##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2006
 or
 o
    
    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: 000-50351
 GENESIS HEALTHCARE CORPORATION
  Pennsylvania
    
    20-0023783(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)101 East State Street 
Kennett Square, Pennsylvania
(Address of principal executive offices)
    
    19348
(Zip Code)
 (610) 444-6350
 N/A
  þ o
  þ o o
  o þ




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##### 



PageCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
    
    
    1PART I: FINANCIAL INFORMATION
    
    
    3ITEM 1: Financial Statements
    
    
    3ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    31ITEM 4: Controls and Procedures
    
    
    32PART II: OTHER INFORMATION
    
    
    33ITEM 1: Legal Proceedings
    
    
    33ITEM 1A: Risk Factors
    
    
    33ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35ITEM 3: Defaults Upon Senior Securities
    
    
    35ITEM 4: Submission of Matters to a Vote of Security Holders
    
    
    35ITEM 5: Other Information
    
    
    35ITEM 6: Exhibits
    
    
    35SIGNATURES
    
    
    36Certification of CEO pursuant to Rule 13a-14(a)Certification of CFO pursuant to Rule 13a-14(a)Certification of CEO pursuant to 18 U.S.C. Section 1350Certification of CFO pursuant to 18 U.S.C. Section 1350




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##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
    
    
    changes in the reimbursement rates or methods of payment from Medicare and Medicaid, including those
described herein, or the implementation of other measures to reduce the reimbursement for our services;
 
    
    the expiration of enactments providing for additional governmental funding;
    
    the impact of federal and state regulations;
    
    changes in case mix, payor mix and payment methodologies;
    
    competition in our businesses;
    
    the capital intensive nature of our inpatient services segment and the need for extensive capital
expenditures in order to modernize and improve our physical infrastructure;
    
    an increase in insurance costs and potential liability for losses not covered by, or in excess of, our
insurance;
    
    competition for, and availability of, qualified staff in the healthcare industry, and risks of potential
labor strikes;
    
    our ability to control operating costs and generate sufficient cash flow to meet operational and financial
requirements;
    
    our ability, and the ability of our subsidiary guarantors, to fulfill debt obligations;
    
    the economic condition of, or changes in, the laws affecting our business in those markets in which we
operate;
    
    our ability to realize tax benefits relating to our estimated net operating loss carryforwards;
    
    the increasing cost of being a publicly owned company and our ability to provide reasonable assurance of
the effectiveness of internal control over financial reporting;
    
    the impact of new accounting pronouncements;
    
    the impact of implementing new information systems;
 1




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##### Table of Contents




    
    the impact of acquisitions on our operations and finances, and our ability to integrate acquired businesses;
    
    the ability to implement and achieve certain performance improvement objectives in our rehabilitation
therapy services segment;
    
    federal income tax liabilities and indemnification obligations related to the spin-off;
    
    the impact of the proposed Merger, as defined herein; and
    
    acts of God or public authorities, war, civil unrest, terrorism, fire, floods, earthquakes and other
matters beyond our control.
   2




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PART I: FINANCIAL INFORMATION
 
 ITEM 1: Financial Statements
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND SEPTEMBER 30, 2006
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 December 31, 2006
    
    
    September 30, 2006Assets:Current assets:Cash and equivalents
    
    $
    66,270
    
    
    $
    74,819Current portion of restricted cash and investments in marketable securities
    
    
    32,403
    
    
    
    35,160Accounts receivable, net of allowances for doubtful accounts of $28,171
and $25,685, at December 31, 2006 and September 30, 2006, respectively
    
    
    244,515
    
    
    
    226,689Prepaid expenses and other current assets
    
    
    46,779
    
    
    
    48,583Current portion of deferred income taxes
    
    
    41,953
    
    
    
    45,206Total current assets
    
    
    431,920
    
    
    
    430,457Property and equipment, net of accumulated depreciation of $257,322
and $234,928, at December 31, 2006 and September 30, 2006, respectively
    
    
    931,992
    
    
    
    873,164Assets held for sale
    
    
    3,911
    
    
    
    3,911Restricted cash and investments in marketable securities
    
    
    65,820
    
    
    
    64,819Deferred income taxes
    
    
    7,107
    
    
    
    5,830Other long-term assets
    
    
    96,934
    
    
    
    94,349Total assets
    
    $
    1,537,684
    
    
    $
    1,472,530Liabilities and Shareholders Equity:Current liabilities:Current installments of long-term debt
    
    $
    14,178
    
    
    $
    4,829Accounts payable and other accrued expenses
    
    
    178,705
    
    
    
