.07)

1.89

1.91

(0.06)

1.85

22,341

23,095

21,900

22,364

21,429

21,942

0.29

0.27

0.25

See accompanying notes to consolidated financial statements.

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THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

2014

Year Ended December 31,
2013
(In thousands)

2012

Net income

Other comprehensive income, net of tax:

33,741

23,854

39,808

Unrealized gain (loss) on interest rate swap, net of income tax
(provision) benefit of ($78), ($405) and $286 for the years ended
December 31, 2014, 2013, and 2012, respectively.

Reclassification adjustment on termination of interest rate swap, net of
income tax benefit of $638 for the year ended December 31, 2014.

Comprehensive income

Less: net loss attributable to noncontrolling interests

Comprehensive income attributable to The Ensign Group, Inc.

1,023

34,853
(2,209)
37,062

633

—

24,487
(186)
24,673

(437)

—

39,371
(783)
40,154

See accompanying notes to consolidated financial statements.

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THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Common Stock

Amount

Additional
Paid-In
Capital

Retained
Earnings

Treasury Stock

Amount

Accumulated
Other
Comprehensive
Loss

Non-
Controlling
Interest

Redeemable
Noncontrolling
Interest

Total

Balance - January 1, 2012

21,179

77,257

204,073

396

(2,559)

(1,308)

(In thousands)

Issuance of common stock to
employees and directors resulting
from the exercise of stock options
and grant of stock awards

Issuance of restricted stock to
employees

Repurchase of common stock

Dividends declared

Employee stock award
compensation

Excess tax benefit from share-
based compensation

Noncontrolling interest assumed
related to acquisition

Acquisition of noncontrolling
interest, net of tax

Net loss attributable to
noncontrolling interest

Net Income attributable to the
Ensign Group, Inc.

Accumulated other
comprehensive loss

488

—

Balance - December 31, 2012

21,719

Issuance of common stock to
employees and directors resulting
from the exercise of stock options
and grant of stock awards

Issuance of restricted stock to
employees

Dividends declared

Employee stock award
compensation

Excess tax benefit from share-
based compensation

Net loss attributable to
noncontrolling interest

Adjustment to net working capital
for prior year acquisition

Net Income attributable to the
Ensign Group, Inc.

Accumulated other
comprehensive income

343

—

Balance - December 31, 2013

22,113

Issuance of common stock to
employees and directors resulting
from the exercise of stock options
and grant of stock awards

Issuance of restricted stock to
employees

Dividends declared

Employee stock award
compensation

Excess tax benefit from share-
based compensation

Net loss attributable to
noncontrolling interest

Distribution of net assets to
CareTrust (Note 2)

—

Net Income attributable to the
Ensign Group, Inc.

Termination of swap and other
comprehensive income

415

—

Balance - December 31, 2014

22,591

—

4,067

1,360

—

3,379

1,868

—

3,018

—

(5,320)

—

40,591

—

(102)

634

—

(174)

—

(437)

—

277,485

—

4,701

1,360

(174)

(5,320)

3,379

1,868

1,778

11,600

13,378

340

(705)

—

(11,522)

(8,164)

(78)

(783)

—

40,591

(437)

90,949

239,344

301

(2,099)

(1,745)

1,413

— $

327,884

3,163

385

—

4,013

2,854

—

(5,882)

—

24,040

—

(64)

419

—

633

—

(186)

(66)

—

3,582

385

(5,882)

4,013

2,854

(186)

(66)

24,040

633

101,364

257,502

237

(1,680)

(1,112)

1,161

— $

357,257

3,475

—

5,190

4,264

—

(6,441)

—

(141,165)

35,950

—

(87)

370

—

1,112

—

(2,209)

—

3,845

—

(6,441)

5,190

4,264

(2,209)

(141,165)

35,950

1,112

114,293

145,846

150

(1,310)

— $

(1,048)

— $

257,803

See accompanying notes to consolidated financial statements.

127

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THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash provided by operating activities:

Loss from sale of discontinued operations (Note 22)

Depreciation and amortization

Goodwill and other indefinite-lived intangibles impairment (Note 12)

Amortization of deferred financing fees and debt discount

Deferred income taxes

Provision for doubtful accounts

Share-based compensation

Excess tax benefit from share-based compensation

Deferred income tax effect of purchase of noncontrolling interest

Loss on extinguishment of debt

Loss on termination of interest rate swap

Gain on sale of equity method investment

Loss on disposition of property and equipment

Change in operating assets and liabilities

Accounts receivable

Prepaid income taxes

Prepaid expenses and other assets

Insurance subsidiary deposits and investments

Accounts payable

U.S. Government inquiry accrual (Note 20)

Accrued wages and related liabilities

Other accrued liabilities

Accrued self-insurance

Deferred rent liability

Net cash provided by operating activities

Cash flows from investing activities:

Purchase of property and equipment

Cash payment for business acquisitions

Cash payment for asset acquisitions

Escrow deposits

Escrow deposits used to fund business acquisitions

Deposits of restricted cash

Uses of restricted cash

Cash proceeds on sale of urgent care franchising business, net of note receivable

Cash proceeds on sale of equity method investment

Cash proceeds from the sale of property and equipment

Restricted and other assets

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from issuance of debt (Note 18)

Payments on debt

Repurchase of shares of common stock

Issuance of treasury stock upon exercise of options

Cash retained by CareTrust at separation (Note 2)

Issuance of common stock upon exercise of options

Dividends paid

Excess tax benefit from share-based compensation

Purchase of non-controlling interest

Prepayment penalties on early retirement of debt

Payments of deferred financing costs

Net cash provided by financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents beginning of period

Cash and cash equivalents end of period

Year Ended December 31,

2014

2013

2012

(In thousands)

33,741

23,854

39,808

—

26,430

—

687

(3,110)

13,179

5,190

(4,264)

—

4,067

1,661

—

100

(31,867)

6,897

864

(1,533)

7,978

—

16,644

6,337

1,881

(2)

84,880

(53,693)

(92,669)

(7,938)

(16,153)

1,000

(8,219)

3,137

2,000

—

(340)

(172,851)

495,677

(331,198)

—

370

(78,731)

3,475

(6,297)

4,280

—

(2,069)

(12,883)

72,624

(15,347)

65,755

50,408

2,837
33,942
490
821
3,006
12,106
4,399
(2,854)
—
—
—
(380)
1,379

(27,290)
(6,129)
(501)
110
(2,236)
(15,000)
4,246
6,645
(1,842)
(179)
37,424

(29,759)
(45,101)
—
(1,000)
4,635
—
—
3,607
1,600
929
(146)
(65,235)

58,700
(7,207)
—

419
—
3,163
(4,318)
2,854

—

(730)

52,881
25,070
40,685
65,755

—
28,464
2,225
826
(2,111)
9,474
4,739
(1,868)
(2,464)
—
—
—
412

(16,150)
2,095
(944)
(5,758)
3,152
15,000
(6,360)
4,908
6,205
397
82,050

(38,853)
(31,558)
(11,261)
(4,635)
175
—
—

155
1,481
(84,496)

36,525
(16,825)
(174)

634
—
4,067
(6,604)
1,868

(5,700)

—

(244)

13,547
11,101
29,584
40,685

See accompanying notes to consolidated financial statements.
128

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THE ENSIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Year Ended December 31,
2013
(In thousands)

2012

2014

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest
Income taxes

Non-cash financing and investing activity:

Acquisition of redeemable noncontrolling interest
Accrued capital expenditures
Note receivable on sale of urgent care franchising business
Debt assumed as part of business acquisition

$
$

$
$
$
$

13,511
22,029

$
$

12,809
19,323

$
$

12,394
24,842

— $
$
$
$

3,109
2,000
3,417

1,693
4,000

— $
$
$
— $

11,600
1,734
—
—

See accompanying notes to consolidated financial statements.

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Table of Contents

THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in thousands, except per share data)

1. DESCRIPTION OF BUSINESS

The Company - The Ensign Group, Inc. (collectively, Ensign or the Company), is a holding company with no direct operating
assets, employees or revenue. The Company, through its operating subsidiaries, is a provider of skilled nursing, rehabilitative care
services, home health, home care, hospice care, assisted living and urgent care services. As of December 31, 2014, the Company
operated 136 facilities, twelve home health and eleven hospice operations, fourteen urgent care centers and a mobile x-ray and
diagnostic company, located in Arizona, California, Colorado, Idaho, Iowa, Nebraska, Nevada, Oregon, Texas, Utah, Washington
and Wisconsin. The Company's operating subsidiaries, each of which strives to be the operation of choice in the community it
serves, provide a broad spectrum of skilled nursing, assisted living, home health and hospice, mobile x-ray and diagnostic, and
urgent care services. The Company's affiliated facilities have a collective capacity of approximately 14,700 operational skilled
nursing, assisted living and independent living beds. As of December 31, 2014, the Company owned 11 of its 136 affiliated facilities
and leased an additional 125 facilities through long-term lease arrangements, and had options to purchase three of those 125
facilities. As of December 31, 2013, the Company owned 96 of its 119 affiliated facilities and leased an additional 23 facilities
through long-term lease arrangements, and had options to purchase two of those 23 facilities. See Note 2, Spin-Off of Real Estate
Assets Through a Real Estate Investment Trust, for the change in ownership profile.

Certain of the Company’s wholly-owned independent subsidiaries, collectively referred to as the Service Center, provide
certain accounting, payroll, human resources, information technology, legal, risk management and other centralized services to
the other operating subsidiaries through contractual relationships with such subsidiaries. The Company also has a wholly-owned
captive insurance subsidiary (the Captive) that provides some claims-made coverage to the Company’s operating subsidiaries for
general and professional liability, as well as coverage for certain workers’ compensation insurance liabilities.

Each of the Company's affiliated operations are operated by separate, wholly-owned, independent subsidiaries that have
their own management, employees and assets. References herein to the consolidated “Company” and “its” assets and activities,
as well as the use of the terms “we,” “us,” “our” and similar terms in this Annual Report is not meant to imply, nor should it be
construed as meaning, that The Ensign Group, Inc. has direct operating assets, employees or revenue, or that any of the subsidiaries,
are operated by The Ensign Group.

2. SPIN-OFF OF REAL ESTATE ASSETS THROUGH A REAL ESTATE INVESTMENT TRUST

On June 1, 2014, the Company completed the separation of its healthcare business and its real estate business into two separate
publicly traded companies through a tax-free distribution of all of the outstanding shares of common stock of CareTrust REIT,
Inc. (CareTrust) to Ensign stockholders on a pro rata basis (the Spin-Off). Ensign stockholders received one share of CareTrust
common stock for each share of Ensign common stock held at the close of business on May 22, 2014, the record date for the Spin-
Off. The Spin-Off was effective from and after June 1, 2014, with shares of CareTrust common stock distributed on June 2, 2014.
CareTrust is listed on the NASDAQ Global Select Market (NASDAQ) and trades under the ticker symbol “CTRE.”

The Company received a private letter ruling from the Internal Revenue Service (IRS) substantially to the effect that the
Spin-Off will qualify as a tax-free transaction for U.S. federal income tax purposes. The private letter ruling relies on certain facts,
representations, assumptions and undertakings. The Company also received opinions from its advisor as to the satisfaction of
certain requirements for the tax-free treatment of the Spin-Off, and an opinion of counsel that, commencing with CareTrust's
taxable year ending on December 31, 2014, CareTrust has been organized in conformity with the requirements for qualification
as a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended, and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a REIT.

Prior to the Spin-Off, the Company entered into a Separation and Distribution Agreement with CareTrust, setting forth the
mechanics of the Spin-Off, certain organizational matters and other ongoing obligations of the Company and CareTrust. The
Company and CareTrust or their respective subsidiaries, as applicable, also entered into a number of other agreements to govern
the relationship between CareTrust and the Company.

Immediately before the Spin-Off, on May 30, 2014, while CareTrust was a wholly-owned subsidiary of the Company,
CareTrust raised $260,000 of debt financing (the Bond). CareTrust also entered into the Fifth Amended and Restated Loan
Agreement, with General Electric Capital Corporation (GECC), which consisted of an additional loan of $50,676 to an aggregate
principal amount of $99,000 (the Ten Project Note). The Ten Project Note and the Bond were assumed by CareTrust in connection

130

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

with the Spin-Off. CareTrust transferred $220,752 to the Company, a portion of which the Company used to retire $208,635 of
long-term debt prior to maturity. The remaining portion was used to pay prepayment penalties and other third party fees relating
to the early retirement of outstanding debt. The amount retained by the Company of $8,219 was recorded as restricted cash, of
which $6,400 was classified as current assets and $1,819 was classified as non-current assets as of June 1, 2014. The amount
represents a portion of the proceeds received from CareTrust in connection with the Spin-Off that the Company intends to use to
pay up to eight regular quarterly dividend payments. During the year ended December 31, 2014, the Company utilized $3,137 to
pay the third and fourth quarter dividend payments. As of December 31, 2014, the Company had $5,082 of restricted cash remaining,
which is classified as current assets as the Company intends to utilize all the remaining amount to make dividend payments within
the next twelve months. The remaining cash of $78,731 that CareTrust retained on the Spin-Off date was transferred to CareTrust
as part of the assets and liabilities contributed to CareTrust in connection with the Spin-Off.

As of March 31, 2014, the Company operated 120 affiliated facilities. Prior to the Spin-Off, the Company separated the
healthcare operations from the independent living operations at two locations, resulting in a total of 122 affiliated facilities. The
Company contributed to CareTrust the assets and liabilities associated with 94 real property and three independent living facilities
that CareTrust now operates that were previously owned by the Company. The results of the three independent living facilities
that were transferred to CareTrust in connection with the Spin-Off were not material to the Company's results of operations for
the years ended December 31, 2014, 2013 or 2012. The assets and liabilities were contributed to CareTrust based on their historical
carrying values, which were as follows:

Cash and cash equivalents

Other current assets

Property and equipment, net

Deferred financing costs

Accounts payable and accrued expenses

Current deferred tax liability

Deferred tax liability

Current maturities of long-term debt

Long-term debt—less current maturities

Net contribution

78,731

421,846

11,088
(4,971)
(125)
(5,925)
(2,342)
(357,171)
141,165

As a result of the Spin-Off, CareTrust owns all of the 94 real property and three independent living facilities that were
transferred in connection with the Spin-Off. The Company leases the 94 real property facilities from CareTrust under eight “triple-
net” master lease agreements (collectively, the Master Leases). The Company continues to operate the affiliated skilled nursing,
assisted living and independent living facilities that are leased from CareTrust pursuant to the Master Leases. The Master Leases
consist of multiple leases, each with its own pool of properties that has varying maturities and diversity in property geography.
Under each Master Lease, the Company’s individual subsidiaries that operate those properties subject to such Master Lease are
the tenants and CareTrust’s individual subsidiaries that own the properties are the landlords. The Company guarantees the obligations
of the tenants under the Master Leases. If a tenant defaults under a Master Lease with respect to any property, CareTrust is entitled
to exercise remedies under such Master Lease as to all properties covered by such Master Lease as though all such properties were
in default. In addition, each Master Lease with the tenant contains cross-default provisions that results in a default under all of the
Master Leases if a default occurs under any Master Lease.

Commencing in the third year, the rent structure under the Master Leases includes a fixed component, subject to annual
escalation equal to the lesser of (1) the percentage change in the Consumer Price Index (but not less than zero) or (2) 2.5%. Annual
rent expense under the Master Lease will be approximately $56,000 during each of the first two years of the Master Leases. In
addition to rent, the Company is required to pay the following: (1) all impositions and taxes levied on or with respect to the leased
properties (other than taxes on the income of the lessor); (2) all utilities and other services necessary or appropriate for the leased
properties and the business conducted on the leased properties; (3) all insurance required in connection with the leased properties
and the business conducted on the leased properties; (4) all facility maintenance and repair costs; and (5) all fees in connection
with any licenses or authorizations necessary or appropriate for the leased properties and the business conducted on the leased
properties.

Each Master Lease has a term ranging from 12 to 19 years. At the Company’s option, the Master Leases may be extended
for two or three five-year renewal terms beyond the initial term, on the same terms and conditions. If the Company elects to renew
the term of a Master Lease, the renewal will be effective as to all, but not less than all, of the leased property then subject to the
Master Lease. The extension of the term of any of the Master Leases will be subject to the following conditions: (1) no event of

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

default under any of the Master Leases having occurred and being continuing; and (2) the tenants providing timely notice of their
intent to renew. The term of the Master Leases will be subject to termination prior to the expiration of the then current term upon
default by the tenants in their obligations, if not cured within any applicable cure periods set forth in the Master Leases.

The Company does not have the ability to terminate the obligations under a Master Lease prior to its expiration without
CareTrust’s consent. If a Master Lease is terminated prior to its expiration other than with CareTrust’s consent, the Company may
be liable for damages and incur charges such as continued payment of rent through the end of the lease term and maintenance and
repair costs for the leased property.

Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants
measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also
include certain reporting, legal and authorization requirements. As of December 31, 2014, the Company was in compliance with
the Master Leases covenants.

The Company and CareTrust also entered into an Opportunities Agreement, which grants CareTrust the right to match any
offer from a third party to finance the acquisition or development of any healthcare or senior-living facility by the Company or
any of its affiliates for a period of one year following the Spin-Off. In addition, this agreement requires CareTrust to provide the
Company, subject to certain exceptions, a right to either purchase and operate, or lease and operate, the affiliated facilities included
in any portfolio of five or fewer healthcare or senior living facilities presented to the Company during the first year following the
Spin-Off; provided that the portfolio is not subject to an existing lease with an operator or manager that has a remaining term of
more than one year, and is not presented to the Company by or on behalf of another operator seeking lease or other financing. If
the Company elects to lease and operate such a property or portfolio, the lease would be on substantially the same terms as the
Master Leases. In addition, Christopher Christensen, the Company's Chief Executive Officer, serves as a board member of CareTrust.

The Company incurred transaction costs of $9,026 for year ended December 31, 2014 associated with the Spin-Off, which
are included in general and administrative expenses within the consolidated statements of income. During the year ended December
31, 2013, the Company incurred transaction costs of $4,050 related to the Spin-Off. The Company did not incur transaction costs
related to the Spin-Off for the year ended December 31, 2012.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying consolidated financial statements (Financial Statements) have been prepared in
accordance with accounting principles generally accepted in the United States of America (GAAP). The Company is the sole
member or shareholder of various consolidated limited liability companies and corporations established to operate various acquired
skilled nursing and assisted living operations, home health and hospice operations, urgent care centers and related ancillary services.
All intercompany transactions and balances have been eliminated in consolidation. The Company presents noncontrolling interest
within the equity section of its consolidated balance sheets. The Company presents the amount of consolidated net income that
is attributable to The Ensign Group, Inc. and the noncontrolling interest in its consolidated statements of income.

The consolidated financial statements include the accounts of all entities controlled by the Company through its ownership
of a majority voting interest and the accounts of any variable interest entities (VIEs) where the Company is subject to a majority
of the risk of loss from the VIE's activities, or entitled to receive a majority of the entity's residual returns, or both. The Company
assesses the requirements related to the consolidation of VIEs, including a qualitative assessment of power and economics that
considers which entity has the power to direct the activities that "most significantly impact" the VIE's economic performance and
has the obligation to absorb losses of, or the right to receive benefits that could be potentially significant to, the VIE. The Company's
relationship with variable interest entities was not material at December 31, 2014.

On March 25, 2013, the Company agreed to terms to sell Doctors Express (DRX), a national urgent care franchise system.
The asset sale was effective on April 15, 2013. The results of operations for DRX have been classified as discontinued operations
for all periods presented (see Note 22, Discontinued Operations) in the accompanying Financial Statements. In addition, the
results of operations of DRX and the loss or impairment related to this divestiture have been classified as discontinued operations
in the accompanying consolidated statements of income for all periods presented.

Estimates and Assumptions — The preparation of Financial Statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.
The most significant estimates in the Company’s Financial Statements relate to revenue, allowance for doubtful accounts, intangible

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

assets and goodwill, impairment of long-lived assets, general and professional liability, worker’s compensation, and healthcare
claims included in accrued self-insurance liabilities, and income taxes. Actual results could differ from those estimates.

Fair Value of Financial Instruments —The Company’s financial instruments consist principally of cash and cash equivalents,
debt security investments, accounts receivable, insurance subsidiary deposits, accounts payable and borrowings. The Company
believes all of the financial instruments’ recorded values approximate fair values because of their nature or respective short durations.

Revenue Recognition — The Company recognizes revenue when the following four conditions have been met: (i) there is
persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or
determinable; and (iv) collection is reasonably assured. The Company's revenue is derived primarily from providing healthcare
services to patients and is recognized on the date services are provided at amounts billable to the individual. For reimbursement
arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually
agreed-upon amounts on a per patient, daily basis.

Revenue from the Medicare and Medicaid programs accounted for 70.4%, 72.2% and 73.6% of the Company's revenue for
the years ended December 31, 2014, 2013 and 2012, respectively. The Company records revenue from these governmental and
managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s
revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-
party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates
are recorded in the period the change or adjustment becomes known based on final settlement. The Company recorded upon
settlement adjustments to revenue which were not material to the Company's consolidated revenue for the years ended December
31, 2014, 2013 and 2012.

The Company’s service specific revenue recognition policies are as follows:

Skilled Nursing, Assisted and Independent Living Revenue

The Company’s revenue is derived primarily from providing long-term healthcare services to residents and is recognized
on the date services are provided at amounts billable to individual residents. For residents under reimbursement arrangements with
third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon
amounts or rate on a per patient, daily basis or as services are performed.

Home Health Revenue

Medicare Revenue

Net service revenue is recorded under the Medicare prospective payment system based on a 60-day episode payment rate
that is subject to adjustment based on certain variables including, but not limited to: (a) an outlier payment if patient care was
unusually costly; (b) a low utilization payment adjustment if the number of visits was fewer than five; (c) a partial payment if the
patient transferred to another provider or the Company received a patient from another provider before completing the episode;
(d) a payment adjustment based upon the level of therapy services required; (e) the number of episodes of care provided to a
patient, regardless of whether the same home health provider provided care for the entire series of episodes; (f) changes in the
base episode payments established by the Medicare program; (g) adjustments to the base episode payments for case mix and
geographic wages; and (h) recoveries of overpayments.

The Company makes adjustments to Medicare revenue on completed episodes to reflect differences between estimated and
actual payment amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and
other reasons unrelated to credit risk. Therefore, the Company believes that its reported net service revenue and patient accounts
receivable will be the net amounts to be realized from Medicare for services rendered.

In addition to revenue recognized on completed episodes, the Company also recognizes a portion of revenue associated with
episodes in progress. Episodes in progress are 60-day episodes of care that begin during the reporting period, but were not completed
as of the end of the period. As such, the Company estimates revenue and recognizes it on a daily basis. The primary factors
underlying this estimate are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per
episode and its estimate of the average percentage complete based on visits performed.

Non-Medicare Revenue

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Episodic Based Revenue - The Company recognizes revenue in a similar manner as it recognizes Medicare revenue for
episodic-based rates that are paid by other insurance carriers, including Medicare Advantage programs; however, these rates can
vary based upon the negotiated terms.

Non-episodic Based Revenue - Revenue is recorded on an accrual basis based upon the date of service at amounts equal to

its established or estimated per-visit rates, as applicable.

Hospice Revenue

Revenue is recorded on an accrual basis based upon the date of service at amounts equal to the estimated payment rates. The
estimated payment rates are daily rates for each of the levels of care the Company delivers. The Company makes adjustments to
revenue for an inability to obtain appropriate billing documentation or authorizations acceptable to the payor and other reasons
unrelated to credit risk. Additionally, as Medicare hospice revenue is subject to an inpatient cap limit and an overall payment cap,
the Company monitors its provider numbers and estimates amounts due back to Medicare if a cap has been exceeded. The Company
records these adjustments as a reduction to revenue and increases other accrued liabilities.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable consist primarily of amounts due from
Medicare and Medicaid programs, other government programs, managed care health plans and private payor sources. Estimated
provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be
collected.

In evaluating the collectability of accounts receivable, the Company considers a number of factors, including the age of the
accounts, changes in collection patterns, the composition of patient accounts by payor type and the status of ongoing disputes with
third-party payors. On an annual basis, the historical collection percentages are reviewed by payor and by state and are updated
to reflect the recent collection experience of the Company. In order to determine the appropriate reserve rate percentages which
ultimately establish the allowance, the Company analyzes historical cash collection patterns by payor and by state. The percentages
applied to the aged receivable balances are based on the Company’s historical experience and time limits, if any, for managed care,
Medicare, Medicaid and other payors. The Company periodically refines its estimates of the allowance for doubtful accounts based
on experience with the estimation process and changes in circumstances.

Cash and Cash Equivalents — Cash and cash equivalents consist of bank term deposits, money market funds and treasury
bill related investments with original maturities of three months or less at time of purchase and therefore approximate fair value.
The fair value of money market funds is determined based on “Level 1” inputs, which consist of unadjusted quoted prices in active
markets that are accessible at the measurement date for identical, unrestricted assets. The Company places its cash and short-term
investments with high credit quality financial institutions.

Insurance Subsidiary Deposits and Investments — The Company's captive insurance subsidiary cash and cash equivalents,
deposits and investments are designated to support long-term insurance subsidiary liabilities and have been classified as short-
term and long-term assets based on the expected future payments of the Company's captive insurance liabilities. The majority of
these deposits and investments are currently held in AA- and A- rated debt security investments and the remainder is held in a
bank account with a high credit quality financial institution. See further discussion at Note 5, Fair Value Measurements.

Property and Equipment — Property and equipment are initially recorded at their historical cost. Repairs and maintenance
are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable
assets (ranging from three to 59 years). Leasehold improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the remaining lease term.

Impairment of Long-Lived Assets — The Company reviews the carrying value of long-lived assets that are held and used in
the Company’s operating subsidiaries for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of these assets is determined based upon expected undiscounted future
net cash flows from the operating subsidiaries to which the assets relate, utilizing management’s best estimate, appropriate
assumptions, and projections at the time. If the carrying value is determined to be unrecoverable from future operating cash flows,
the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated
fair value of the asset. The Company estimates the fair value of assets based on the estimated future discounted cash flows of the
asset. Management has evaluated its long-lived assets and has not identified any asset impairment during the years ended December
31, 2014, 2013 or 2012.

Intangible Assets and Goodwill — Definite-lived intangible assets consist primarily of favorable leases, lease acquisition
costs, patient base, facility trade names and customer relationships. Favorable leases and lease acquisition costs are amortized over

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the life of the lease of the facility, typically ranging from five to 52 years. Patient base is amortized over a period of four to eight
months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition date.
Trade names at affiliated facilities are amortized over 30 years and customer relationships are amortized over a period up to 20
years.

The Company's indefinite-lived intangible assets consist of trade names and home health and hospice Medicare licenses.
The Company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes
in circumstances indicate that the carrying amount of the intangible asset may not be recoverable.

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations. Goodwill is subject to annual testing for impairment. In addition, goodwill is tested for impairment if events occur
or circumstances change that would reduce the fair value of a reporting unit (operating segment or one level below an operating
segment) below its carrying amount. The Company performs its annual test for impairment during the fourth quarter of each
year. See further discussion at Note 12, Goodwill and Other Indefinite-Lived Intangible Assets.

Deferred Rent - Deferred rent represents rental expense, determined on a straight-line basis over the life of the related lease,

in excess of actual rent payments.

Self-Insurance — The Company is partially self-insured for general and professional liability up to a base amount per claim
(the self-insured retention) with an aggregate, one-time deductible above this limit. Losses beyond these amounts are insured
through third-party policies with coverage limits per occurrence, per location and on an aggregate basis for the Company. For
claims made after January 1, 2013, the combined self-insured retention was $500 per claim, subject to an additional one-time
deductible of $1,000 for California affiliated facilities and a separate, one-time, deductible of $750 for non-California facilities.
For all affiliated facilities, except those located in Colorado, the third-party coverage above these limits was $1,000 per claim,
$3,000 per facility, with a $5,000 blanket aggregate and an additional state-specific aggregate where required by state law. In
Colorado, the third-party coverage above these limits was $1,000 per claim and $3,000 per facility for skilled nursing facilities,
which is independent of the aforementioned blanket aggregate applicable to its other 129 affiliated facilities.

The self-insured retention and deductible limits for general and professional liability and workers' compensation for all states,
except Texas and Washington, are self-insured through the Captive, the related assets and liabilities of which are included in the
accompanying consolidated balance sheets. The Captive is subject to certain statutory requirements as an insurance provider. These
requirements include, but are not limited to, maintaining statutory capital. The Company’s policy is to accrue amounts equal to
the actuarially estimated costs to settle open claims of insureds, as well as an estimate of the cost of insured claims that have been
incurred but not reported. The Company develops information about the size of the ultimate claims based on historical experience,
current industry information and actuarial analysis, and evaluates the estimates for claim loss exposure on a quarterly basis.

The Company’s operating subsidiaries are self-insured for workers’ compensation liability in all states, except for Texas and
Washington. To protect itself against loss exposure in California with this policy, the Company has purchased individual specific
excess insurance coverage that insures individual claims that exceed $500 per occurrence. In Texas, the operating subsidiaries
have elected non-subscriber status for workers’ compensation claims and, effective February 1, 2011, the Company has purchased
individual stop-loss coverage that insures individual claims that exceed $750 per occurrence. As of July 1, 2014, the Company’s
operating subsidiaries in other states, with the exception of Washington, are under a loss sensitive plan that insures individual
claims that exceed $350 per occurrence. In Washington, the operating subsidiaries' coverage is financed through premiums paid
by the employers and employees. The claims and pay benefits are managed through a state insurance pool. Outside of California,
Texas, and Washington, the Company has purchased insurance coverage that insures individual claims that exceed $350 per
accident. In all state except Washington, the Company accrues amounts equal to the estimated costs to settle open claims, as well
as an estimate of the cost of claims that have been incurred but not reported. The Company uses actuarial valuations to estimate
the liability based on historical experience and industry information.

In addition, the Company has recorded an asset and equal liability of $2,256 and $3,280 at December 31, 2014 and 2013,
respectively, in order to present the ultimate costs of malpractice and workers' compensation claims and the anticipated insurance
recoveries on a gross basis. See Note 13, Restricted and Other Assets.

The Company self-funds medical (including prescription drugs) and dental healthcare benefits to the majority of its
employees. The Company is fully liable for all financial and legal aspects of these benefit plans. To protect itself against loss
exposure with this policy, the Company has purchased individual stop-loss insurance coverage that insures individual claims that
exceed $300 for each covered person with an additional one-time aggregate individual stop loss deductible of $75.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company believes that adequate provision has been made in the Financial Statements for liabilities that may arise out
of patient care, workers’ compensation, healthcare benefits and related services provided to date. The amount of the Company’s
reserves was determined based on an estimation process that uses information obtained from both company-specific and industry
data. This estimation process requires the Company to continuously monitor and evaluate the life cycle of the claims. Using data
obtained from this monitoring and the Company’s assumptions about emerging trends, the Company, with the assistance of an
independent actuary, develops information about the size of ultimate claims based on the Company’s historical experience and
other available industry information. The most significant assumptions used in the estimation process include determining the
trend in costs, the expected cost of claims incurred but not reported and the expected costs to settle or pay damage awards with
respect to unpaid claims. The self-insured liabilities are based upon estimates, and while management believes that the estimates
of loss are reasonable, the ultimate liability may be in excess of or less than the recorded amounts. Due to the inherent volatility
of actuarially determined loss estimates, it is reasonably possible that the Company could experience changes in estimated losses
that could be material to net income. If the Company’s actual liability exceeds its estimates of loss, its future earnings, cash flows
and financial condition would be adversely affected.

Income Taxes —Deferred tax assets and liabilities are established for temporary differences between the financial reporting
basis and the tax basis of the Company’s assets and liabilities at tax rates in effect when such temporary differences are expected
to reverse. The Company generally expects to fully utilize its deferred tax assets; however, when necessary, the Company records
a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.

When the Company takes uncertain income tax positions that do not meet the recognition criteria, it records a liability for
underpayment of income taxes and related interest and penalties, if any. In considering the need for and magnitude of a liability
for such positions, the Company must consider the potential outcomes from a review of the positions by the taxing authorities.

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

Noncontrolling Interest — The noncontrolling interest in a subsidiary is initially recognized at estimated fair value on the
acquisition date and is presented within total equity in the Company's consolidated balance sheets. The Company presents the
noncontrolling interest and the amount of consolidated net income attributable to The Ensign Group, Inc. in its consolidated
statements of income and net income per share is calculated based on net income attributable to The Ensign Group, Inc.'s
stockholders. The carrying amount of the noncontrolling interest is adjusted based on an allocation of subsidiary earnings based
on ownership interest.

Stock-Based Compensation — The Company measures and recognizes compensation expense for all share-based payment
awards made to employees and directors including employee stock options based on estimated fair values, ratably over the requisite
service period of the award. Net income has been reduced as a result of the recognition of the fair value of all stock options and
restricted stock awards issued, the amount of which is contingent upon the number of future grants and other variables.

Derivatives and Hedging Activities — Previously, the Company had an interest-rate swap contract in place. Effective May
30, 2014, the Company de-designated its interest rate swap contract that historically qualified for cash flow hedge accounting.
This was due to the termination of the interest rate swap agreement related to the early retirement of the Senior Credit Facility. As
a result, the loss previously recorded in accumulated other comprehensive loss related to the interest rate swap was recognized
in interest expense in the Consolidated Statements of Income during the second quarter of 2014. There was no outstanding interest
rate swap contract as of December 31, 2014.

The Company has historically evaluated variable and fixed interest rate risk exposure on a routine basis and to the extent the
Company believes that it is appropriate, it will offset most of its variable risk exposure by entering into interest-rate swap agreements.
It is the Company's policy to only utilize derivative instruments for hedging purposes (i.e. not for speculation). The Company
formally designates its interest rate swap agreements as hedges and documents all relationships between hedging instruments and
hedged items. The Company formally assesses effectiveness of its hedging relationships, both at the hedge inception and on an
ongoing basis, then measures and records ineffectiveness. The Company would discontinue hedge accounting prospectively (i) if
it is determined that the derivative is no longer effective in offsetting change in the cash flows of a hedged item, (ii) when the
derivative expires or is sold, terminated or exercised, (iii) if it is no longer probable that the forecasted transaction will occur, or
(iv) if management determines that designation of the derivative as a hedge instrument is no longer appropriate.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Leases and Leasehold Improvements - At the inception of each lease, the Company performs an evaluation to determine
whether the lease should be classified as an operating or capital lease. The Company records rent expense for operating leases that
contain scheduled rent increases on a straight-line basis over the term of the lease. The lease term used for straight-line rent expense
is calculated from the date the Company is given control of the leased premises through the end of the lease term. The lease term
used for this evaluation also provides the basis for establishing depreciable lives for buildings subject to lease and leasehold
improvements, as well as the period over which the Company records straight-line rent expense.

Accumulated Other Comprehensive Loss and Total Comprehensive Income — Accumulated other comprehensive loss refers
to revenue, expenses, gains, and losses that are recorded as an element of stockholders’ equity but are excluded from net income.
The Company’s other comprehensive loss consists of net deferred gains and losses on certain derivative instruments accounted
for as cash flow hedges. The Company recognized a loss of $1,023, net of taxes of $638, to interest expense from accumulated
other comprehensive loss during the year ended December 31, 2014 related to the termination of the interest rate swap agreement.
There was no gain or loss recognized in the Consolidated Statements of Income during the year ended December 31, 2013 as the
interest rate swap was terminated in fiscal year 2014. As of December 31, 2014, accumulated other comprehensive losses were
$0 in stockholders' equity. As of December 31, 2013, accumulated other comprehensive losses were $1,828, recorded net of tax
of $716, or $1,112.