    162,978Current portion of self-insurance liability reserves
    
    
    38,079
    
    
    
    40,455Total current liabilities
    
    
    230,962
    
    
    
    208,262Long-term debt
    
    
    457,538
    
    
    
    440,005Self-insurance liability reserves
    
    
    73,409
    
    
    
    70,682Other long-term liabilities
    
    
    61,506
    
    
    
    53,107Commitments and contingenciesShareholders equity:Common stock  par $0.01, 45,000,000 shares authorized at December 31, 2006
and September 30, 2006, 20,808,867 and 20,736,223 shares issued
at December 31, 2006 and September 30, 2006, respectively
    
    
    208
    
    
    
    207Additional paid-in capital
    
    
    649,325
    
    
    
    645,278Retained earnings
    
    
    112,268
    
    
    
    101,546Accumulated other comprehensive loss
    
    
    (130
    )
    
    
    (65
    )Treasury stock at cost, 1,075,745 shares at December 31, 2006 and
September 30, 2006
    
    
    (42,787
    )
    
    
    (42,787
    )Common stock held in deferred compensation plan at cost, 261,066 and
236,227 shares at December 31, 2006 and September 30, 2006, respectively
    
    
    (11,003
    )
    
    
    (9,714
    )Deferred compensation liability
    
    
    6,388
    
    
    
    6,009Total shareholders equity
    
    
    714,269
    
    
    
    700,474Total liabilities and shareholders equity
    
    $
    1,537,684
    
    
    $
    1,472,530
  3




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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 Three months endedDecember 31, 2006
    
    
    December 31, 2005Net revenues
    
    $
    477,038
    
    
    $
    436,982Salaries, wages and benefits
    
    
    287,789
    
    
    
    268,771Other operating expenses
    
    
    104,450
    
    
    
    95,672General and administrative costs
    
    
    30,743
    
    
    
    25,665Provision for losses on accounts receivable and notes receivable
    
    
    5,074
    
    
    
    2,940Loss on early extinguishment of debt
    
    
    766
    
    
    
    -Transaction costs of proposed Merger
    
    
    2,789
    
    
    
    -Lease expense
    
    
    5,464
    
    
    
    5,466Depreciation and amortization expense
    
    
    17,641
    
    
    
    14,789Interest expense
    
    
    6,709
    
    
    
    6,498Investment income
    
    
    (2,564
    )
    
    
    (1,939
    )Income before income tax expense, equity in net income of
unconsolidated affiliates and minority interests
    
    
    18,177
    
    
    
    19,120Income tax expense
    
    
    7,314
    
    
    
    7,837Income before equity in net income of unconsolidated
affiliates and minority interests
    
    
    10,863
    
    
    
    11,283Equity in net income of unconsolidated affiliates
    
    
    236
    
    
    
    534Minority interests
    
    
    (489
    )
    
    
    (495
    )Income from continuing operations
    
    
    10,610
    
    
    
    11,322Income from discontinued operations, net of taxes
    
    
    112
    
    
    
    115Net income
    
    $
    10,722
    
    
    $
    11,437Per common share data:Basic:Income from continuing operations
    
    $
    0.55
    
    
    $
    0.58Income from discontinued operations
    
    
    0.01
    
    
    
    0.01Net income
    
    $
    0.55
    
    
    $
    0.59Weighted average shares
    
    
    19,449,706
    
    
    
    19,462,199Diluted:Income from continuing operations
    
    $
    0.54
    
    
    $
    0.57Income from discontinued operations
    
    
    0.01
    
    
    
    0.01Net income
    
    $
    0.54
    
    
    $
    0.58Weighted average shares
    
    
    19,745,423
    
    
    
    19,739,352
  4




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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(IN THOUSANDS)
 Three months endedDecember 31, 2006
    
    
    December 31, 2005Cash flows from operating activities:Net income
    
    $
    10,722
    
    
    $
    11,437Net charges included in operations not requiring funds
    
    
    37,689
    
    
    
    26,040Changes in assets and liabilities:Accounts receivable
    
    
    (21,479
    )
    
    
    (20,247
    )Accounts payable and other accrued expenses
    
    
    17,409
    
    
    
    2,041Other, net
    
    
    (1,853
    )
    
    
    305Total adjustments
    
    
    31,766
    
    
    
    8,139Net cash provided by operating activities
    
    
    42,488
    
    
    
    19,576Cash flows from investing activities:Capital expenditures
    
    
    (27,095
    )
    
    
    (32,041
    )Net proceeds on maturity or sale of restricted marketable securities
    
    
    8,801
    
    
    
    4,510Net change in restricted cash and equivalents
    
    
    (7,109
    )
    