Recent Accounting Pronouncements — Except for rules and interpretive releases of the Securities and Exchange Commission
(SEC) under authority of federal securities laws and a limited number of grandfathered standards, the Financial Accounting
Standards Board (FASB) ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the
Company. For any new pronouncements announced, the Company considers whether the new pronouncements could alter previous
generally accepted accounting principles and determines whether any new or modified principles will have a material impact on
the Company's reported financial position or operations in the near term. The applicability of any standard is subject to the formal
review of the Company's financial management and certain standards are under consideration.

In April 2014, the FASB issued an accounting standards update that raises the threshold for disposals to qualify as discontinued
operations and allows companies to have significant continuing involvement with and continuing cash flows from or to the
discontinued operation. It also requires additional disclosures for discontinued operations and new disclosures for individually
material disposal transactions that do not meet the definition of a discontinued operation. This guidance will be effective for fiscal
years beginning after December 15, 2014, which will be the Company's fiscal year 2015, with early adoption permitted. The
Company does not expect the adoption of the guidance will have a material impact on the Company's consolidated financial
statements.

In May 2014, the FASB and International Accounting Standards Board (IASB) issued their final standard on revenue from
contracts with customers that outlines a single comprehensive model for entities to use in accounting for revenue arising from
contracts with customers. The new standard supersedes most current revenue recognition guidance, including industry-specific
guidance. This guidance will be effective for fiscal years beginning after December 15, 2016, which will be the Company's fiscal
year 2017. Early adoption is not permitted. The Company is currently assessing whether the adoption of the guidance will have
a material impact on the Company's consolidated financial statements.

In August 2014, the FASB issued its final standard on going concerns, which requires management to perform interim and
annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are
issued. It also requires additional disclosures if an entity's conditions or events raise substantial doubt about the entity's ability to
continue as a going concern. This guidance applies to all entities and is effective for annual periods ending after December 15,
2016, which will be the Company's fiscal year 2016, with early adoption permitted. The Company does not expect the adoption
of the guidance will have a material impact on the Company's consolidated financial statements.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4. COMPUTATION OF NET INCOME PER COMMON SHARE

Basic net income per share is computed by dividing income from continuing operations attributable to The Ensign Group,
Inc. stockholders by the weighted average number of outstanding common shares for the period. The computation of diluted net
income per share is similar to the computation of basic net income per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued.

A reconciliation of the numerator and denominator used in the calculation of basic net income per common share follows:

Year Ended December 31,
2013

2012

2014

Numerator:

Income from continuing operations

Less: net loss attributable to noncontrolling interests

Income from continuing operations attributable to The Ensign Group,
Inc.

Loss from discontinued operations, net of income tax

33,741
(2,209)

35,950

—

Net income attributable to The Ensign Group, Inc.

35,950

25,658
(186)

25,844
(1,804)
24,040

41,165
(783)

41,948
(1,357)
40,591

Denominator:

Weighted average shares outstanding for basic net income per share

22,341

21,900

21,429

Basic net income (loss) per common share:

Income from continuing operations attributable to The Ensign Group,
Inc.

Loss from discontinued operations

Net income attributable to The Ensign Group, Inc.

1.61

—

1.61

1.18
(0.08)
1.10

1.96
(0.07)
1.89

A reconciliation of the numerator and denominator used in the calculation of diluted net income per common share

follows:

Numerator:

Income from continuing operations

Less: net loss attributable to noncontrolling interests

Income from continuing operations attributable to The Ensign Group,
Inc.

Loss from discontinued operations, net of income tax
Net income attributable to The Ensign Group, Inc.

Denominator:

Weighted average common shares outstanding
Plus: incremental shares from assumed conversion (1)

Adjusted weighted average common shares outstanding

Diluted net income (loss) per common share:

Income from continuing operations attributable to The Ensign Group,
Inc.
Loss from discontinued operations

Net income attributable to The Ensign Group, Inc.

Year Ended December 31,
2013

2014

33,741
(2,209)

25,658
(186)

35,950

—
35,950

22,341

754
23,095

1.56
—
1.56

25,844
(1,804)
24,040

21,900

464
22,364

1.16
(0.09)
1.07

41,165
(783)

41,948
(1,357)
40,591

21,429

513
21,942

1.91
(0.06)
1.85

(1)
Options outstanding which are anti-dilutive and therefore not factored into the weighted average common shares amount
above were 542, 402 and 340 for the years ended December 31, 2014, 2013 and 2012, respectively. As discussed in Note 2, Spin-
Off of Real Estate Assets through a Real Estate Investment Trust and Note 19, Options and Awards effective with the Spin-Off

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

transaction, the holders of the Company's stock options on the date of record received stock options consistent with a conversion
ratio that was necessary to maintain the pre spin-off intrinsic value of the options. The stock option terms and conditions are based
on the existing terms in the the 2001 Stock Option, Deferred Stock and Restricted Stock Plan (2001 Plan), the 2005 Stock Incentive
Plan (2005 Plan) and the 2007 Omnibus Incentive Plan (2007 Plan). In order to preserve the aggregate intrinsic value of the
Company's stock options held by such persons, the exercise prices of such awards were adjusted by using the proportion of the
CareTrust "when-issued" closing stock price to the total Company closing stock prices on the distribution date. The number of
options outstanding were increased by a conversion rate of 1.83 as a result of the Spin-Off.

5. FAIR VALUE MEASUREMENTS

Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers
include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other
than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3,
defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of

December 31, 2014 and 2013:

Cash and cash equivalents

Fair value of interest rate swap

December 31,

2014

2013

Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

$ 50,408

$ — $ — $ 65,755

$ — $ —

$ — $ — $ — $ — $ 1,828

$ —

Our non-financial assets, which include long-lived assets, including goodwill, intangible assets and property and equipment,
are not required to be measured at fair value on a recurring basis. However, on a periodic basis, or whenever events or changes in
circumstances indicate that their carrying value may not be recoverable, we assess our long-lived assets for impairment. When
impairment has occurred, such long-lived assets are written down to fair value. See Note 3, Summary of Significant Accounting
Policies for further discussion of our significant accounting policies.

Debt Security Investments - Held to Maturity

At December 31, 2014 and 2013, the Company had approximately $23,933 and $22,399, respectively, in debt security
investments which were classified as held to maturity and carried at amortized cost. The carrying value of the debt securities
approximates fair value. The Company has the intent and ability to hold these debt securities to maturity. Further, at December 31,
2014, the debt security investments are held in AA, A and BBB- rated debt securities.

Interest Rate Swap Agreement

In connection with the Senior Credit Facility with a six-bank lending consortium arranged by SunTrust and Wells Fargo (the
Senior Credit Facility), in July 2011, the Company entered into an interest rate swap agreement in accordance with Company
policy to reduce risk from volatility in the income statement due to changes in the LIBOR interest rate. The swap agreement, with
a notional amount of $75,000, amortized concurrently with the related term loan portion of the Senior Credit Facility, was five
years in length and set to mature on July 15, 2016. The interest rate swap was designated as a cash flow hedge and, as such, changes
in fair value were reported in other comprehensive income in accordance with hedge accounting. Under the terms of this swap
agreement, the net effect of the hedge was to record swap interest expense at a fixed rate of approximately 4.3%, exclusive of fees.
Net interest paid under the swap was $423, $1,047 and $951 for the years ended December 31, 2014, 2013 and 2012, respectively.

Effective May 30, 2014, the Company de-designated its interest rate swap contract that historically qualified for cash flow
hedge accounting. This was due to the termination of the interest rate swap agreement related to the early retirement of the Senior
Credit Facility. As a result, the Company recognized a loss of $1,023, net of income tax benefit of $638, to interest expense from
accumulated other comprehensive loss during the second quarter of 2014. See Note 18, Debt for additional information.

There was no outstanding interest rate swap contract as of December 31, 2014. As the interest rate swap was terminated
during the second quarter of 2014, there were no gains or losses due to the discontinuance of cash flow hedge treatment during
the years ended December 31, 2013 and 2012.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. REVENUE AND ACCOUNTS RECEIVABLE

Revenue for the years ended December 31, 2014, 2013 and 2012 is summarized in the following tables:

Medicaid

Medicare

Medicaid — skilled

Total Medicaid and Medicare

Managed care
Private and other payors(1)

Year Ended December 31,

2014

2013

2012

Revenue

% of
Revenue

Revenue

% of
Revenue

Revenue

% of
Revenue

358,119

34.9% $ 323,803

35.8% $ 302,046

36.7%

313,144

51,157

722,420

145,796

159,190

30.5

5.0

70.4

14.2

15.4

292,917

36,085

652,805

118,168

133,583

32.4

4.0

72.2

13.1

14.7

278,578

25,418

606,042

106,268

110,845

33.8

3.1

73.6

12.9

13.5

Revenue

$ 1,027,406

100.0% $ 904,556

100.0% $ 823,155

100.0%

(1) Private and other payors includes revenue from urgent care centers and other ancillary services.

Accounts receivable as of December 31, 2014 and 2013 is summarized in the following table:

Medicaid
Managed care
Medicare
Private and other payors

Less: allowance for doubtful accounts

Accounts receivable

December 31,

2014

2013

45,943
39,782
32,861
31,903
150,489
(20,438)
130,051

38,068
30,911
34,562
24,369
127,910
(16,540)
111,370

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. BUSINESS SEGMENTS

The Company has two reportable operating segments: (1) transitional, skilled and assisted living services (TSA services),
which includes the operation of skilled nursing facilities and assisted and independent living facilities and is the largest portion of
the Company's business and (2) home health and hospice services, which includes the Company's home health, home care and
hospice businesses. The Company's Chief Executive Officer, who is the chief operating decision maker, or CODM, reviews
financial information at the operating segment level.

The expansion of the home health and hospice business led the Company to separate its home health and hospice businesses
into a distinct reportable segment in the fourth quarter of 2014. The Company also reports an “all other” category that includes
revenue from its urgent care centers and a mobile x-ray and diagnostic company. The urgent care centers and mobile x-ray and
diagnostic business are neither significant individually nor in aggregate and therefore do not constitute a reportable segment. The
reporting segments are business units that offer different services and that are managed separately to provide greater visibility into
those operations. The "all other" category also includes operating expenses that the Company does not allocate to operating
segments as these expenses are not included in the segment operating performance measures evaluated by the CODM. Previously,
the Company had a single reportable segment, healthcare services, which included providing skilled nursing, assisted living, home
health and hospice, urgent care and related ancillary services. The Company has presented 2013 and 2012 financial information
on a comparative basis to conform with the current year segment presentation. See also Note 12 for comparative information on
changes in the carrying amount of goodwill by segment.

At December 31, 2014, transitional, skilled and assisted living services included 136 wholly-owned skilled nursing

affiliated facilities that offer post-acute, rehabilitative custodial and specialty skilled nursing care, as well as wholly-owned
assisted and independent living affiliated facilities that provide room and board and social services. Home health and hospice
services were provided to patients by the Company's 23 wholly-owned home health and hospice operating subsidiaries. The
Company's urgent care services, which is included in "all other" category, were provided to patients, by the Company's wholly
owned urgent care operating subsidiaries. As of December 31, 2014, the Company held 80% of the membership interest of a
mobile x-ray and diagnostic company, which revenue is included in the "all other" category.

During 2013, the Company sold Doctors Express, a national urgent care franchise system. The results of operations of

this business for all periods presented and the loss or impairment related to this divesture have been classified as discontinued
operations in the accompanying consolidated statements of income and included in the "all other" category. See Note 22,
Discontinued Operations for additional information.

The Company evaluates performance and allocates capital resources to each segment based on an operating model that is

designed to maximize the quality of care provided and profitability. General and administrative expenses are not allocated to
any segment for purposes of determining segment profit or loss, and are included in the "all other" category in the selected
segment financial data that follows. The accounting policies of the reporting segments are the same as those described in Note
3, Summary of Significant Accounting Policies. The Company's CODM does not review assets by segment in his resource
allocation and therefore assets by segment are not disclosed below.

141

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Segment revenues by major payer source were as follows:

Medicaid

Medicare

Medicaid-skilled

Subtotal

Managed care

Private and other

Total revenue

Medicaid

Medicare

Medicaid-skilled

Subtotal

Managed care

Private and other

Total revenue

Medicaid
Medicare

Medicaid-skilled

Subtotal

Managed care
Private and other
Total revenue

Year Ended December 31, 2014

Home
Health and
Hospice
Services

TSA
Services

All Other

Total
Revenue

Revenue %

352,874

5,245

— $

358,119

34.9%

274,723

51,157

678,754

138,215

133,349

38,421

—

43,666

7,581

3,269

—

22,572

313,144

51,157

722,420

145,796

159,190

30.5

5.0

70.4

14.2

15.4

950,318

54,516

22,572

$ 1,027,406

100.0%

Year Ended December 31, 2013

Home
Health and
Hospice
Services

TSA
Services

All Other

Total
Revenue

Revenue %

320,580

3,223

— $

323,803

35.8%

264,223

36,085

620,888

112,669

119,722

28,694

—

31,917

5,499

2,346

—

11,515

292,917

36,085

652,805

118,168

133,583

32.4

4.0

72.2

13.1

14.7

853,279

39,762

11,515

904,556

100.0%

Year Ended December 31, 2012

Home
Health and
Hospice
Services

TSA
Services

301,051
261,745

25,418
588,214
102,737
108,702
799,653

995
16,833

—
17,828
3,531
1,927
23,286

All Other
$

— $
—

—
—
—
216
216

Total
Revenue

302,046
278,578

25,418
606,042
106,268
110,845
823,155

Revenue %
36.7%
33.8

3.1
73.6
12.9
13.5
100.0%

142

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table sets forth selected financial data consolidated by business segment:

Year Ended December 31, 2014

TSA
Services

Home
Health and
Hospice
Services

All Other

Elimination

Revenue from external customers

Intersegment revenue

Total revenue

Income from operations

Interest expense, net of interest income

Income before provision for income taxes

950,318

2,066

952,384

126,011

54,516

9,701

22,572

735

23,307
(62,788)

Total
$ 1,027,406

(2,801)
—
(2,801) $ 1,027,406
72,924
$
(12,382)
60,542

Depreciation and amortization

21,669

539

4,222

— $

26,430

Year Ended December 31, 2013

TSA
Services

Home
Health and
Hospice
Services

All Other

Elimination

Revenue from external customers

Intersegment revenue

Income from operations

Interest expense, net of interest income

Income before provision for income taxes

853,279

1,909

855,188

97,777

39,762

4,776

11,515

523

12,038
$
(44,611) $

Total
904,556

(2,432)
(2,432) $
— $

—

904,556

57,942
(12,281)
45,661

Depreciation and amortization

30,595

400

2,914

— $

33,909

Year Ended December 31, 2012

Revenue from external customers

Intersegment revenue

Total revenue

Income from operations
Interest expense, net of interest income
Income before provision for income taxes
Depreciation and amortization

Elimination

Total
823,155

(766)
(766) $
— $

$
— $

—

823,155
78,273
(11,974)
66,299
28,358

TSA
Services

Home
Health and
Hospice
Services

Other
Ancillary
Services

$
$

799,653

766

800,419
109,478

$
$

23,286

23,286
3,855

$
$

216

—

216
$
(35,060) $

26,882

247

1,229

143

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8. ACQUISITIONS

THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s acquisition strategy is to purchase or lease operating subsidiaries that are complementary to the Company’s
current affiliated facilities, accretive to the Company's business or otherwise advance the Company's strategy. The results of all
the Company’s operating subsidiaries are included in the accompanying Financial Statements subsequent to the date of acquisition.
Acquisitions are typically paid for in cash and are accounted for using the acquisition method of accounting. The Company also
enters in long-term leases that include options to purchase the affiliated facilities. As a result, from time to time, the Company will
acquire affiliated facilities that the Company has been operating under third-party leases.

During the year ended December 31, 2014, the Company continued to expand its operations with the addition of fifteen
stand-alone skilled nursing operations, three assisted living operations, three home health agencies, four hospice agencies, one
hospice license, one home care business, one primary care group and one transitional care management company to its operations.
The aggregate purchase price of the 27 business acquisitions was approximately $96,085, of which $92,669 was paid in cash and
the assumption of an existing HUD-insured loan of $3,417. The Company also entered into three long-term operating leases to
three skilled nursing facilities The details of the operating subsidiaries acquired during the year ended December 31, 2014 are as
follows:

• On March 1, 2014, the Company acquired a skilled nursing operation in Arizona for approximately $9,108. The

acquisition added 196 operational skilled nursing beds operated by the Company's operating subsidiaries.

• On March 3, 2014, the Company acquired a transitional care management company in Idaho for $40. The Company
recorded $31 of goodwill as a part of this transaction. This acquisition did not have an impact on the number of beds
operated by the Company's operating subsidiaries.

• On April 1, 2014 the Company acquired a home health and hospice agency in Idaho and a primary care group in
Washington in two separate transactions, for an aggregate purchase price of approximately $1,350. The Company
recorded $360 and $600 of goodwill and other indefinite-lived intangible assets, respectively, as part of the transactions.
These acquisitions did not impact the number of beds operated by the Company's operating subsidiaries.

• On May 1, 2014, the Company acquired a skilled nursing operation in Arizona for approximately $10,127. This

acquisition added 230 operational skilled nursing beds operated by the Company's operating subsidiaries.

• On May 3, 2014, the Company acquired an assisted living operation in California and the underlying assets of a skilled
nursing facility which the Company previously operated under a long-term lease agreement for an aggregate purchase
price of approximately $16,012. The assisted living operation acquisition added 144 operational assisted living units
operated by the Company's operating subsidiaries. The skilled nursing operation acquisition did not have an impact on
the number of beds operated by the Company's operating subsidiaries.

• On May 7, 2014, the Company purchased the underlying assets of one skilled nursing facility in Utah which it previously
operated under a long-term lease agreement for approximately $4,812. This acquisition did not have an impact on the
number of beds operated by the Company's operating subsidiaries.

• On June 1, 2014, the Company entered into long-term lease agreements and assumed the operations of one skilled nursing
facility in Washington and one skilled nursing facility in Colorado. These leases added 199 operational skilled nursing
beds operated by the Company's operating subsidiaries. The Company did not acquire any material assets or assume
any liabilities other than the tenant's post-assumption rights and obligations under the leases.