    
    (598
    )Purchase of eldercare centers
    
    
    (49,619
    )
    
    
    (5,023
    )Consolidation of partnerships
    
    
    2,324
    
    
    
    -Other, net
    
    
    (643
    )
    
    
    6,285Net cash used in investing activities
    
    
    (73,341
    )
    
    
    (26,867
    )Cash flows from financing activities:Net borrowings under revolving credit facility
    
    
    33,000
    
    
    
    -Repayment of long-term debt
    
    
    (10,510
    )
    
    
    (1,475
    )Debt prepayment premium
    
    
    (383
    )
    
    
    -Purchase of common stock for treasury
    
    
    -
    
    
    
    (10,691
    )Proceeds from exercise of stock options
    
    
    88
    
    
    
    269Other, net
    
    
    109
    
    
    
    78Net cash provided by (used in) financing activities
    
    
    22,304
    
    
    
    (11,819
    )Net decrease in cash and equivalents
    
    $
    (8,549
    )
    
    $
    (19,110
    )Cash and equivalents:Beginning of period
    
    
    74,819
    
    
    
    107,350End of period
    
    $
    66,270
    
    
    $
    88,240Supplemental disclosure of cash flow information:Interest paid
    
    $
    8,237
    
    
    $
    8,118Taxes paid
    
    
    1,816
    
    
    
    3,455Non-cash financing activities:Assumption of debt
    
    $
    4,375
    
    
    $
    -
  5




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Genesis HealthCare Corporation and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
 (1) Organization and Basis of Presentation
 Description of Business
     Basis of Presentation
   Principles of Consolidation and Variable Interest Entities
    6




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Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners
Have Certain Rights
 (2) Certain Significant Risks and Uncertainties
 Revenue Sources
    Use of Estimates
  7




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(3) Significant Transactions and Events
 Proposed Merger
  Acquisition of ElderCare Centers
    Debt Extinguishment
    8




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(4) Long-Term Debt
  December 31, 2006
    
    
    September 30, 2006Senior credit facility  revolving credit
    
    $
    39,000
    
    
    $
    6,000Senior subordinated notes
    
    
    145,935
    
    
    
    145,935Convertible senior subordinated debentures
    
    
    180,000
    
    
    
    180,000Mortgages and other secured debt (recourse)
    
    
    27,864
    
    
    
    37,909Capital lease obligations
    
    
    34,838
    
    
    
    34,950Mortgages and other secured debt (non recourse)
    
    
    44,079
    
    
    
    40,040471,716
    
    
    
    444,834Less:Current installments of long-term debt
    
    
    (14,178
    )
    
    
    (4,829
    )Long-term debt
    
    $
    457,538
    
    
    $
    440,005
 Senior credit facility.
 Senior subordinated notes
 Convertible senior subordinated debentures.
 Mortgages and other secured debt (recourse).
 Capital lease obligations.
 Mortgages and other secured debt (non-recourse).
 9




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(5) Investment Income
   Three months ended December 31,2006
    
    
    2005Income on cash and short-term investments
    
    $
    964
    
    
    $
    1,092Income on restricted cash and investments
    
    
    1,082
    
    
    
    581Income on assets held in rabbi trust
    
    
    445
    
    
    
    206Interest income on notes receivable
    
    
    73
    
    
    
    60Total investment income
    
    $
    2,564
    
    
    $
    1,939
 (6) Earnings Per Share
  (7) Comprehensive Income
  Three months ended December 31,2006
    
    
    2005Net income
    
    $
    10,722
    
    
    $
    11,437Net unrealized loss on restricted investments
in marketable securities
    
    
    (65
    )
    
    
    (81
    )Unrealized gain on interest rate swap agreement
    
    
    -
    
    
    
    63Total comprehensive income
    
    $
    10,657
    
    
    $
    11,419
   10




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(8) Segment Information
      11




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Three months ended December 31,(in thousands)
    
    2006
    
    
    2005Revenues:Inpatient
services - external
    
    $
    427,373
    
    
    $
    393,159Rehabilitation therapy services:External
    
    
    40,831
    
    
    
    35,688Intersegment
    
    
    26,944
    
    
    
    22,457All other services:External
    
    
    8,834
    
    
    
    8,135Intersegment
    
    
    9,127
    
    
    
    12,657Elimination of intersegment revenues
    
    
    (36,071
    )
    
    
    (35,114
    )Total net revenues
    
    
    477,038
    
    
    
    436,982EBITDA (1):Inpatient services
    
    
    61,411
    
    
    
    52,618Rehabilitation therapy services
    
    
    5,597
    
    
    
    4,686All other services and corporate costs
    
    
    (20,926
    )
    
    
    (16,897
    )Loss on early extinguishment of debt
    
    
    (766
    )
    
    
    -Transaction costs of proposed Merger
    
    
    (2,789
    )
    
    
    -Total EBITDA
    
    
    42,527
    
    
    
    40,407Capital and other:Depreciation and amortization expense
    
    
    (17,641
    )
    
    
    (14,789
    )Interest expense
    
    
    (6,709
    )
    
    
    (6,498
    )Income tax expense
    
    
    (7,314
    )
    
    
    (7,837
    )Equity in net income of unconsolidated affiliates
    
    
    236
    
    
    
    534Minority interests
    
    
    (489
    )
    
    
    (495
    )Income from continuing operations
    
    
    10,610
    
    
    
    11,322Income from discontinued operations, net of taxes
    
    
    112
    
    
    
    115Net income
    
    $
    10,722
    
    
    $
    11,437
 
 (1)
    
    GHC defines EBITDA as earnings from continuing operations before
equity in net income of unconsolidated affiliates, minority interests,
interest expense, income taxes, depreciation and amortization. EBITDA
can be calculated through GHCs unaudited condensed consolidated
statements of operations by adding back interest expense, income
taxes, depreciation and amortization, equity in net income of
unconsolidated affiliates and minority interests costs to GHCs
income from continuing operations.Total assets by segment at December 31, 2006 and September 30, 2006 were as follows (in
thousands): December 31, 2006
    
    
    September 30, 2006Inpatient services
    
    $
    1,151,916
    
    
    $
    1,071,635Rehabilitation therapy services
    
    
    45,047
    
    
    
    43,189All other
    
    
    340,721
    
    
    
    357,706Total assets
    
    $
    1,537,684
    
    
    $
    1,472,530
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(9) Stock-Based Benefit Plans
 Stock-Based Compensation Expenses
  Three months endedDecember 31,
    
    
    December 31,2006
    
    
    2005Stock options
    
    $
    881
    
    
    $
    573Stock incentive plan
    
    
    2,008
    
    
    
    1,773Stock held in deferred compensation plan
    
    
    (53
    )
    
    
    (687
    )Total stock-based compensation before income taxes
    
    
    2,836
    
    
    
    1,659Income tax benefit
    
    
    (1,157
    )
    
    
    (678
    )Total stock-based compensation after income taxes
    
    $
    1,679
    
    
    $
    981
  Stock Option Plan
  13




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WeightedWeighted
    
    
    
    
    
    
    AverageAverage
    
    
    Intrinsic
    
    
    RemainingExercise
    
    
    Value (in
    
    
    ContractualShares
    
    
    Price
    
    
    thousands)
    
    
    LifeOutstanding at October 1, 2006
    
    
    1,022,629
    
    
    $
    32.17Exercised
    
    
    (3,666
    )
    
    
    24.09
    
    
    $
    90Outstanding at December 31, 2006
    
    
    1,018,963
    
    
    $
    32.20
    
    
    $
    15,325
    
    
    
    8.21Exercisable at December 31, 2006
    
    
    622,207
    
    
    $
    28.24
    
    
    $
    11,817
    
    
    
    7.68Vested and expected to vest at December 31, 2006
    
    
    968,360
    
    
    $
    31.89
    
    
    $
    14,858
    
    
    
    8.16
   Stock Options Outstanding
    
    
    Stock Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    Average
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    Remaining
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    Contractual
    
    
    ExerciseRange of Exercise Prices
    
    Number
    
    
    Life
    
    
    Price
    
    
    Number
    
    
    Life
    
    
    Price$20.00 - $29.99
    
    
    421,547
    
    
    
    7.11
    
    
    $
    23.70
    
    
    
    421,547
    
    
    
    7.11
    
    
    $
    23.70$30.00 - $39.99
    
    
    474,916
    
    
    
    8.96
    
    
    
    36.40
    
    
    
    156,908
    
    
    
    8.96
    
    
    
    36.40$40.00 - $49.99
    
    
    122,500
    
    
    
    9.03
    
    
    $
    45.16
    
    
    
    43,752
    
    
    
    9.82
    
    
    $
    42.74
 14




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WeightedNon-Vested
    
    
    AverageNumber of
    
    
    Grant-DateStock Options
    
    
    Fair ValueNon-vested at October 1, 2006
    
    
    559,629
    
    
    $
    17.20Vested
    
    
    (162,873
    )
    