•

In a separate transaction, on June 1, 2014, the Company acquired two skilled nursing operations in Wisconsin for an
aggregate purchase price of approximately $4,507. The acquisition added 138 operational skilled nursing beds operated
by the Company's operating subsidiaries.

• On July 1, 2014, the Company entered into a long-term lease agreement and assumed the operations of one skilled
nursing facility in Washington. The acquisition added 67 operational skilled nursing beds operated by the Company's
operating subsidiaries. The Company did not acquire any material assets or assume any liabilities other than the tenant's
post-assumption rights and obligations under the lease.

144

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

• On July 1, 2014, the Company acquired a hospice agency in Colorado for approximately $1,866. The Company recorded
$1,392 and $467 of goodwill and other indefinite-lived intangible assets, respectively, as part of this transaction. This
acquisition did not have an impact on the number of beds operated by the Company's operating subsidiaries.

• On August 1, 2014, the Company acquired a home health agency in California for approximately $1,277. The Company
recorded $1,277 of other indefinite-lived intangible assets as part of this transaction. This acquisition did not impact the
number of beds operated by the Company's operating subsidiaries.

• On August 21, 2014, the Company acquired a hospice license in Arizona for approximately $425. The Company recorded
$425 of other indefinite-lived intangible assets as part of this transaction. This acquisition did not impact the number of
beds operated by the Company's operating subsidiaries.

• On September 24, 2014, the Company acquired an assisted living operation in Arizona for approximately $4,776, which
included the assumption of an existing U.S. Department of Housing and Urban Development (HUD)-insured loan. This
acquisition added 135 operational assisted living units operated by the Company's operating subsidiaries.

• On December 1, 2014, the Company acquired eight skilled nursing operations, two assisted living operations, one home
health agency and one home care business in California for approximately $48,221. The acquisition added 623 and 66
operational skilled nursing beds and operational assisted living units, respectively, operated by the Company's operating
subsidiaries. The Company recognized approximately $13,801 in property, plant and equipment, intangible assets of
approximately $34,420, consisting of $473 in assembled occupancy, $28,680 in favorable leases, $4,551 of goodwill,
$370 in customer relationships and $348 in other indefinite-lived intangible assets as part of this transaction.

• On December 1, 2014, the Company acquired a hospice agency in California for approximately $653. The Company
recorded $653 of other indefinite-lived intangible assets as part of this transaction. This acquisition did not impact the
number of beds operated by the Company's operating subsidiaries.

• On December 31, 2014, the Company acquired a hospice agency in Texas for approximately $850. The Company
recorded $850 of other indefinite-lived intangible assets as part of this transaction. This acquisition did not impact the
number of beds operated by the Company's operating subsidiaries.

During the year ended December 31, 2013, the Company acquired seven stand-alone skilled nursing operations, three stand-
alone assisted living operations, three home health agencies, three hospice agencies and one urgent care center. The aggregate
purchase price of the 17 business acquisitions was approximately $45,364. The Company also entered into a separate operations
transfer agreement with the prior operator as part of each transaction.

During the year ended December 31, 2012, the Company acquired five stand-alone skilled nursing operations, one stand-
alone assisted living operation, two home health agencies and one hospice agency. The aggregate purchase price of the nine business
acquisitions was approximately $31,558. The Company also entered into a separate operations transfer agreement with the prior
tenant as part of each transaction.

In addition, during the year ended December 31, 2012, the Company purchased the underlying assets of three of its skilled
nursing operations in California which it previously operated under long-term lease agreements, which contained options to
purchase, for $11,386. These acquisitions did not impact the Company's operational bed count.

On March 1, 2012, DRX Urgent Care LLC (DRX), a newly formed subsidiary of IC, purchased substantially all of the
assets and assumed certain liabilities of Doctors Express Franchising LLC, a national urgent care franchise system for $2,000,
adjusted for certain items at the time of close and redeemable noncontrolling interest. The redeemable noncontrolling interest was
fair valued at the acquisition date at $11,600. The Company recognized intangible assets of $7,900 in trade name, $3,000 in
franchise relationships and $2,724 in goodwill. See additional details in Note 12, Goodwill and Other Indefinite-Lived Intangible
Assets - Net. On December 31, 2012, IC purchased the remaining ownership interest in DRX for approximately $5,300.

On December 31, 2012, the Company purchased 80% of the membership interest of a mobile x-ray and diagnostic company
for $5,800, plus preliminary net working capital of approximately $1,300 for total consideration of approximately $7,100, which
was paid in cash. The Company recognized intangible assets of approximately $900 in trade name, $4,200 in customer relationship
and $2,100 in goodwill. The Company believes that goodwill will be deductible for tax purposes. See additional details in Note
12 Goodwill and Other Indefinite-Lived Intangible Assets-Net to the Financial Statements.

145

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below presents the allocation of the purchase price for the operations acquired in business combinations during

the year ended December 31, 2014, 2013 and 2012:

Land

Building and improvements

Equipment, furniture, and fixtures

Assembled occupancy

Other assets acquired, net of liabilities assumed

Definite-lived intangible assets

Goodwill

Favorable leases

Other indefinite-lived intangible assets

December 31,

2014

2013

2012

10,314

9,312

41,995

2,933

905

—

729

6,334

28,680

4,195

26,593

1,386

724

—

3,197

—

4,152

1,012

17,615

1,771

289

10,007

7,200

7,105

—

651

96,085

45,364

45,650

Subsequent to the year ended December 31, 2014, the Company acquired five stand-alone skilled nursing operations, two
assisted living operations, two independent living operations, one home health agency, and two urgent care centers for an aggregate
purchase price of $38,570. The Company also entered into a separate operations transfer agreement with the prior operator as part
of each transaction. These acquisitions added 419 and 286 operational skilled nursing beds and operational assisted and independent
living units, respectively, operated by the Company's operating subsidiaries. As of the date of this filing, the preliminary allocation
of the purchase price was not completed as necessary valuation information was not yet available.

9. ACQUISITIONS - UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Company has established an acquisition strategy that is focused on identifying acquisitions within its target markets that
offer the greatest opportunity for investment return at attractive prices. The facilities acquired by the Company are frequently
underperforming financially and can have regulatory and clinical challenges to overcome. Financial information, especially with
underperforming facilities, is often inadequate, inaccurate or unavailable. As a result, the Company has developed an acquisition
assessment program that is based on existing and potential resident mix, the local available market, referral sources and operating
expectations based on the Company's experience with its existing facilities. Following an acquisition, the Company implements
a well-developed integration program to provide a plan for transition and generation of profits from facilities that have a history
of significant operating losses. Consequently, the Company believes that prior operating results are not meaningful as the
information is not generally representative of the Company's current operating results or indicative of the integration potential of
its newly acquired facilities.

The following table represents unaudited pro forma results of consolidated operations as if the acquisitions through the

issuance date of the financial statements had occurred at the beginning of 2013, after giving effect to certain adjustments.

Revenue
Net income
Diluted net income per common share

Our pro forma assumptions are as follows:

December 31,

2014

2013

$1,167,099
30,830
$
1.33
$

$1,074,843
21,625
$
0.97
$

• Revenues and operating costs were based on actual results from the prior operator or from regulatory filings where
available. If actual results were not available, revenues and operating costs were estimated based on available partial
operating results of the prior operator of the facility, or if no information was available, estimates were derived from the
Company’s post-acquisition operating results for that particular facility. Prior year results for the 2014 acquisitions were
obtained from available financial statements provided by prior operators or available cost reports filed by the prior
operators.

146

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

•

Interest expense is based upon the purchase price and average cost of debt borrowed during each respective year when
applicable and depreciation is calculated using the purchase price allocated to the related assets through acquisition
accounting.

The foregoing pro forma information is not indicative of what the results of operations would have been if the acquisitions
had actually occurred at the beginning of the periods presented, and is not intended as a projection of future results or trends.
Included in the table above are pro forma revenue and losses generated during the year ended December 31, 2014, by individually
immaterial business acquisitions completed through December 31, 2014, of $139,693 and $5,120, respectively. The businesses
acquired during the years ended December 31, 2013 and 2012 were not material acquisitions to the Company individually or in
the aggregate. Accordingly, pro forma financial information for the acquisitions in the years ended December 31, 2013 and 2012
is not presented.

10. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

Land
Buildings and improvements
Equipment
Furniture and fixtures
Leasehold improvements
Construction in progress

Less: accumulated depreciation
Property and equipment, net

December 31,

2014

2013

18,994
57,947
80,112
5,732
50,671
423
213,879
(64,171)
149,708

79,679
379,021
97,984
8,851
44,123
2,081
611,739
(131,969)
479,770

See Note 2, Spin-Off of Real Estate Assets through a Real Estate Investment Trust for the impact of the Spin-Off on
property and equipment and Note 8, Acquisitions for information on acquisitions during the year ended December 31, 2014.

11. INTANGIBLE ASSETS — Net

Weighted
Average
Life
(Years)

Gross
Carrying
Amount

2014

Accumulated
Amortization

15.5
31.0
0.5
30.0
18.0

684
30,890
3,884
733
4,940
41,131

(634) $
(783)
(3,461)
(220)
(465)
(5,563) $

December 31,

2013

Gross
Carrying
Amount

Accumulated
Amortization

Net

684
1,596
2,979
733
4,200
10,192

(589) $
(532)
(2,948)
(195)
(210)
(4,474) $

95
1,064
31
538
3,990
5,718

Net

50
30,107
423
513
4,475
35,568

Intangible Assets

Lease acquisition costs
Favorable lease (Note 8)
Assembled occupancy
Facility trade name
Customer relationships

Total

Amortization expense was $1,089, $1,121 and $571 for the years ended December 31, 2014, 2013 and 2012, respectively.
Of the $1,089 in amortization expense incurred during the year ended December 31, 2014, approximately $500 related to the
amortization of patient base intangible assets at recently acquired facilities, which is typically amortized over a period of four to
eight months, depending on the classification of the patients and the level of occupancy in a new acquisition on the acquisition
date.

147

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Estimated amortization expense for each of the years ending December 31 is as follows:

Year
2015
2016
2017
2018
2019
Thereafter

Amount

2,715
2,094
2,007
2,007
2,007
24,738
35,568

12. GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

The Company performs its annual goodwill impairment analysis during the fourth quarter of each year for each reporting
unit that constitutes a business for which discrete financial information is produced and reviewed by operating segment management
and provides services that are distinct from the other components of the operating segment. The Company tests for impairment
by comparing the net assets of each reporting unit to their respective fair values. The Company determines the estimated fair value
of each reporting unit using a discounted cash flow analysis. In the event a unit's net assets exceed its fair value, an implied fair
value of goodwill must be determined by assigning the unit's fair value to each asset and liability of the unit. The excess of the
fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An
impairment loss is measured by the difference between the goodwill carrying value and the implied fair value.

On March 25, 2013, the Company agreed to terms to sell DRX, a national urgent care franchise system for approximately
$8,000, adjusted for certain assets and liabilities. The asset sale was effective on April 15, 2013. The sale resulted in a pre-tax
loss of $2,837 for the year ended December 31, 2013. The Company recognized charges to discontinued operations for the excess
carrying amount of goodwill and other indefinite-lived intangible assets of $1,099 and $1,738, respectively, during the year ended
December 31, 2013 as part of this transaction. See Note 22, Discontinued Operations for additional information.

The Company performs its goodwill impairment test annually and evaluates goodwill when events or changes in
circumstances indicate that its carrying value may not be recoverable. Prior to 2014, the Company performed the annual impairment
testing of goodwill using December 31 as the measurement date. This cycle historically created significant constraints in the
availability of human resources needed to prepare the appropriate projections to be used in the goodwill impairment test using the
December 31 test date, complete the goodwill impairment testing process, and report the results in the Company's financial
statements by the date of filing its Annual Report on Form 10-K. Accordingly, effective with the 2014 annual impairment test, the
Company changed its goodwill impairment test date from December 31 to October 1. The Company believes that using the October
1 date will alleviate the resource constraints that historically existed. The Company believes that this accounting change is to an
alternative accounting principle that is preferable under the circumstances and did not result in the delay, acceleration or avoidance
of an impairment charge. The Company has determined that it is impracticable to objectively determine projected cash flows and
related valuation estimates that would have been used as of each October 1 of prior reporting periods without the use of hindsight.
As such, the change in annual goodwill impairment test date has been prospectively applied as of October 1, 2014. The Company
completed its goodwill impairment test as of October 1, 2014 and no impairments were identified. No triggering events or changes
in circumstances occurred during the period October 1, 2014 (the testing date) through December 31, 2014 that would warrant re-
testing for goodwill impairment.

148

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table represents activity in goodwill by segment as of and for the years ended December 31, 2014, 2013 and

2012:

January 1, 2012

Impairments

Additions
December 31, 2012

Less: charge to discontinued operations for the excess carrying
amount of goodwill

Impairments

Additions

Purchase price adjustment
December 31, 2013

Impairments

Additions
December 31, 2014

Goodwill

Home
Health and
Hospice
Services

TSA
Services

All Other

Total

14,144

3,033

— $

—

14,144

—

14,144
(490)
—

—

13,654

—

2,323

—

2,279

5,312

—

5,312

—

1,966

—

7,278

—

3,651

(1,625)
4,825

3,200

(1,099)
2,101

—

1,231
(329)
3,003

—

360

17,177
(1,625)
7,104

22,656

(1,099)
21,557
(490)
3,197
(329)
23,935

—

6,334

15,977

10,929

3,363

30,269

There was no impairment charge to goodwill for the year ended December 31, 2014. The Company recorded an impairment
charge to goodwill on one facility of $490 for the year ended December 31, 2013. The facility experienced a significant reduction
in admissions due to extensive renovations, which occurred over a year, which resulted in declines in related forecasted cash flows.
Since 1999, the Company has recognized cumulative goodwill impairment losses of $3,399. The purchase price adjustment of
$329 relates to the finalization of net working capital for the Company's acquisition in a mobile x-ray and diagnostic company in
fiscal year 2012.

The initial fair value of DRX assets and liabilities incorporated the fair value analysis of the noncontrolling interest. Therefore,
the original carrying value was based on the fair value of the noncontrolling interest and cash paid. In the course of performing
its impairment analysis for the year ended December 31, 2012 the Company performed an impairment test over the assets of DRX.
As part of the impairment test, the Company calculated the fair value of certain assets, including trade name and franchise
agreements. To determine the implied value of goodwill, fair values were allocated to the assets and liabilities of DRX as of
December 31, 2012. The implied fair value of goodwill was measured as the excess of the fair value of DRX over the amounts
assigned to its assets and liabilities. The impairment loss for DRX was measured by the amount the carrying value of goodwill
exceeded the implied fair value of the goodwill. Based on this assessment, the Company recorded a charge to goodwill and trade
name at DRX of $1,625 and $600, respectively, in the year ended December 31, 2012, which the Company attributed to a decline
in the estimated fair value of redeemable noncontrolling interest. See Note 22, Discontinued Operations for additional information.

As of December 31, 2014, the Company anticipates that total goodwill recognized will be fully deductible for tax purposes.

See further discussion of goodwill acquired at Note 8, Acquisitions.

During the year ended December 31, 2014, the Company recorded $4,598 and $22 in home health and hospice Medicare
license and trade name indefinite-lived intangible assets, respectively, as part of its acquisition of three home health and four
hospice operating subsidiaries.

149

Table of Contents

THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other indefinite-lived intangible assets consists of the following:

Trade name

Home health and hospice Medicare license

13. RESTRICTED AND OTHER ASSETS

Restricted and other assets consist of the following:

Note receivable

Debt issuance costs, net

Long-term insurance losses recoverable asset

Deposits with landlords

Capital improvement reserves with landlords and lenders

Other long-term assets

Restricted and other assets

December 31,

2014

2013

1,055

11,306

12,361

1,033

6,707

7,740

December 31,

2014

2013

— $

2,612

2,256

1,143

774

6,833

2,000

2,801

3,280

872

706

145

9,804

Included in restricted and other assets as of December 31, 2014 and 2013, are anticipated insurance recoveries related to the
Company's general and professional liability claims that are recorded on a gross rather than net basis in accordance with an
Accounting Standards Update issued by the FASB, capitalized debt issuance costs, in 2013, and the long-term portion of a note
receivable from the sale of DRX. See Note 22, Discontinued Operations.

14. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

Quality assurance fee

Resident refunds payable
Deferred revenue
Cash held in trust for patients
Resident deposits
Dividends payable
Property taxes
Other

Other accrued liabilities

December 31,

2014

2013

2,855

7,014
3,471
1,824
1,593
1,708
3,043
3,122
24,630

3,933

5,238
4,633
1,780
1,680
1,564
2,894
3,976
25,698

Quality assurance fee represents amounts payable to Arizona, California, Colorado, Idaho, Iowa, Nebraska, Utah, Washington
and Wisconsin in respect of a mandated fee based on resident days. Patient refunds payable includes amounts due to patients for
overpayments and duplicate payments. Deferred revenue occurs when the Company receives payments in advance of services
provided. Cash held in trust for patients reflects monies received from, or on behalf of, patients. Maintaining a trust account for
patients is a regulatory requirement and, while the trust assets offset the liabilities, the Company assumes a fiduciary responsibility
for these funds. The cash balance related to this liability is included in other current assets in the accompanying consolidated
balance sheets.