    
    14.63Non-vested at December 31, 2006
    
    
    396,756
    
    
    $
    18.26
   Stock Incentive Plan
   15




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##### Table of Contents



Non-Vested
    
    
    WeightedNumber of
    
    
    AverageRestricted
    
    
    Grant-DateShares
    
    
    Fair ValueNon-vested at October 1, 2006
    
    
    532,699
    
    
    $
    25.72Granted
    
    
    16,216
    
    
    
    47.28Vested and Distributed
    
    
    (69,267
    )
    
    
    24.88Forfeited
    
    
    (5,365
    )
    
    
    27.13Non-vested at December 31, 2006
    
    
    474,283
    
    
    $
    26.48
  (10) New Accounting Pronouncements
 Income Tax Uncertainties
 Accounting for Uncertainty in Income
Taxes, Accounting for Income Taxes.
 Accounting for Misstatements
  Fair Value Measurements
 Fair Value Measurements
 16




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(11) Commitments and Contingencies
   
    
    extended $3.9 million in working capital lines of credit to certain jointly owned and
managed companies, including certain consolidated VIEs, of which $2.1 million was unused;
and
    
    posted $10.0 million of outstanding letters of credit to guarantee the performance to
third parties of various trade activities.
 (12) Condensed Consolidating Financial Statements of Genesis HealthCare Corporation and Subsidiaries
    17




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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2006
(IN THOUSANDS)
 Parent
    
    
    Guarantors
    
    
    Non-guarantors
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assets
    
    $
    111,498
    
    
    $
    271,730
    
    
    $
    50,986
    
    
    $
    (2,294
    )
    
    $
    431,920Property and equipment, net
    
    
    31,987
    
    
    
    857,076
    
    
    
    42,929
    
    
    
    -
    
    
    
    931,992Other long-term assets
    
    
    122,825
    
    
    
    25,762
    
    
    
    80,710
    
    
    
    (55,525
    )
    
    
    173,772Investments in subsidiaries
    
    
    561,193
    
    
    
    -
    
    
    
    -
    
    
    
    (561,193
    )
    
    
    -Intercompany receivables
    
    
    398,180
    
    
    
    -
    
    
    
    -
    
    
    
    (398,180
    )
    
    
    -Total assets
    
    $
    1,225,683
    
    
    $
    1,154,568
    
    
    $
    174,625
    
    
    $
    (1,017,192
    )
    
    $
    1,537,684Liabilities and shareholders equity:Current liabilities
    
    $
    80,720
    
    
    $
    118,946
    
    
    $
    37,169
    
    
    $
    (5,873
    )
    
    $
    230,962Intercompany payables
    
    
    -
    
    
    
    389,397
    
    
    
    8,783
    
    
    
    (398,180
    )
    
    
    -Long-term debt
    
    
    360,470
    
    
    
    54,327
    
    
    
    45,469
    
    
    
    (2,728
    )
    
    
    457,538Other long-term liabilities
    
    
    70,224
    
    
    
    4,008
    
    
    
    58,187
    
    
    
    2,496
    
    
    
    134,915Shareholders equity
    
    
    714,269
    
    
    
    587,890
    
    
    
    25,017
    
    
    
    (612,907
    )
    
    
    714,269Total liabilities and shareholders equity
    
    $
    1,225,683
    
    
    $
    1,154,568
    
    
    $
    174,625
    
    
    $
    (1,017,192
    )
    
    $
    1,537,684
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2006
(IN THOUSANDS)
 Parent
    
    
    Guarantors
    
    
    Non-guarantors
    
    
    Eliminations
    
    
    ConsolidatedAssets:Current assets
    
    $
    125,595
    
    
    $
    252,830
    
    
    $
    52,571
    
    
    $
    (539
    )
    
    $
    430,457Property and equipment, net
    
    
    31,933
    
    
    
    799,232
    
    
    
    41,999
    
    
    
    -
    
    
    
    873,164Other long-term assets
    
    
    117,893
    
    
    
    21,928
    
    
    
    81,944
    
    
    
    (52,856
    )
    
    
    168,909Investments in subsidiaries
    
    
    493,115
    
    
    
    -
    
    
    
    -
    
    
    
    (493,115
    )
    
    
    -Intercompany receivables
    
    
    397,566
    
    
    
    -
    
    
    
    -
    
    
    
    (397,566
    )
    
    
    -Total assets
    
    $
    1,166,102
    
    
    $
    1,073,990
    
    
    $
    176,514
    
    
    $
    (944,076
    )
    
    $
    1,472,530Liabilities and shareholders equity:Current liabilities
    
    $
    71,684
    
    
    $
    101,228
    
    
    $
    38,610
    
    
    $
    (3,260
    )
    