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15. INCOME TAXES

THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The provision for income taxes for the years ended December 31, 2014, 2013 and 2012 is summarized as follows:

Current:

Federal

State

Deferred:

Federal

State

Total

December 31,
2013

2012

2014

25,490

13,457

24,434

4,405

2,766

29,895

16,223

4,445

28,879

(2,438)
(656)
(3,094)
26,801 $

3,777

3,780

20,003 $

(2,433)
(1,312)
(3,745)
25,134

A reconciliation of the federal statutory rate to the effective tax rate for the years ended December 31, 2014, 2013 and

2012, respectively, is comprised as follows:

Income tax expense at statutory rate

State income taxes - net of federal benefit

Non-deductible settlement costs

Non-deductible expenses

Non-deductible transaction costs

Other adjustments

Total income tax provision

2014

December 31,
2013

2012

35.0%

4.0

—

0.6

5.2
(0.4)
44.4%

4.0

5.0

0.6

—
(0.8)
43.8%

3.0

—

0.5

—
(0.6)
37.9%

The Company's deferred tax assets and liabilities as of December 31, 2014 and 2013 are summarized as follows:

Deferred tax assets (liabilities):

Accrued expenses

Allowance for doubtful accounts
Tax credits
Captive insurance

Total deferred tax assets

State taxes
Depreciation and amortization
Prepaid expenses

Total deferred tax liabilities
Net deferred tax assets

December 31,

2014

2013

13,913

12,814

8,324
3,375
10,302
35,914
(670)
(6,590)
(6,530)
(13,790)
22,124 $

6,836
2,898
8,979
31,527
(1,111)
(10,825)
(5,895)
(17,831)
13,696

The Company had state credit carryforwards as of December 31, 2014 and 2013 of $3,375 and $2,898, respectively. These
carryforwards almost entirely relate to state limitations on the application of Enterprise Zone employment-related tax credits.
Unless the Company uses the Enterprise Zone credits beforehand, the carryforward will begin to expire in 2023. The remainder
of these carryforwards relates to credits against the Texas margin tax and is expected to carryforward until 2027.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company had federal net operating loss carryforwards as of December 31, 2014 and 2013 of $4,889 and $1,243,
respectively. These Federal net operating losses are expected to begin expiring in 2032. The Company also had state net operating
losses as of December 31, 2014 and 2013 of $309 and $559, respectively. These state net operating losses carry forward over
various periods.

For the years ended December 31, 2014, 2013 and 2012, the Company incurred $7,046, $3,884 and $0, respectively, of
third-party costs in connection with the Spin-Off. The Company has determined that $8,820 of the third-party costs directly
facilitating the Spin-Off are permanently non-deductible for tax purposes and has reflected this determination in its calculation
of the estimated annual effective tax rate. The Company's net tax benefit for the deductible portion of these costs is approximately
$843.

See Note 2, Spin-Off of Real Estate Assets Through a Real Estate Investment Trust, for the changes to the Company's
balance sheet as a result of the Spin-Off on the portions of the Company's consolidated deferred tax assets and liabilities that
no longer pertain to the Company.

The federal statutes of limitations on the Company's 2008, 2009 and 2010 income tax years lapsed during the third quarter
of 2012, 2013 and 2014, respectively. During the fourth quarter of each year, various state statutes of limitations also lapsed.
The lapses for the years ended December 31, 2014, 2013 and 2012 had no impact on the Company's unrecognized tax benefits.

The Company recorded total pre-tax charges related to the settlement with the U.S. Department of Justice (DOJ) and
related expenses of $33,000 and $15,000 during the years ended December 31, 2013 and 2012, respectively, for a total charge
of $48,000. The Company recorded estimated tax benefits of $10,383 and $5,865 during the year ended December 31, 2013
and 2012, respectively. See Note 20, Commitments and Contingencies.

As of December 31, 2014, 2013 and 2012, the Company did not have any unrecognized tax benefits, net of their state

benefits, that would affect the Company's effective tax rate.

During the first quarter of 2012, the State of California initiated an examination of the Company's income tax returns for
the 2008 and 2009 income tax years. The examination was primarily focused on the Captive and the treatment of related insurance
matters and closed with no adjustment. During the third quarter of 2014, the Internal Revenue Service initiated an examination
of the Company's income tax return for the 2012 income tax year. The Company is not currently under examination by any other
major income tax jurisdiction. The Company does not believe the Internal Revenue Service examination or any other event will
significantly impact the balance of unrecognized tax benefits in the next twelve months.

The Company classifies interest and/or penalties on income tax liabilities or refunds as additional income tax expense or

income. Such amounts are not material.

16. LEASES

As a result of the Spin-Off, the Company leases from CareTrust real property associated with 94 affiliated skilled nursing,
assisted living and independent living facilities used in the Company’s operations under the Master Leases. The Master Leases
consist of multiple leases, each with its own pool of properties, that have varying maturities and diversity in property geography.
Under each Master Lease, the Company's individual subsidiaries that operate those properties are the tenants and CareTrust's
individual subsidiaries that own the properties subject to the Master Leases are the landlords. Commencing the third year, the rent
structure under the Master Leases includes a fixed component, subject to annual escalation equal to the lesser of (1) the percentage
change in the Consumer Price Index (but not less than zero) or (2) 2.5%. Annual rent expense under the Master Leases will be
approximately $56,000 during each of the first two years of the Master Leases.

The Master Leases arrangement is commonly known as a triple-net lease. Accordingly, in addition to rent, the Company is
required to pay the following: (1) all impositions and taxes levied on or with respect to the leased properties (other than taxes on
the income of the lessor), (2) all utilities and other services necessary or appropriate for the leased properties and the business
conducted on the leased properties, (3) all insurance required in connection with the leased properties and the business conducted
on the leased properties, (4) all facility maintenance and repair costs and (5) all fees in connection with any licenses or authorizations
necessary or appropriate for the leased properties and the business conducted on the leased properties. Total rent expense under
the Master Leases was approximately $32,667 for the year ended December 31, 2014, respectively, as a result of the Spin-Off on
June 1, 2014. There was no rent expense under the Master Leases for the years ended December 31, 2013 and 2012.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At the Company’s option, the Master Leases may be extended for two or three five-year renewal terms beyond the initial
term, on the same terms and conditions. If the Company elects to renew the term of a master lease, the renewal will be effective
as to all, but not less than all, of the leased property then subject to the master lease.

Among other things, under the Master Leases, the Company must maintain compliance with specified financial covenants
measured on a quarterly basis, including a portfolio coverage ratio and a minimum rent coverage ratio. The Master Leases also
include certain reporting, legal and authorization requirements. The Company is not aware of any defaults as of December 31,
2014.

The Company also leases certain affiliated facilities and its administrative offices under non-cancelable operating leases,
most of which have initial lease terms ranging from five to 20 years. In addition, the Company leases certain of its equipment
under non-cancelable operating leases with initial terms ranging from three to five years. Most of these leases contain renewal
options, certain of which involve rent increases. Total rent expense, inclusive of straight-line rent adjustments and rent associated
with the Master Leases noted above, was $48,947, $14,073 and $13,779 for the years ended December 31, 2014, 2013 and 2012,
respectively.

Future minimum lease payments for all leases as of December 31, 2014 are as follows:

Year

2015

2016

2017

2018

2019

Thereafter

Amount

74,927

74,778

74,270

74,293

73,232

755,212

$ 1,126,712

Six of the Company’s affiliated facilities, excluding the facilities that are operated under the Master Leases from CareTrust,
are operated under two separate three-facility master lease arrangements. Under these master leases, a breach at a single facility
could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with
Medicare and Medicaid provider requirements is a default under several of the Company’s leases, master lease agreements and
debt financing instruments. In addition, other potential defaults related to an individual facility may cause a default of an entire
master lease portfolio and could trigger cross-default provisions in the Company’s outstanding debt arrangements and other leases.
With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the
consent of the landlord.

In addition, a number of the Company's individual facility leases are held by the same or related landlords, and some of
these leases include cross-default provisions that could cause a default at one facility to trigger a technical default with respect to
others, potentially subjecting certain leases and facilities to the various remedies available to the landlords under separate but
cross-defaulted leases. The Company is not aware of any defaults as of December 31, 2014.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17. SELF INSURANCE RESERVES

The following table represents activity in our insurance reserves as of and for the years ended December 31, 2014 and

2013:

Balance January 1, 2013

Current year provisions

Claims paid and direct expenses

Change in long-term insurance losses recoverable
Balance December 31, 2013

Current year provisions

Claims paid and direct expenses

Change in long-term insurance losses recoverable
Balance December 31, 2014

General and
Professional
Liability

35,108

Worker's
Compensation
13,308
$

Health

Total

2,467

50,883

7,879
(11,890)
(648)
30,449

9,746
(9,638)
(156)
30,401 $

6,656
(4,755)
709

15,918

6,083
(5,376)
(867)
15,758 $

17,171
(16,902)
—

2,736

18,046
(16,981)
—

3,801 $

31,706
(33,547)
61

49,103

33,875
(31,995)
(1,023)
49,960

Included in long-term insurance losses recoverable as of December 31, 2014 and 2013, are anticipated insurance recoveries
related to the Company's general and professional liability claims that are recorded on a gross rather than net basis in accordance
with GAAP.

18. DEBT

Long-term debt consists of the following:

The 2014 Credit Facility with SunTrust, principal and interest payable quarterly,
balance due at May 1, 2019, secured by substantially all of the Company’s personal
property.

Senior Credit Facility with SunTrust and Wells Fargo, principal and interest payable
quarterly, balance due at February 1, 2018, secured by substantially all of the
Company’s personal property.

Mortgage note, principal, and interest payable monthly and continuing through
October 2037, interest at fixed rate, collateralized by deed of trust on real property,
assignment of rents and security agreement.

Promissory note with RBS, principal and interest payable monthly and continuing
through March 2019, interest at a fixed rate, collateralized by real property, assignment
of rents and Company guaranty.
Promissory note with RBS, principal and interest payable monthly and continuing
through January 2018, interest at a fixed rate, collateralized by real property,
assignment of rents and Company guaranty.
Ten Project Note with GECC, principal and interest payable monthly; interest is fixed,
balance due June 2016, collateralized by deeds of trust on real property, assignment of
rents, security agreements and fixture financing statements.
Promissory notes, principal, and interest payable monthly and continuing through
October 2019, interest at fixed rate, collateralized by deed of trust on real property,
assignment of rents and security agreement.
Mortgage note, principal, and interest payable monthly and continuing through
February 2027, interest at fixed rate, collateralized by deed of trust on real property,
assignment of rents and security agreement.

Less current maturities
Less debt discount

December 31,

2014

2013

65,000

—

144,325

3,390

—

—
68,390
(111)
—

20,347

32,122

48,864

8,919

5,429
260,006
(7,411)
(700)
251,895

68,279

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2014 Credit Facility with a Lending Consortium Arranged by SunTrust (2014 Credit Facility)

On May 30, 2014, the Company entered into the 2014 Credit Facility in an aggregate principal amount of $150,000 from a
syndicate of banks and other financial institutions. Under the 2014 Credit Facility, the Company may seek to obtain incremental
revolving or term loans in an aggregate amount not to exceed $75,000. The interest rates applicable to loans under the 2014 Credit
Facility are, at the Company’s option, equal to either a base rate plus a margin ranging from 1.25% to 2.25% per annum or LIBOR
plus a margin ranging from 2.25% to 3.25% per annum, based on the debt to Consolidated EBITDA ratio of the Company and its
subsidiaries as defined in the agreement. In addition, the Company will pay a commitment fee on the unused portion of the
commitments under the 2014 Credit Facility that will range from 0.30% to 0.50% per annum, depending on the debt to Consolidated
EBITDA ratio of the Company and its subsidiaries. Loans made under the 2014 Credit Facility are not subject to interim
amortization. The Company is not required to repay any loans under the 2014 Credit Facility prior to maturity, other than to the
extent the outstanding borrowings exceed the aggregate commitments under the 2014 Credit Facility. The Company is permitted
to prepay all or any portion of the loans under the 2014 Credit Facility prior to maturity without premium or penalty, subject to
reimbursement of any LIBOR breakage costs of the lenders. In connection with the 2014 Credit Facility, the Company incurred
financing costs of approximately $2,013, which were deferred and are being amortized over the term of the 2014 Credit Facility.
As of December 31, 2014, the Company's operating subsidiaries had $65,000 outstanding under the 2014 Credit Facility.

The 2014 Credit Facility is guaranteed, jointly and severally, by certain of the Company’s wholly owned subsidiaries, and
is secured by substantially all of the Company's personal property. The 2014 Credit Facility contains customary covenants that,
among other things, restrict, subject to certain exceptions, the ability of the Company and its subsidiaries to grant liens on their
assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, amend certain material
agreements and pay certain dividends and other restricted payments. Under the 2014 Credit Facility, the Company must comply
with financial maintenance covenants to be tested quarterly, consisting of a maximum debt to consolidated EBITDA ratio, and a
minimum interest/rent coverage ratio. The majority of lenders can require that the Company and its subsidiaries mortgage certain
of their real property assets to secure the 2014 Credit Facility if an event of default occurs, the debt to consolidated EBITDA ratio
is above 2.50:1.00 for two consecutive fiscal quarters, or the Company’s liquidity is equal or less than 10% of the Aggregate
Revolving Commitment Amount (as defined in the agreement) for ten consecutive business days, provided that such mortgages
will no longer be required if the event of default is cured, the debt to consolidated EBITDA ratio is below 2.50:1.00 for two
consecutive fiscal quarters, or the Company’s liquidity is above 10% of the Aggregate Revolving Commitment Amount (as defined
in the agreement) or ninety consecutive days, as applicable. As of December 31, 2014, the Company was in compliance with all
loan covenants. As of February 5, 2015, there was approximately $94,000 outstanding under the 2014 Credit Facility.

Senior Credit Facility with a Lending Consortium Arranged by SunTrust and Wells Fargo (Senior Credit Facility)

On July 15, 2011, the Company entered into the Senior Credit Facility in an aggregate principal amount of up to $150,000
comprised of a $75,000 revolving credit facility and a $75,000 term loan advanced in one drawing on July 15, 2011. Borrowings
under the term loan portion of the Senior Credit Facility amortize in equal quarterly installments commencing on September 30,
2011, in an aggregate annual amount equal to 5.0% per annum of the original principal amount. Amounts borrowed pursuant to
the Senior Credit Facility were guaranteed by certain of the Company’s wholly-owned subsidiaries and secured by substantially
all of their personal property. To reduce the risk related to interest rate fluctuations, the Company, on behalf of the subsidiaries,
entered into an interest rate swap agreement to effectively fix the interest rate on the term loan portion of the Senior Credit Facility.
See further details of the interest rate swap at Note 5, Fair Value Measurements.

On May 30, 2014, the Senior Credit Facility outstanding was paid in full with a portion of the proceeds received from

CareTrust in connection with the Spin-Off and the agreement was terminated at the time of the Spin-Off.

Mortgage Loan with Red Mortgage Capital, LLC

On September 24, 2014, the Company acquired an assisted living operation in Arizona. The acquisition was purchased with
a combination of cash and the assumption of an existing mortgage loan with Red Mortgage Capital, LLC of approximately $3,417.
The mortgage loan is insured with the U.S. Department of Housing and Urban Development (HUD), which subjects the facility
to HUD oversight and periodic inspections. The mortgage loan bears interest at the rate of 2.55% per annum. Amounts borrowed
under the mortgage loan may be prepaid starting after the second anniversary of the note subject to prepayment fees of 9.0% of
the principal balance on the date of prepayment. These prepayment fees are reduced by 1.0% a year for years three through 11 of
the loan. There is no repayment penalty after year eleven. The term of the mortgage loan is for 25 years, with monthly principal
and interest payments commencing on September 12, 2012 and the balance due on October 1, 2037. The mortgage loan was
secured by the real property comprising the facility and the rents, issues and profits thereof, as well as all personal property used

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

in the operation of the facility. As of December 31, 2014, the Company's operating subsidiary had $3,390 outstanding, of which
$111 is classified as short-term and the remaining $3,279 is classified as long-term. As of December 31, 2014, the Company is
in compliance with all loan covenants.

Promissory Note with RBS Asset Finance, Inc.

On February 17, 2012, two of the Company's real estate holding subsidiaries as Borrowers executed a promissory note in
favor of RBS Asset Finance, Inc. (RBS) as Lender for an aggregate of $21,525 (the 2012 RBS Loan). The 2012 RBS Loan was
secured by Commercial Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filings on the properties
owned by the Borrowers, and other related instruments and agreements, including without limitation a promissory note and a
Company guaranty. The 2012 RBS Loan had a fixed interest rate of 4.75%.

On May 30, 2014, the RBS Loan was paid in full with a portion of the proceeds received from CareTrust in connection with

the Spin-Off and the agreement was terminated at the time of the Spin-Off.

Promissory Note with RBS Asset Finance, Inc.

On December 31, 2010, four of the Company's real estate holding subsidiaries executed a promissory note with RBS as
Lender for an aggregate of $35,000 (RBS Loan). The RBS Loan was secured by Commercial Deeds of Trust, Security Agreements,
Assignment of Leases and Rents and Fixture Fillings on the four properties and other related instruments and agreements, including
without limitation a promissory note and a Company guaranty. The RBS Loan had a fixed interest rate of 6.04%.

On May 30, 2014, the RBS Loan was paid in full with a portion of the proceeds received from CareTrust in connection with

the Spin-Off and the agreement was terminated at the time of the Spin-Off.

CareTrust Indebtedness

Immediately before the Spin-Off, on May 30, 2014, while CareTrust was a wholly-owned subsidiary of the Company,

CareTrust raised $260,000 of debt financing, which was part of the net assets contributed to CareTrust as part of the Spin-Off.
See Note 2, Spin-Off of Real Estate Assets Through a Real Estate Investment Trust.

Promissory Notes with Johnson Land Enterprises, Inc.

On October 1, 2009, four subsidiaries of The Ensign Group, Inc. entered into four separate promissory notes with Johnson
Land Enterprises, LLC, for an aggregate of $10,000, as a part of the Company’s acquisition of three skilled nursing facilities in
Utah.

On May 30, 2014, the Company repaid the majority of the four promissory notes with a portion of the proceeds received

from CareTrust in connection with the Spin-Off. The remaining $615 was assumed.

Mortgage Loan with Continental Wingate Associates, Inc.

Ensign Southland LLC, a subsidiary of The Ensign Group, Inc., entered into a mortgage loan on January 30, 2001 with
Continental Wingate Associates, Inc. The mortgage loan is insured with HUD, which subjects the Company's Southland facility
to HUD oversight and periodic inspections. The mortgage loan was secured by the real property comprising the Southland Care
Center facility and the rents, issues and profits thereof, as well as all personal property used in the operation of the facility.