    $
    208,262Intercompany payables
    
    
    -
    
    
    
    393,177
    
    
    
    4,389
    
    
    
    (397,566
    )
    
    
    -Long-term debt
    
    
    334,255
    
    
    
    59,074
    
    
    
    49,404
    
    
    
    (2,728
    )
    
    
    440,005Other long-term liabilities
    
    
    59,689
    
    
    
    8,509
    
    
    
    58,374
    
    
    
    (2,783
    )
    
    
    123,789Shareholders equity
    
    
    700,474
    
    
    
    512,002
    
    
    
    25,737
    
    
    
    (537,739
    )
    
    
    700,474Total liabilities and shareholders equity
    
    $
    1,166,102
    
    
    $
    1,073,990
    
    
    $
    176,514
    
    
    $
    (944,076
    )
    
    $
    1,472,530
 18




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##### Table of Contents



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2006
(IN THOUSANDS)
 Parent
    
    
    Guarantors
    
    
    Non-guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    127
    
    
    $
    496,521
    
    
    $
    16,426
    
    
    $
    (36,036
    )
    
    $
    477,038Equity in net income of subsidiaries
    
    
    33,843
    
    
    
    -
    
    
    
    -
    
    
    
    (33,843
    )
    
    
    -Operating expenses
    
    
    33,531
    
    
    
    418,620
    
    
    
    14,868
    
    
    
    (35,408
    )
    
    
    431,611Lease expense
    
    
    426
    
    
    
    5,314
    
    
    
    28
    
    
    
    (304
    )
    
    
    5,464Depreciation and amortization expense
    
    
    3,207
    
    
    
    13,849
    
    
    
    585
    
    
    
    -
    
    
    
    17,641Interest expense
    
    
    4,517
    
    
    
    1,357
    
    
    
    989
    
    
    
    (154
    )
    
    
    6,709Investment income
    
    
    (971
    )
    
    
    (446
    )
    
    
    (1,147
    )
    
    
    -
    
    
    
    (2,564
    )Income (loss) before income tax (benefit) expense,
equity in net income of unconsolidated
affiliates and minority interests
    
    
    (6,740
    )
    
    
    57,827
    
    
    
    1,103
    
    
    
    (34,013
    )
    
    
    18,177Income tax (benefit) expense
    
    
    (16,604
    )
    
    
    23,994
    
    
    
    461
    
    
    
    (537
    )
    
    
    7,314Income before equity in net income of
unconsolidated affiliates and minority interests
    
    
    9,864
    
    
    
    33,833
    
    
    
    642
    
    
    
    (33,476
    )
    
    
    10,863Equity in net income of unconsolidated affiliates
    
    
    861
    
    
    
    -
    
    
    
    -
    
    
    
    (625
    )
    
    
    236Minority interests
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (489
    )
    
    
    (489
    )Income from continuing operations
    
    
    10,725
    
    
    
    33,833
    
    
    
    642
    
    
    
    (34,590
    )
    
    
    10,610(Loss) income from discontinued operations, net of taxes
    
    
    (3
    )
    
    
    115
    
    
    
    -
    
    
    
    -
    
    
    
    112Net income
    
    $
    10,722
    
    
    $
    33,948
    
    
    $
    642
    
    
    $
    (34,590
    )
    
    $
    10,722
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2005
(IN THOUSANDS)
 Parent
    
    
    Guarantors
    
    
    Non-guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    571
    
    
    $
    449,062
    
    
    $
    22,715
    
    
    $
    (35,366
    )
    
    $
    436,982Equity in net income of subsidiaries
    
    
    31,862
    
    
    
    -
    
    
    
    -
    
    
    
    (31,862
    )
    
    
    -Operating expenses
    
    
    29,572
    
    
    
    376,007
    
    
    
    22,532
    
    
    
    (35,063
    )
    
    
    393,048Lease expense
    
    
    446
    
    
    
    4,992
    
    
    
    28
    
    
    
    -
    
    
    
    5,466Depreciation and amortization expense
    
    
    2,789
    
    
    
    11,423
    
    
    
    577
    
    
    
    -
    
    
    
    14,789Interest expense
    
    
    4,529
    
    
    
    1,061
    
    
    
    1,149
    
    
    
    (241
    )
    
    
    6,498Investment income
    
    
    (1,119
    )
    
    
    (206
    )
    
    
    (614
    )
    
    
    -
    
    
    
    (1,939
    )Income (loss) before income tax (benefit) expense,
equity in net income of unconsolidated
affiliates and minority interests
    
    
    (3,784
    )
    
    
    55,785
    
    
    
    (957
    )
    
    
    (31,924
    )
    
    
    19,120Income tax (benefit) expense
    
    
    (14,230
    )
    
    
    22,803
    
    
    
    (484
    )
    
    
    (252
    )
    
    
    7,837Income (loss) before equity in net income of
unconsolidated affiliates and minority interests
    
    
    10,446
    
    
    
    32,982
    
    
    
    (473
    )
    
    
    (31,672
    )
    
    
    11,283Equity in net income of unconsolidated affiliates
    
    
    905
    
    
    
    -
    
    
    
    -
    
    
    
    (371
    )
    
    
    534Minority interests
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (495
    )
    
    
    (495
    )Income (loss) from continuing operations
    
    
    11,351
    
    
    
    32,982
    
    
    
    (473
    )
    
    
    (32,538
    )
    
    
    11,322Income (loss) from discontinued operations, net of taxes
    
    
    86
    
    
    
    (28
    )
    
    
    57
    
    
    
    -
    
    
    
    115Net income (loss)
    
    $
    11,437
    
    
    $
    32,954
    
    
    $
    (416
    )
    
    $
    (32,538
    )
    
    $
    11,437
 19




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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2006
(IN THOUSANDS)
 Parent
    
    
    Guarantors
    
    
    Non-guarantors
    
    
    ConsolidatedNet cash (used in) provided by operating activities
    
    $
    (28,008
    )
    
    $
    67,106
    
    
    $
    3,390
    
    
    $
    42,488Net cash provided by (used in) investing activities
    
    
    652
    
    
    
    (76,877
    )
    
    
    2,884
    
    
    
    (73,341
    )Net cash provided by (used in) financing activities
    
    
    18,241
    
    
    
    4,402
    
    
    
    (339
    )
    
    
    22,304Net (decrease) increase in cash and equivalents
    
    $
    (9,115
    )
    
    $
    (5,369
    )
    
    $
    5,935
    
    
    $
    (8,549
    )
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 2005
(IN THOUSANDS)
 Parent
    
    
    Guarantors
    
    
    Non-guarantors
    
    
    ConsolidatedNet cash (used in) provided by operating activities
    
    $
    (29,196
    )
    
    $
    51,817
    
    
    $
    (3,045
    )
    
    $
    19,576Net cash (used in) provided by investing activities
    
    
    (3,154
    )
    
    
    (27,405
    )
    
    
    3,692
    
    
    
    (26,867
    )Net cash provided by (used in) financing activities
    
    
    16,085
    
    
    
    (27,603
    )
    
    
    (301
    )
    
    
    (11,819
    )Net (decrease) increase in cash and equivalents
    
    $
    (16,265
    )
    
    $
    (3,191
    )
    
    $
    346
    
    
    $
    (19,110
    )
 (13) Subsequent Events
 Proposed Merger
   Lease and Purchase Option Agreements
  20




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ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
  Revenue Sources
   Laws Affecting Medicare Revenues
    21




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Laws Affecting Medicaid Revenues
     22




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Significant Transactions and Events
 Proposed Merger
     Lease and Purchase Option Agreements
  23




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##### Table of Contents



Acquisition of ElderCare Centers
    Debt Extinguishment
    Recently Adopted Accounting Principle
 Determining Whether a General Partner, or the General Partners
as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights
 Results of Operations
 Reasons for Non-GAAP Financial Disclosure
   24




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##### Table of Contents




    
    allows investors to evaluate our performance from managements perspective,
resulting in greater transparency with respect to supplemental information used by
us in our financial and operational decision making;
    
    facilitates comparisons with prior periods and reflect the principal basis on
which management monitors financial performance; and
    
    facilitates comparisons with the performance of others in the long-term care
services industry.
      25




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##### Table of Contents



Reconciliation of Net Income to EBITDA
 Three months ended December 31,(in thousands)
    
    2006
    
    
    2005Net income
    
    $
    10,722
    
    
    $
    11,437Add back:Income from discontinued operations, net of taxes
    
    
    (112
    )
    
    
    (115
    )Equity in net income of unconsolidated affiliates
    
    
    (236
    )
    
    
    (534
    )Minority interests
    
    
    489
    
    
    
    495Income tax expense
    
    
    7,314
    
    
    
    7,837Interest expense
    
    
    6,709
    
    
    
    6,498Depreciation and amortization expense
    
    
    17,641
    
    
    
    14,789EBITDA
    
    $
    42,527
    
    
    $
    40,407
 Three Months Ended December 31, 2006 Compared to Three Months Ended December 31, 2005
     26




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Capital Costs and Other
   27