On May 30, 2014, the mortgage loan was paid in full with a portion of the proceeds received from CareTrust in connection

with the Spin-Off and the agreement was terminated at the time of the Spin-Off.

Term Loan with General Electric Capital Corporation

On December 29, 2006, a number of the Company's independent real estate holding subsidiaries jointly entered into the Ten
Project Note with GECC, which consisted of an approximately $55,700 multiple-advance term loan (Ten Project Note). The Ten
Project Note was secured by the real and personal property comprising the ten facilities owned by these subsidiaries.

On May 30, 2014, the Company entered into the Fifth Amended and Restated Loan Agreement, with GECC, which consisted
of an additional loan of $50,676 to an aggregate principal amount of $99,000. The Ten Project Note matures in May 2017. The
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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

initial term loan of $55,700 was funded in advances, with each advance bearing interest at a separate rate. The interest rates range
from 6.95% to 7.50% per annum. The additional loan of $50,676 bears interest at a floating rate equal to the three month LIBOR
plus 3.35%, reset monthly and subject to a LIBOR floor of 0.50%, with monthly principal and interest payments based on a 25
years amortization.

On May 30, 2014, the Ten Project Note was assumed by CareTrust in connection with the Spin-Off.

In connection with the debt retirements, the Company incurred losses of $5,728 consisting of $4,067 in repayment penalties
and the write off of unamortized debt discount and deferred financing costs and $1,661 of recognized loss due to the discontinuance
of cash flow hedge accounting for the related interest-rate swap, which are included in interest expense within the 2014 consolidated
statements of income.

Based on Level 2, the carrying value of the Company's long-term debt is considered to approximate the fair value of such

debt for all periods presented based upon the interest rates that the Company believes it can currently obtain for similar debt.

Future principal payments due under the long-term debt arrangements discussed above are as follows:

Years Ending
December 31,
2015

2016

2017

2018

2019

Thereafter

Amount

111

114

117

120

65,123

2,805

68,390

Off-Balance Sheet Arrangements

As of December 31, 2014 and 2013, we had approximately $2,750 on the 2014 Credit Facility and $2,000 on the Senior
Credit Facility, respectively, of borrowing capacity pledged as collateral to secure outstanding letters of credit. The letters of credit
are outstanding as of December 31, 2014.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19. OPTIONS AND AWARDS

Stock-based compensation expense consists of share-based payment awards made to employees and directors, including
employee stock options and restricted stock awards, based on estimated fair values. As stock-based compensation expense
recognized in the Company’s consolidated statements of income for the years ended December 31, 2014, 2013 and 2012 was based
on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time
of grant and, if necessary, revises the estimate in subsequent periods if actual forfeitures differ.

The Company has three option plans, the 2001 Plan, the 2005 Plan and the 2007 Plan, all of which have been approved by
the stockholders. The total number of shares available under all of the Company’s stock incentive plans was 1,233 as of
December 31, 2014.

2001 Stock Option, Deferred Stock and Restricted Stock Plan - The 2001 Plan authorizes the sale of up to 1,980 shares of
common stock to officers, employees, directors, and consultants of the Company. Granted non-employee director options vest
and become exercisable immediately. Generally, all other granted options and restricted stock vest over five years at 20% per year
on the anniversary of the grant date. Options expire ten years from the date of grant. The exercise price of the stock is determined
by the board of directors, but shall not be less than 100% of the fair value on the date of grant. There were 319 unissued shares
of common stock available for issuance under this plan for each of the years ending December 31, 2014, 2013 and 2012, including
shares that have been forfeited and are available for reissue.

2005 Stock Incentive Plan - The 2005 Plan authorizes the sale of up to 1,000 shares of treasury stock of which only 800 shares
were repurchased and therefore eligible for reissuance. Options granted to non-employee directors vest and become exercisable
immediately. All other granted options vest over five years at 20% per year on the anniversary of the grant date. Options expire
10 years from the date of grant. There were 147 unissued shares of common stock available for issuance under this plan for each
of the years ending December 31, 2014, 2013 and 2012, including shares that have been forfeited and are available for reissue.

2007 Omnibus Incentive Plan - The 2007 Plan authorizes the sale of up to 1,000 shares of common stock to officers,
employees, directors and consultants of the Company. In addition, the number of shares of common stock reserved under the 2007
Plan will automatically increase on the first day of each fiscal year, beginning on January 1, 2008, in an amount equal to the lesser
of (i) 1,000 shares of common stock, or (ii) 2% of the number of shares outstanding as of the last day of the immediately preceding
fiscal year, or (iii) such lesser number as determined by the Company's board of directors. Granted non-employee director options
vest and become exercisable in three equal annual installments, or the length of the term if less than three years, on the completion
of each year of service measured from the grant date. All other granted options vest over five years at 20% per year on the anniversary
of the grant date. Options expire 10 years from the date of grant. At December 31, 2014, 2013 and 2012, there were 767, 717 and
627 unissued shares of common stock available for issuance under this plan.

Effective with the Spin-Off transaction (see Note 2, Spin-Off of Real Estate Assets Through a Real Estate Investment Trust,
for further information), all holders of the Company's restricted stock awards on the May 22, 2014 date of record for the Spin-Off
received CareTrust restricted stock awards consistent with the distribution ratio, with terms and conditions substantially similar
to the terms and conditions applicable to the Company's restricted stock awards. Also, effective with the Spin-Off transaction, the
holders of the Company's stock options on the date of record received stock options consistent with a conversion ratio that was
necessary to maintain the pre spin-off intrinsic value of the options. The stock options terms and conditions are based on the
preexisting terms in the 2001 Plan, 2005 Plan and 2007 Plan, including nondiscretionary antidilution provisions. In order to preserve
the aggregate intrinsic value of the Company's stock options held by such persons, the exercise prices of such awards were adjusted
by using the proportion of the CareTrust closing stock price to the total Company closing stock prices on the distribution date. All
of these adjustments were designed to equalize the fair value of each award before and after Spin-Off. These adjustments were
accounted for as modifications to the original awards. A comparison of the fair value of the modified awards with the fair value
of the original awards immediately before the modification did not yield incremental value. Accordingly, the Company did not
record any incremental compensation expense as a result of the modifications to the awards on the Spin-Off date.

The Company's future share-based compensation expense will not be significantly impacted by the equity award adjustments
that occurred as a result of the Spin-Off. Deferred compensation costs as of the date of the Spin-Off reflected the unamortized
balance of the original grant date fair value of the equity awards held by the employees of the Company's operating subsidiaries
(regardless of whether those awards are linked to the Company's stock or CareTrust's stock).

The Company uses the Black-Scholes option-pricing model to recognize the value of stock-based compensation expense
for all share-based payment awards. Determining the appropriate fair-value model and calculating the fair value of stock-based
awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and

158

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly
over time. The Black-Scholes model required the Company to make several key judgments including:

• The expected option term reflects the application of the simplified method set out in Staff Accounting Bulletin
(SAB) No. 107 Share-Based Payment (SAB 107), which was issued in March 2005. In December 2007, the Securities
and Exchange Commission (SEC) released Staff Accounting Bulletin No. 110 (SAB 110), which extends the use of the
“simplified” method, under certain circumstances, in developing an estimate of the expected term of “plain vanilla” share
options. Accordingly, the Company has utilized the average of the contractual term of the options and the weighted
average vesting period for all options to calculate the expected option term. The Company will utilize its own experience
to calculate the expected option term in the future when it has sufficient history.

• Estimated volatility also reflects the application of SAB 107 interpretive guidance and, accordingly, incorporates historical
volatility of similar public entities until sufficient information regarding the volatility of the Company's share price
becomes available. As sufficient historical information was available in the current period, the Company utilized its own
experience to calculate estimated volatility for options granted in the year 2014.

• The dividend yield is based on the Company's historical pattern of dividends as well as expected dividend patterns.

• The risk-free rate is based on the implied yield of U.S. Treasury notes as of the grant date with a remaining term

approximately equal to the expected term.

• Estimated forfeiture rate of approximately 8.45% per year is based on the Company's historical forfeiture activity of

unvested stock options.

The Company granted 1,029 options and 28 restricted stock awards from the 2007 Plan during the year ended December 31,
2014. The Company used the following assumptions for stock options granted during the years ended December 31, 2014, 2013
and 2012:

Grant Year

2014

2013

2012

Options
Granted

Weighted
Average Risk-
Free Rate

Expected
Life

1,029

455

451

1.80% -
1.18% -
0.84% -

1.91% 6.5 years

1.87% 6.5 years

1.18% 6.5 years

Weighted
Average Volatility
-

44%

47%

55%

Weighted
Average Dividend
Yield

0.57% -
0.64% -

0.82%

0.93%

For the years ended December 31, 2014, 2013 and 2012, the following represents the exercise price and fair value

displayed at grant date for stock option grants:

Grant Year
2014
2013
2012

Weighted
Average
Exercise
Price

Granted

1,029
455
451

$
$
$

25.36
19.35
15.08

Weighted
Average
Fair Value
of Options
11.31
$
9.66
$
7.35
$

The weighted average exercise price equaled the weighted average fair value of common stock on the grant date for all

options granted during the periods ended December 31, 2014, 2013 and 2012 and therefore, the intrinsic value was $0 at date of
grant.

As discussed above and in Note 2, Spin-Off of Real Estate Assets through a Real Estate Investment Trust, the weighted
average exercise prices shown in the table above for the year ended December 31, 2014 were reduced as a result of the Spin-
Off. The number of options outstanding shown in the table below for the year ended December 31, 2014 were increased as a
result of the Spin-Off.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table represents the employee stock option activity during the years ended December 31, 2014, 2013 and

2012:

January 1, 2012

Granted

Forfeited

Exercised
December 31, 2012

Granted

Forfeited

Exercised
December 31, 2013

Granted

Forfeited

Exercised
December 31, 2014

Number of
Options
Outstanding

2,993

451
(115)
(786)
2,543

455
(121)
(587)
2,290

1,029
(64)
(489)
2,766

Weighted
Average
Exercise Price
7.08
$

Number of
Options Vested
1,716

Weighted
Average
Exercise Price
of Options
Vested

5.81

15.08

8.62

5.97

8.76

19.35

13.48

6.10

11.30

25.36

16.27

7.86

17.02

1,355

6.48

1,249

7.76

1,109

9.39

The following summary information reflects stock options outstanding, vested and related details as of December 31,

2014:

Year of Grant

2005

2006

2008

2009

2010

2011

2012

2013
2014
Total

Stock Options Outstanding

Stock
Options
Vested

Exercise Price
3.14
-
2.72

3.85

5.12

8.12

9.53

4.09

8.11

9.11

9.91

11.79 - 15.98

13.12 - 15.91

15.96 - 22.98
21.09 - 37.88

Number
Outstanding
28

Black-
Scholes
Fair Value
*

Remaining
Contractual
Life (Years)
1

Vested and
Exercisable
28

281

404

103

122

342

382

837

1,736

495

822

2,522

395
1,018
2,766

3,856
11,522
$ 22,172

9
10

281

404

116

69
—
1,109

* The Company will not recognize the Black-Scholes fair value for awards granted prior to January 1, 2006 unless such awards
are modified.

The Company granted 28, 93, and 71 restricted stock awards during the years ended December 31, 2014, 2013 and 2012,
respectively. All awards were granted at an exercise price of $0 and generally vest over five years. The fair value per share of
restricted awards granted in 2014, 2013, and 2012 ranged from $30.75 to $44.71, $27.98 to $42.13 and $24.04 to $29.16,
respectively.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of the Company's nonvested restricted stock awards as of December 31, 2014, and changes during

the years ended December 31, 2014, 2013 and 2012 is presented below:

Nonvested at January 1, 2012

Granted

Vested

Forfeited
Nonvested at December 31, 2012

Granted

Vested

Forfeited
Nonvested at December 31, 2013

Granted

Vested

Forfeited
Nonvested at December 31, 2014

Nonvested
Restricted
Awards

Weighted Average
Grant Date Fair
Value

210

71
(44)
(13)
224

93
(51)
(36)
230

28
(65)
(10)
183

22.32

27.78

27.53

21.98

23.04

35.27

23.67

24.70

28.68

35.50

26.75

30.24

30.30

As a result of the Spin-Off, holders of outstanding restricted stock awards received an additional share of restricted stock
unit award in CareTrust common stock at the Spin-Off so that the intrinsic value of these awards were equivalent to those that
existed immediately prior to the Spin-Off. The weighted average grant date fair value shown in the table above did not change as
a result of the Spin-Off. The number of nonvested restricted awards shown in the table above did not change as a result of the
Spin-Off.

In addition, during the year ended December 31, 2014, the Company granted 7 automatic quarterly stock awards to non-
employee directors for their service on the Company's board of directors. The fair value per share of these stock awards ranged
from $30.75 to $44.71 based on the market price on the grant date.

Total share-based compensation expense recognized for the years ended December 31, 2014, 2013 and 2012 was as

follows:

Share-based compensation expense related to stock options

Share-based compensation expense related to restricted stock awards

Share-based compensation expense related to stock awards
Total

Year Ended December 31,

2014

2013

2012

3,134

2,217

1,657

399
5,190

1,387

795
4,399

1,903

1,084

1,752
4,739

For the year ended December 31, 2014, the Company expensed $399 in share-based compensation related to the quarterly

stock awards to non-employee directors.

The Company recognized tax benefits related to share-based compensation expense of $2,306, $1,723, and $1,740 during
the years ended December 31, 2014, 2013 and 2012, respectively. In future periods, the Company expects to recognize
approximately $15,128 and $4,762 in share-based compensation expense for unvested options and unvested restricted stock awards,
respectively, that were outstanding as of December 31, 2014. Future share-based compensation expense will be recognized over
4.0 and 3.0 weighted average years for unvested options and restricted stock awards, respectively. There were 1,657 unvested and
outstanding options at December 31, 2014, of which 1,495 are expected to vest. The weighted average contractual life for options
outstanding, vested and expected to vest at December 31, 2014 was 7.0 years.

161

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The aggregate intrinsic value of options outstanding, vested, expected to vest and exercised as of December 31, 2014,

2013 and 2012 is as follows:

Options

Outstanding

Vested

Expected to vest

Exercised

2014

December 31,
2013

2012

75,689

29,431

38,811

31,160

10,496

20,465

7,873

8,709

15,703

11,285

4,088

7,123

The intrinsic value is calculated as the difference between the market value of the underlying common stock and the

exercise price of the options.

20. COMMITMENTS AND CONTINGENCIES

Regulatory Matters — Laws and regulations governing Medicare and Medicaid programs are complex and subject to
interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation, as well
as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. The Company
believes that it is in compliance in all material respects with all applicable laws and regulations.

Cost-Containment Measures — Both government and private pay sources have instituted cost-containment measures designed
to limit payments made to providers of healthcare services, and there can be no assurance that future measures designed to limit
payments made to providers will not adversely affect the Company.

Income Tax Examinations — During the third quarter of 2014, the IRS sent notification to the Company that the 2012 tax
return will be examined. The examination was closed in 2014 with no adjustment. During the first quarter of 2012, the State of
California initiated an examination of the Company's income tax returns for the 2008 and 2009 income tax years. The examination
was primarily focused on the Captive and the treatment of related insurance matters. See Note 15, Income Taxes.

Indemnities — From time to time, the Company enters into certain types of contracts that contingently require the Company
to indemnify parties against third-party claims. These contracts primarily include (i) certain real estate leases, under which the
Company may be required to indemnify property owners or prior facility operators for post-transfer environmental or other liabilities
and other claims arising from the Company’s use of the applicable premises, (ii) operations transfer agreements, in which the
Company agrees to indemnify past operators of facilities the Company acquires against certain liabilities arising from the transfer
of the operation and/or the operation thereof after the transfer, (iii) certain lending agreements, under which the Company may be
required to indemnify the lender against various claims and liabilities, and (iv) certain agreements with the Company’s officers,
directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their
employment relationships. The terms of such obligations vary by contract and, in most instances, a specific or maximum dollar
amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a specific
claim is asserted. Consequently, because no claims have been asserted, no liabilities have been recorded for these obligations on
the Company’s balance sheets for any of the periods presented.

Litigation — The skilled nursing business involves a significant risk of liability given the age and health of the patients and
residents served by the Company's operating subsidiaries. The Company, its operating subsidiaries, and others in the industry are
subject to an increasing number of claims and lawsuits, including professional liability claims, alleging that services provided
have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in
significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards.

In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the
Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program
(such as Medicare) or payor. A violation may provide the basis for exclusion from federally-funded healthcare programs. Such
exclusions could have a correlative negative impact on the Company’s financial performance. Some states, including California,
Arizona and Texas, have enacted similar whistleblower and false claims laws and regulations. In addition, the Deficit Reduction
Act of 2005 created incentives for states to enact anti-fraud legislation modeled on the Federal False Claims Act. As such, the
Company could face increased scrutiny, potential liability and legal expenses and costs based on claims under state false claims
acts in markets in which it does business.

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In May 2009, Congress passed the Fraud Enforcement and Recovery Act (FERA) of 2009 which made significant changes
to the Federal False Claims Act (FCA), expanding the types of activities subject to prosecution and whistleblower liability. Following
changes by FERA, health care providers face significant penalties for the knowing retention of government overpayments, even
if no false claim was involved. Health care providers can now be liable for knowingly and improperly avoiding or decreasing an
obligation to pay money or property to the government. This includes the retention of any government overpayment. The government
can argue, therefore, that a FCA violation can occur without any affirmative fraudulent action or statement, as long as it is knowingly
improper. In addition, FERA extended protections against retaliation for whistleblowers, including protections not only for
employees, but also contractors and agents. Thus, there is generally no need for an employment relationship in order to qualify
for protection against retaliation for whistleblowing.

Healthcare litigation (including class action litigation) is common and is filed based upon a wide variety of claims and
theories, and we are routinely subjected to varying types of claims. One particular type of suit arises from alleged violations of
state-established minimum staffing requirements for skilled nursing facilities. Failure to meet these requirements can, among other
things, jeopardize a facility's compliance with conditions of participation under certain state and federal healthcare programs; it
may also subject the facility to a notice of deficiency, a citation, civil monetary penalty, or litigation. These class-action “staffing”
suits have the potential to result in large jury verdicts and settlements, and have become more prevalent in the wake of a previous
substantial jury award against one of the Company's competitors. The Company expects the plaintiff's bar to continue to be
aggressive in their pursuit of these staffing and similar claims.

A class action staffing suit was previously filed against the Company and certain of its California subsidiaries in the State
of California, alleging, among other things, violations of certain Health and Safety Code provisions and a violation of the Consumer
Legal Remedies Act. In 2007, the Company settled this class action suit, and the settlement was approved by the affected class
and the Court. The Company has been defending a second such staffing class-action claim filed in Los Angeles Superior Court;
however, a settlement was reached with class counsel and has received Court approval. The total costs associated with the settlement,
including attorney's fees, estimated class payout, and related costs and expenses, were approximately $6,500, of which,
approximately $1,500 and $2,596 of this amount was recorded during the years ended December 31, 2013 and 2012, respectively,
with the balance having been expensed in prior periods. The Company believes that the settlement will not have a material ongoing
adverse effect on the Company’s business, financial condition or results of operations.

Other claims and suits, including class actions, continue to be filed against us and other companies in our industry. If
there were a significant increase in the number of these claims or an increase in amounts owing should plaintiffs be successful in
their prosecution of these claims, this could materially adversely affect the Company’s business, financial condition, results of
operations and cash flows.

The Company and its affiliates and subsidiaries have been, and continue to be, subject to claims and legal actions that arise
in the ordinary course of business, including potential claims related to patient care and treatment as well as employment related
claims. The Company does not believe that the ultimate resolution of these actions will have a material adverse effect on the
Company’s business, cash flows, financial condition or results of operations. A significant increase in the number of these claims
or an increase in amounts owing should plaintiffs be successful in their prosecution of these claims, could materially adversely
affect the Company’s business, financial condition, results of operations and cash flows.

The Company cannot predict or provide any assurance as to the possible outcome of any litigation. If any litigation were to
proceed, and the Company, its affiliates and subsidiaries are subjected to, alleged to be liable for, or agrees to a settlement of,
claims or obligations under Federal Medicare statutes, the Federal False Claims Act, or similar State and Federal statutes and
related regulations, its business, financial condition and results of operations and cash flows could be materially and adversely
affected and its stock price could be adversely impacted. Among other things, any settlement or litigation could involve the payment
of substantial sums to settle any alleged civil violations, and may also include the assumption of specific procedural and financial
obligations by the Company or its subsidiaries going forward under a corporate integrity agreement and/or other arrangement with
the government.

Medicare Revenue Recoupments — The Company is subject to reviews relating to Medicare services, billings and potential
overpayments. The Company had one operation subject to probe review during the year ended December 31, 2014. The Company
anticipates that these probe reviews will increase in frequency in the future. Further, the Company currently has no affiliated
facilities on prepayment review; however, others may be placed on prepayment review in the future. If a facility fails prepayment
review, the facility could then be subject to undergo targeted review, which is a review that targets perceived claims deficiencies.

U.S. Government Inquiry — In late 2006, the Company learned that it might be the subject of an on-going criminal and civil
investigation by the DOJ. This was confirmed in March 2007. The investigation was prompted by a whistleblower complaint,

163

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and related primarily to claims submitted to the Medicare program for rehabilitation services provided at skilled nursing facilities
in Southern California. The Company recorded an initial estimated liability in the amount of $15,000 in the fourth quarter of 2012
for the resolution of claims connected to the investigation based on the facts available at the time. In April 2013, the Company
and government representatives reached an agreement in principle to resolve the allegations and close the investigation. Based on
these discussions, the Company recorded and announced an additional charge in the amount of $33,000 in the first quarter of 2013,
increasing the total reserve to resolve the matter to $48,000 (the Reserve Amount).

In October 2013, the Company completed and executed a settlement agreement (the Settlement Agreement) with the DOJ
and received the final approval of the Office of Inspector General-HHS and the United States District Court for the Central District
of California. Pursuant to the Settlement Agreement, the Company made a single lump-sum remittance to the government in the
amount of $48,000 in October 2013. The Company has denied engaging in any illegal conduct, and has agreed to the settlement
amount without any admission of wrongdoing in order to resolve the allegations and to avoid the uncertainty and expense of
protracted litigation.

In connection with the settlement and effective as of October 1, 2013, the Company entered into a five-year corporate integrity
agreement (the CIA) with the Office of Inspector General-HHS. The CIA acknowledges the existence of the Company’s current
compliance program, which is in accord with the Office of the Inspector General (OIG)’s guidance related to an effective compliance
program, and requires that the Company continue during the term of the CIA to maintain a compliance program designed to promote
compliance with the statutes, regulations, and written directives of Medicare, Medicaid, and all other Federal health care programs.
The Company is also required to notify the Office of Inspector General-HHS in writing, of, among other things: (i) any ongoing
government investigation or legal proceeding involving an allegation that the Company has committed a crime or has engaged in
fraudulent activities; (ii) any other matter that a reasonable person would consider a probable violation of applicable criminal,
civil, or administrative laws related to compliance with federal healthcare programs; and (iii) any change in location, sale, closing,
purchase, or establishment of a new business unit or location related to items or services that may be reimbursed by federal health
care programs. The Company is also required to retain an Independent Review Organization (IRO) to review certain clinical
documentation annually for the term of the CIA.

The Company has met the requirements of its first year under the Settlement Agreement and passed its IRO audits.

Participation in federal healthcare programs by the Company is not affected by the Settlement Agreement or the CIA. In the
event of an uncured material breach of the CIA, the Company could be excluded from participation in federal healthcare
programs and/or subject to prosecution.

Concentrations

Credit Risk — The Company has significant accounts receivable balances, the collectability of which is dependent on the
availability of funds from certain governmental programs, primarily Medicare and Medicaid. These receivables represent the only
significant concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated
with these governmental programs. The Company believes that an appropriate allowance has been recorded for the possibility of
these receivables proving uncollectible, and continually monitors and adjusts these allowances as necessary. The Company’s
receivables from Medicare and Medicaid payor programs accounted for approximately 52.4% and 56.8% of its total accounts
receivable as of December 31, 2014 and 2013, respectively. Revenue from reimbursement under the Medicare and Medicaid
programs accounted for 70.4%, 72.2%, and 73.6% of the Company’s revenue for the years ended December 31, 2014, 2013 and
2012, respectively.

Cash in Excess of FDIC Limits — The Company currently has bank deposits with financial institutions in the U.S. that
exceed FDIC insurance limits. FDIC insurance provides protection for bank deposits up to $250. In addition, the Company has
uninsured bank deposits with a financial institution outside the U.S. As of February 5, 2015, the Company had approximately
$2,500 in uninsured cash deposits. All uninsured bank deposits are held at high quality credit institutions.

164

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THE ENSIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

21. DEFINED CONTRIBUTION PLAN

The Company has a 401(k) defined contribution plan (the 401(k) Plan), whereby eligible employees may contribute up to
15% of their annual basic earnings. Additionally, the 401(k) Plan provides for discretionary matching contributions (as defined in
the 401(k) Plan) by the Company. The Company expensed matching contributions to the 401(k) Plan of $565, $487 and $444
during the years ended December 31, 2014, 2013 and 2012, respectively. Beginning in 2007, the 401(k) Plan allowed eligible
employees to contribute up to 90% of their eligible compensation, subject to applicable annual Internal Revenue Code limits.

22. DISCONTINUED OPERATIONS

On March 25, 2013, the Company agreed to terms to sell DRX, a national urgent care franchise system for approximately
$8,000, adjusted for certain assets and liabilities. The asset sale was effective on April 15, 2013. The sale resulted in a pre-tax
loss of $2,837 for the year ended December 31, 2013. The assets acquired at the initial purchase of DRX, including noncontrolling
interest, were recorded at fair value. The initial fair value was greater than total cash paid to acquire all interests in DRX and the
subsequent sale price. The sale of DRX has been accounted for as discontinued operations. Accordingly, the results of operations
of this business for all periods presented and the loss related to this divesture have been classified as discontinued operations in
the accompanying consolidated statements of income.

A summary of discontinued operations follows:

Year Ended December 31,

2014

2013

2012

— $

728

1,564

—

(807)

(3,646)

(2,837)
(12)
(33)
(2,961)
(1,157)
(1,804) $

—
(38)
(106)
(2,226)
(869)
(1,357)

Revenue

Cost of services (exclusive of facility rent, general and administrative and
depreciation and amortization expenses shown separately below)

Charges to discontinued operations for the excess carrying amount of goodwill and
other indefinite-lived intangible assets

Facility rent—cost of services

Depreciation and amortization

Loss from discontinued operations

Benefit from income taxes

Loss from discontinued operations, net of income tax

— $

165

Table of Contents

(b) Financial Statement Schedules

THE ENSIGN GROUP, INC. and SUBSIDIARIES

Schedule II
Valuation and Qualifying Accounts

Year Ended December 31, 2012

Allowance for doubtful accounts

Year Ended December 31, 2013

Allowance for doubtful accounts

Year Ended December 31, 2014

Allowance for doubtful accounts

Balance at
Beginning of
Year

Additions
Charged to
Costs and
Expenses

Deductions

Balances at
End of Year

(In thousands)

$ (12,782) $

(9,474) $

8,445 $ (13,811)

$ (13,811) $ (12,106) $

9,377 $ (16,540)

$ (16,540) $ (13,179) $

9,281

$ (20,438)

All other schedules have been omitted because the information required to be set forth therein is not applicable or is shown

in the consolidated financial statements or notes thereto.

166

Table of Contents

EXHIBIT INDEX

Exhibit

No.

2.1

3.1

3.2

3.3

3.4

3.5

4.1

4.2

4.3

Exhibit Description*
Separation and Distribution Agreement, dated as of May 23,
2014, by and between The Ensign Group, Inc. and CareTrust
REIT, Inc.

Fifth Amended and Restated Certificate of Incorporation of
The Ensign Group, Inc., filed with the Delaware Secretary of
State on November 15, 2007

Amendment to the Amended and Restated Bylaws, dated
August 5, 2014

File

Exhibit

Form
8-K

No.
001-33757

No.

2.1

Filing

Date

Filed

Herewith

6/5/2014

10-Q 001-33757

3.1 12/21/2007

8-K

001-33757

3.2

8/8/2014

Amended and Restated Bylaws of The Ensign Group, Inc.

10-Q 001-33757

3.2 12/21/2007

Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock, as filed with the
Secretary of State of the State of Delaware on November 7,
2013

Certificate of Elimination of Series A Junior Participating
Preferred Stock

Specimen common stock certificate

Stock Position Management Agreement, dated October 16,
2008, between The Ensign Group, Inc. and Terri M.
Christensen

Rights Agreement, dated as of November 7, 2013, between
The Ensign Group, Inc. and Registrar and Transfer Company,
as Rights Agent.

10.1 + The Ensign Group, Inc. 2001 Stock Option, Deferred Stock
and Restricted Stock Plan, form of Stock Option Grant Notice
for Executive Officers and Directors, stock option agreement
and form of restricted stock agreement for Executive Officers
and Directors

10.2 + The Ensign Group, Inc. 2005 Stock Incentive Plan, form of
Nonqualified Stock Option Award for Executive Officers and
Directors, and form of restricted stock agreement for
Executive Officers and Directors

8-K

001-33757

3.1

11/7/2013

8-K

001-33757

3.1

6/5/2014

S-1 333-142897

4.1 10/5/2007

10-K 001-33757

4.2 2/18/2009

8-K

001-33757

4.1

11/7/2013

S-1 333-142897

10.1 7/26/2007

S-1 333-142897

99.2 7/26/2007

10.3 + The Ensign Group, Inc. 2007 Omnibus Incentive Plan

S-1 333-142897

10.3 10/5/2007

10.4 + Amendment to The Ensign Group, Inc. 2007 Omnibus

8-K 001-33757

10.2 7/28/2009

Incentive Plan

10.5 + Form of 2007 Omnibus Incentive Plan Notice of Grant of
Stock Options; and form of Non-Incentive Stock Option
Award Terms and Conditions

10.6 + Form of 2007 Omnibus Incentive Plan Restricted Stock

Agreement

10.8

10.7 + Form of Indemnification Agreement entered into between The
Ensign Group, Inc. and its directors, officers and certain key
employees
Fourth Amended and Restated Loan Agreement, dated as of
November 10, 2009, by and among certain subsidiaries of The
Ensign Group, Inc. as Borrowers, and General Electric Capital
Corporation as Agent and Lender
Consolidated, Amended and Restated Promissory Note, dated
as of December 29, 2006, in the original principal amount of
$64,692,111.67, by certain subsidiaries of The Ensign Group,
Inc. in favor of General Electric Capital Corporation

10.9

S-1 333-142797

10.4 10/5/2007

S-1 333-142897

10.5 10/5/2007

S-1 333-142897

10.6 10/5/2007

8-K 001-33757

10.1 11/17/2009

S-1 333-142897

10.8 7/26/2007

167

Form

File

No.

S-1 333-142897

Exhibit

Filing

Filed

No.
10.9 7/26/2007

Date

Herewith

S-1

333-142897

10.10

7/26/2007

S-1 333-142897 10.11 7/26/2007

S-1 333-142897 10.12 7/26/2007

S-1 333-142897 10.13 7/26/2007

S-1 333-142897 10.14 7/26/2007

S-1 333-142897 10.15 7/26/2007

Table of Contents

Exhibit

Exhibit Description*

No.
10.10 Third Amended and Restated Guaranty of Payment and
Performance, dated as of December 29, 2006, by The Ensign
Group, Inc. as Guarantor and General Electric Capital
Corporation as Agent and Lender, under which Guarantor
guarantees the payment and performance of the obligations of
certain of Guarantor's subsidiaries under the Third Amended
and Restated Loan Agreement

10.11 Form of Amended and Restated Deed of Trust, Assignment of
Rents, Security Agreement and Fixture Financing Statement,
dated as of June 30, 2006 (filed against Desert Terrace Nursing
Center, Desert Sky Nursing Home, Highland Manor Health
and Rehabilitation Center and North Mountain Medical and
Rehabilitation Center), by and among Terrace Holdings AZ
LLC, Sky Holdings AZ LLC, Ensign Highland LLC and Valley
Health Holdings LLC as Grantors, Chicago Title Insurance
Company as Trustee, and General Electric Capital Corporation
as Beneficiary and Schedule of Material Differences therein

10.12 Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Financing Statement, dated as of June 30, 2006 (filed
against Park Manor), by and among Plaza Health Holdings
LLC as Grantor, Chicago Title Insurance Company as Trustee,
and General Electric Capital Corporation as Beneficiary

10.13 Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Financing Statement, dated as of June 30, 2006 (filed
against Catalina Care and Rehabilitation Center), by and
among Rillito Holdings LLC as Grantor, Chicago Title
Insurance Company as Trustee, and General Electric Capital
Corporation as Beneficiary

10.14 Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Financing Statement, dated as of October 16, 2006
(filed against Park View Gardens at Montgomery), by and
among Mountainview Communitycare LLC as Grantor,
Chicago Title Insurance Company as Trustee, and General
Electric Capital Corporation as Beneficiary

10.15 Deed of Trust, Assignment of Rents, Security Agreement and
Fixture Financing Statement, dated as of October 16, 2006
(filed against Sabino Canyon Rehabilitation and Care Center),
by and among Meadowbrook Health Associates LLC as
Grantor, Chicago Title Insurance Company as Trustee and
General Electric Capital Corporation as Beneficiary

10.16 Form of Deed of Trust, Assignment of Rents, Security
Agreement and Fixture Financing Statement, dated as of
December 29, 2006 (filed against Upland Care and
Rehabilitation Center and Camarillo Care Center), by and
among Cedar Avenue Holdings LLC and Granada Investments
LLC as Grantors, Chicago Title Insurance Company as Trustee
and General Electric Capital Corporation as Beneficiary and
Schedule of Material Differences therein

168

Table of Contents

Exhibit

Exhibit Description*

No.
10.17 Form of First Amendment to (Amended and Restated) Deed
of Trust, Assignment of Rents, Security Agreement and
Fixture Financing Statement, dated as of December 29, 2006
(filed against Desert Terrace Nursing Center, Desert Sky
Nursing Home, Highland Manor Health and Rehabilitation
Center, North Mountain Medical and Rehabilitation Center,
Catalina Care and Rehabilitation Center, Park Manor, Park
View Gardens at Montgomery, Sabino Canyon Rehabilitation
and Care Center), by and among Terrace Holdings AZ LLC,
Sky Holdings AZ LLC, Ensign Highland LLC, Valley Health
Holdings LLC, Rillito Holdings LLC, Plaza Health Holdings
LLC, Mountainview Communitycare LLC and Meadowbrook
Health Associates LLC as Grantors, Chicago Title Insurance
Company as Trustee, and General Electric Capital Corporation
as Beneficiary and Schedule of Material Differences therein

10.18 Amended and Restated Loan and Security Agreement, dated
as of March 25, 2004, by and among The Ensign Group, Inc.
and certain of its subsidiaries as Borrower, and General
Electric Capital Corporation as Agent and Lender

10.19 Amendment No. 1, dated as of December 3, 2004, to the
Amended and Restated Loan and Security Agreement, by and
among The Ensign Group, Inc. and certain of its subsidiaries
as Borrower, and General Electric Capital Corporation as
Lender

10.20 Second Amended and Restated Revolving Credit Note, dated
as of December 3, 2004, in the original principal amount of
$20,000,000, by The Ensign Group, Inc. and certain of its
subsidiaries in favor of General Electric Capital Corporation
10.21 Amendment No. 2, dated as of March 25, 2007, to the
Amended and Restated Loan and Security Agreement, by and
among The Ensign Group, Inc. and certain of its subsidiaries
as Borrower, and General Electric Capital Corporation as
Lender

10.22 Amendment No. 3, dated as of June 22, 2007, to the Amended
and Restated Loan and Security Agreement, by and among
The Ensign Group, Inc. and certain of its subsidiaries as
Borrower and General Electric Capital Corporation as Lender
10.23 Amendment No. 4, dated as of August 1, 2007, to the Amended
and Restated Loan and Security Agreement, by and among
The Ensign Group, Inc. and certain of its subsidiaries as
Borrowers and General Electric Capital Corporation as Lender
10.24 Amendment No. 5, dated September 13, 2007, to the Amended
and Restated Loan and Security Agreement, by and among
The Ensign Group, Inc. and certain of its subsidiaries as
Borrowers and General Electric Capital Corporation as Lender
10.25 Revolving Credit Note, dated as of September 13, 2007, in the
original principal amount of $5,000,000 by The Ensign Group,
Inc. and certain of its subsidiaries in favor of General Electric
Capital Corporation

10.26 Commitment Letter, dated October 3, 2007, from General
Electric Capital Corporation to The Ensign Group, Inc., setting
forth the general terms and conditions of the proposed
amendment to the revolving credit facility, which will increase
the available credit thereunder to $50.0 million

10.27 Amendment No. 6, dated November 19, 2007, to the Amended
and Restated Loan and Security Agreement, by and among
The Ensign Group, Inc. and certain of its subsidiaries as
Borrowers and General Electric Capital Corporation as Lender

169

Form

File

No.

Exhibit

No.

Filing

Date

S-1 333-142897 10.16 7/26/2007

Filed

Herewit
h

S-1 333-142897 10.19 5/14/2007

S-1 333-142897 10.20 5/14/2007

S-1 333-142897 10.19 7/26/2007

S-1 333-142897 10.22 5/14/2007

S-1 333-142897 10.21 7/26/2007

S-1 333-142897 10.42 8/17/2007

S-1 333-142897 10.43 10/5/2007

S-1 333-142897 10.44 10/5/2007

S-1 333-142897 10.46 10/5/2007

8-K 001-33757

10.1 11/21/2007

Table of Contents

10.28 Amendment No. 7, dated December 21, 2007, to the Amended
and Restated Loan and Security Agreement, by and among
The Ensign Group, Inc. and certain of its subsidiaries as
Borrowers and General Electric Capital Corporation as Lender

10.29 Amendment No. 1 and Joinder Agreement to Second Amended
and Restated Loan and Security Agreement, by certain
subsidiaries of The Ensign Group, Inc. as Borrower and
General Electric Capital Corporation as Lender

8-K 001-33757

10.1 12/27/2007

8-K 001-33757

10.1

2/9/2009

170

Table of Contents

Exhibit

Exhibit Description*

No.
10.30 Second Amended and Restated Revolving Credit Note, dated
February 4, 2009, by certain subsidiaries of The Ensign Group,
Inc. as Borrowers for the benefit of General Electric Capital
Corporation as Lender

10.31 Amended and Restated Revolving Credit Note, dated February
21, 2008, by certain subsidiaries of The Ensign Group, Inc. as
Borrowers for the benefit of General Electric Capital
Corporation as Lender

10.32 Ensign Guaranty, dated February 21, 2008, between The Ensign
Group, Inc. as Guarantor and General Electric Capital
Corporation as Lender

10.33 Holding Company Guaranty, dated February 21, 2008, by and
among The Ensign Group, Inc. and certain of its subsidiaries
as Guarantors and General Electric Capital Corporation as
Lender

10.34 Pacific Care Center Loan Agreement, dated as of August 6,
1998, by and between G&L Hoquiam, LLC as Borrower and
GMAC Commercial Mortgage Corporation as Lender (later
assumed by Cherry Health Holdings, Inc. as Borrower and
Wells Fargo Bank, N.A. as Lender)

10.35 Deed of Trust and Security Agreement, dated as of August 6,
1998, by and among G&L Hoquiam, LLC as Grantor, Ticor
Title Insurance Company as Trustee and GMAC Commercial
Mortgage Corporation as Beneficiary

10.36 Promissory Note, dated as of August 6, 1998, in the original
principal amount of $2,475,000, by G&L Hoquiam, LLC in
favor of GMAC Commercial Mortgage Corporation

10.37 Loan Assumption Agreement, by and among G&L Hoquiam,
LLC as Prior Owner; G&L Realty Partnership, L.P. as Prior
Guarantor; Cherry Health Holdings, Inc. as Borrower; and
Wells Fargo Bank, N.A., the Trustee for GMAC Commercial
Mortgage Securities, Inc., as Lender

10.38 Exceptions to Nonrecourse Guaranty, dated as of October 2006,
by The Ensign Group, Inc. as Guarantor and Wells Fargo Bank,
N.A. as Trustee for GMAC Commercial Mortgage Securities,
Inc., under which Guarantor guarantees full and prompt
payment of all amounts due and owing by Cherry Health
Holdings, Inc. under the Promissory Note

10.39 Deed of Trust with Assignment of Rents, dated as of January
30, 2001, by and among Ensign Southland LLC as Trustor,
Brian E. Callahan as Trustee and Continental Wingate
Associates, Inc. as Beneficiary

10.40 Deed of Trust Note, dated as of January 30, 2001, in the original
principal amount of $7,455,100, by Ensign Southland, LLC in
favor of Continental Wingate Associates, Inc.

10.41 Security Agreement, dated as of January 30, 2001, by and
between Ensign Southland, LLC and Continental Wingate
Associates, Inc.

10.42 Master Lease Agreement, dated July 3, 2003, between
Adipiscor LLC as Lessee and LTC Partners VI, L.P., Coronado
Corporation and Park Villa Corporation collectively as Lessor

File

Exhibit

Filing

Filed

Form
8-K 001-33757

No.

No.
10.2

Herewith

Date
2/9/2009

8-K 001-33757

10.2 2/27/2008

8-K 001-33757

10.3 2/27/2008

8-K 001-33757

10.4 2/27/2008

S-1 333-142897 10.23 5/14/2007

S-1 333-142897 10.24 7/26/2007

S-1 333-142897 10.25 7/26/2007

S-1 333-142897 10.26 5/14/2007

S-1 333-142897 10.22 7/26/2007

S-1 333-142897 10.27 7/26/2007

S-1 333-142897 10.28 5/14/2007

S-1 333-142897 10.29 5/14/2007

S-1 333-142897 10.30 5/14/2007

171

File

Exhibit

Filing

Filed

Form
S-1 333-142897 10.31 5/14/2007

Date

No.

Herewith

S-1 333-142897 10.32 5/14/2007

S-1 333-142897 10.33 5/14/2007

S-1 333-142897 10.34 5/14/2007

S-1 333-142897 10.35 5/14/2007

S-1 333-142897 10.36 5/14/2007

S-1 333-142897 10.37 5/14/2007

S-1 333-142897 10.38 5/14/2007

S-1 333-142897 10.39 5/14/2007

S-1 333-142897 10.40 5/14/2007

Table of Contents

Exhibit

Exhibit Description*

No.
10.43 Lease Guaranty, dated July 3, 2003, between The Ensign Group,
Inc. as Guarantor and LTC Partners VI, L.P., Coronado
Corporation and Park Villa Corporation collectively as Lessor,
under which Guarantor guarantees
the payment and
performance of Adipiscor LLC's obligations under the Master
Lease Agreement

10.44 Master Lease Agreement, dated September 30, 2003, between
Permunitum LLC as Lessee, Vista Woods Health Associates
LLC, City Heights Health Associates LLC, and Claremont
Foothills Health Associates LLC as Sublessees, and OHI Asset
(CA), LLC as Lessor

10.45 Lease Guaranty, dated September 30, 2003, between The
Ensign Group, Inc. as Guarantor and OHI Asset (CA), LLC as
Lessor, under which Guarantor guarantees the payment and
performance of Permunitum LLC's obligations under the
Master Lease Agreement

10.46 Lease Guaranty, dated September 30, 2003, between Vista
Woods Health Associates LLC, City Heights Health Associates
LLC and Claremont Foothills Health Associates LLC as
Guarantors and OHI Asset (CA), LLC as Lessor, under which
Guarantors guarantee the payment and performance of
Permunitum LLC's obligations under the Master Lease
Agreement

10.47 Master Lease Agreement, dated January 31, 2003, between
Moenium Holdings LLC as Lessee and Healthcare Property
Investors, Inc., d/b/a in the State of Arizona as HC Properties,
Inc., and Healthcare Investors III collectively as Lessor
10.48 Lease Guaranty, between The Ensign Group, Inc. as Guarantor
and Healthcare Property Investors, Inc. as Owner, under which
Guarantor guarantees the payment and performance of
Moenium Holdings LLC's obligations under the Master Lease
Agreement

10.49 First Amendment to Master Lease Agreement, dated May 27,
2003, between Moenium Holdings LLC as Lessee and
Healthcare Property Investors, Inc., d/b/a in the State of Arizona
as HC Properties, Inc., and Healthcare Investors III collectively
as Lessor

10.50 Second Amendment to Master Lease Agreement, dated October
31. 2004, between Moenium Holdings LLC as Lessee and
Healthcare Property Investors, Inc., d/b/a in the State of Arizona
as HC Properties, Inc., and Healthcare Investors III collectively
as Lessor

10.51 Lease Agreement, by and between Mission Ridge Associates
LLC as Landlord and Ensign Facility Services, Inc. as Tenant;
and Guaranty of Lease, dated August 2, 2003, by The Ensign
Group, Inc. as Guarantor in favor of Landlord, under which
Guarantor guarantees Tenant's obligations under the Lease
Agreement

10.52 First Amendment to Lease Agreement dated January 15, 2004,
by and between Mission Ridge Associates LLC as Landlord
and Ensign Facility Services, Inc. as Tenant

172

Table of Contents

Exhibit

Exhibit Description*

No.
10.53 Second Amendment to Lease Agreement dated December 13,
2007, by and between Mission Ridge Associates LLC as
Landlord and Ensign Facility Services, Inc. as Tenant; and
Reaffirmation of Guaranty of Lease, dated December 13, 2007,
by The Ensign Group, Inc. as Guarantor in favor of Landlord,
under which Guarantor reaffirms its guaranty of Tenants
obligations under the Lease Agreement

10.54 Third Amendment to Lease Agreement dated February 21,
2008, by and between Mission Ridge Associates LLC as
Landlord and Ensign Facility Services, Inc. as Tenant

10.55 Fourth Amendment to Lease Agreement dated July 15, 2009,
by and between Mission Ridge Associates LLC as Landlord
and Ensign Facility Services, Inc. as Tenant

10.56 Form of Independent Consulting and Centralized Services
Agreement between Ensign Facility Services, Inc. and certain
of its subsidiaries

File

Exhibit

Filing

Filed

Form
10-K 001-33757 10.52

No.

Herewith

Date
3/6/2008

10-K 001-33757 10.54 2/17/2010

10-K 001-33757 10.55 2/17/2010

S-1 333-142897 10.41 5/14/2007

10.57 Agreement of Purchase and Sale and Joint Escrow Instructions,

S-1 333-142897 10.45 10/5/2007

dated August 31, 2007, as amended on September 6, 2007

10.58 Form of Health Insurance Benefit Agreement pursuant to which
certain subsidiaries of The Ensign Group, Inc. participate in the
Medicare program

10.59 Form of Medi-Cal Provider Agreement pursuant to which
certain subsidiaries of The Ensign Group, Inc. participate in the
California Medicaid program

10.60 Form of Provider Participation Agreement pursuant to which
certain subsidiaries of The Ensign Group, Inc. participate in the
Arizona Medicaid program

10.61 Form of Contract to Provide Nursing Facility Services under
the Texas Medical Assistance Program pursuant to which
certain subsidiaries of The Ensign Group, Inc. participate in the
Texas Medicaid program

10.62 Form of Client Service Contract pursuant to which certain
subsidiaries of The Ensign Group, Inc. participate in the
Washington Medicaid program

10.63 Form of Provider Agreement for Medicaid and UMAP pursuant
to which certain subsidiaries of The Ensign Group, Inc.
participate in the Utah Medicaid program

10.64 Form of Medicaid Provider Agreement pursuant to which a
subsidiary of The Ensign Group, Inc. participates in the Idaho
Medicaid program

10.65 Six Project Promissory Note dated as of November 10, 2009,
in the original principal amount of $40,000,000, by certain
subsidiaries of the Ensign Group, Inc. in favor of General
Electric Capital Corporation

10.66 Commercial Deeds of Trust, Security Agreement, Assignment
of Leases and Rents and Fixture Filing, dated as of December
31, 2010, made by certain subsidiaries of the Company for the
benefit of RBS Asset Finance, Inc.

10.67 Note, dated December 31, 2010 by certain subsidiaries of the

Company.

S-1 333-142897 10.48 10/19/2007

S-1 333-142897 10.49 10/19/2007

S-1 333-142897 10.50 10/19/2007

S-1

333-142897

10.51 10/19/2007

S-1

333-142897

10.52 10/19/2007

S-1

333-142897

10.53 10/19/2007

S-1

333-142897

10.54 10/19/2007

8-K

001-33757

10.2 11/17/2009

8-K

001-33757

10.1

1/6/2011

8-K

001-33757

10.1

1/6/2011

173

Table of Contents

Exhibit

No.

Exhibit Description*

Form

File

No.

Exhibit

No.

8-K 001-33757

10.1

Filing

Filed

Date
7/19/2011

Herewith

10.68 Revolving Credit and Term Loan Agreement, dated as
of July 15, 2011, among the Ensign Group, Inc. and the
several banks and other financial institutions and
lenders from time to time party thereto (the "Lenders")
and SunTrust Bank, in its capacity as administrative
agent for the Lenders, as issuing bank and as swingline
lender.

10.69 Commercial Deeds of Trust, Security Agreements,
Assignment of Leases and Rents and Future Filing,
dated as of February 17, 2012, made by certain
subsidiaries of the Company for the benefit of RBS
Asset Finance, Inc. 8-K.

10.70 First Amendment to Revolving Credit and Term Loan
Agreement, dated as of October 27, 2011, among The
Ensign Group, Inc. and the several banks and other
financial institutions and lenders from time to time party
thereto (the "Lenders") and SunTrust Bank, in its
capacity as administrative agent for the Lenders, as
issuing bank and as swingline lender.

10.71 Second Amendment to Revolving Credit and Term Loan
Agreement, dated as of April 30, 2012, among The
Ensign Group, Inc. and the several banks and other
financial institutions and lenders from time to time party
thereto (the "Lenders") and SunTrust Bank, in its
capacity as administrative agent for the Lenders, as
issuing bank and as swingline lender.

10.72 Third Amendment to Revolving Credit and Term Loan
Agreement, dated as of February 1, 2013, among The
Ensign Group, Inc. and the several banks and other
financial institutions and lenders from time to time party
thereto (the "Lenders") and SunTrust Bank, in its
capacity as administrative agent for the Lenders, as
issuing bank and as swingline lender.

10.73 Fourth Amendment to Revolving Credit and Term Loan
Agreement, dated as of April 16, 2013, among the
Ensign Group, Inc. and the several banks and other
financial institutions and lenders from time to time party
thereto(the "Lenders") and SunTrust Bank, in its
capacity as administrative agent fort he Lenders, as
issuing bank and as swingline lender.

10.74 Corporate Integrity Agreement between the Office of
Inspector General of the Department of Health and
Human Services and The Ensign Group, Inc. dated
October 1, 2013.

10.75 Settlement agreement dated October 1, 2013, entered
into among the United States of America, acting through
the United States Department of Justice and on behalf
of the Office of Inspector General ("OIG-HHS") of the
Department of Health and Human Services ("HHS")
(collectively the "United States") and the Company.

10.76 Form of Master Lease by and among certain subsidiaries
of The Ensign Group, Inc. and certain subsidiaries of
CareTrust REIT, Inc.

10.77 Form of Guaranty of Master Lease by The Ensign
Group, Inc. in favor of certain subsidiaries of CareTrust
REIT, Inc., as landlords under the Master Leases
10.78 Opportunities Agreement, dated as of May 30, 2014, by
and between The Ensign Group, Inc. and CareTrust
REIT, Inc.

174

8-K 001-33757

10.1

2/22/2012

10-K 001-33757

10.70

2/13/2013

10-K 001-33757

10.71

2/13/2013

8-K 001-33757

10.1

2/6/2012

8-K 001-33757

10.1

4/22/2013

10-K 001-33757

10.74

2/13/2014

8-K 001-33757

10.75

2/13/2014

8-K 001-33757

10.1

6/5/2014

8-K 001-33757

10.2

6/5/2014

8-K 001-33757

10.3

6/5/2014

Table of Contents

Exhibit

No.

Exhibit Description*

Form

File

No.

Exhibit

No.

Filing

Date

Filed

Herewith

10.79 Transition Services Agreement, dated as of May 30,
2014, by and between The Ensign Group, Inc. and
CareTrust REIT, Inc.

10.80 Tax Matters Agreement, dated as of May 30, 2014, by
and between The Ensign Group, Inc. and CareTrust
REIT, Inc.

10.81 Employee Matters Agreement, dated as of May 30,
2014, by and between The Ensign Group, Inc. and
CareTrust REIT, Inc.

10.82 Contribution Agreement, dated as of May 30, 2014, by
and among CTR Partnership L.P., CareTrust GP, LLC,
CareTrust REIT, Inc. and The Ensign Group, Inc.

10.83 Credit Agreement, dated as of May 30, 2014, by and
among The Ensign Group, Inc., SunTrust Bank, as
administrative agent, and the lenders party thereto

18.1 Preferability Letter of Deloitte & Touche LLP

21.1 Subsidiaries of The Ensign Group, Inc., as amended

23.1 Consent of Deloitte & Touche LLP

31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

101 Interactive data file (furnished electronically herewith

pursuant to Rule 406T of Regulations S-T)

+ Indicates management contract or compensatory plan.

8-K 001-33757

10.4

6/5/2014

8-K 001-33757

10.5

6/5/2014

8-K 001-33757

10.6

6/5/2014

8-K 001-33757

10.7

6/5/2014

8-K 001-33757

10.8

6/5/2014

X
X
X

* Documents not filed herewith are incorporated by reference to the prior filings identified in the table above.

175

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