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##### Table of Contents



Liquidity and Capital Resources
 Working Capital and Cash Flows
      28




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##### Table of Contents




    
    merge or consolidate us or any of our subsidiaries with an unrelated third party;
    
    sell, lease or otherwise dispose of a material amount of
assets or securities, subject to certain exceptions;
    
    make any material business acquisitions, other than those expressly provided for in the
Merger Agreement, if the aggregate amount of the consideration paid or transferred by us
and our subsidiaries in connection with all such transactions would exceed $20 million;
    
    repay or incur indebtedness outside of the ordinary course of business that is in excess
of $5.0 million in the aggregate;
    
    make, outside of the ordinary course of business, any material loans, advances or
capital contributions to, or investments in, any other person in
excess of $2.5 million in the aggregate, subject to certain exceptions;
    
    authorize any capital expenditures other than expenditures provided for in our budget for fiscal
year 2007 or in connection with the repair or replacement of
facilities destroyed or damaged due to casualty or
accident;
    
    pledge or otherwise encumber shares of capital stock or other voting securities of us or
our subsidiaries, other than in the ordinary course of business; and
    
    enter into, renew, extend, amend, transfer, terminate or waive any provision or right
with respect to any material contract.
   Off-Balance Sheet Commitments and Commitments to Consolidated VIEs
    29




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##### Table of Contents



Income Taxes
  Critical Accounting Policies
  
    
    Allowance for Doubtful Accounts;
    
    Loss Reserves for Certain Self-Insured Programs;
    
    Revenue Recognition / Contractual Allowances; and
    
    Long-Lived Asset Impairments.
  New Accounting Pronouncements
 Income Tax Uncertainties
 Accounting for Uncertainty in Income
Taxes, Accounting for Income Taxes.
 30




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##### Table of Contents



Accounting for Misstatements
  Fair Value Measurements
 Fair Value Measurements
 Seasonality
  Impact of Inflation
  
 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
      31




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ITEM 4: Controls and Procedures
      32




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PART II: OTHER INFORMATION
 
 ITEM 1: Legal Proceedings
 Haskell et al. v. Goldman Sachs & Co. et al.
  
 ITEM 1A: Risk Factors
  Risks Associated with the Proposed Merger
 Prior to completion of the proposed Merger and if the Merger is not completed, there may be a
negative impact on our ongoing business.
   33




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##### Table of Contents



If we complete the proposed Merger and the related transactions, we will be a highly leveraged
company and our substantial leverage could adversely affect our operations.
  
    
    increasing our vulnerability to general economic and industry conditions;
    
    requiring a substantial portion of cash flow from operations to be dedicated to the
payment of debt service, including lease expense, therefore reducing our ability to use our
cash flow to fund our operations, capital expenditures and future business opportunities;
    
    exposing us to the risk of increased interest rates as certain of our borrowings may be at
variable rates of interest;
    
    restricting us from making strategic acquisitions or causing us to make non-strategic
divestitures;
    
    limiting our ability to obtain additional financing for working capital, capital
expenditures, debt service requirements, acquisitions and general corporate or other
purposes; and
    
    limiting our ability to adjust to changing market conditions and placing us at a
competitive disadvantage compared to competitors who are less highly leveraged.
  Our capital structure and lease and indebtedness agreements after the proposed Merger are uncertain
and may contain restrictions that will limit our flexibility in operating our business.
  
    
    incur additional indebtedness, enter into additional leases or issue equity securities;
    
    pay dividends on, repurchase or make distributions in respect of our capital stock or
make other restricted payments;
    
    make certain investments;
    
    sell certain assets;
    
    create liens;
    
    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
    
    enter into certain transactions with our affiliates.
  34




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##### Table of Contents



ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds 
 
 ITEM 3: Defaults Upon Senior Securities 
 
 ITEM 4: Submission of Matters to a Vote of Security Holders 
 
 ITEM 5: Other Information
 
 ITEM 6: Exhibits
  31.1
    
    Certification of George V. Hager, Jr., Chief Executive Officer,
of the Company dated February 9, 2007 pursuant to Rule 13a  14(a) of the
Securities Exchange Act of 1934, as amended.31.2
    
    Certification of James V. McKeon, Chief Financial Officer, of
the Company dated February 9, 2007 pursuant to Rule 13a  14(a) of the
Securities Exchange Act of 1934, as amended.32.1
    
    Certification of George V. Hager, Jr., Chief Executive Officer,
of the Company dated February 9, 2007 pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of James V. McKeon, Chief Financial Officer, of
the Company dated February 9, 2007 pursuant to 18 U.S.C. Section 1350.
 35




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##### Table of Contents



SIGNATURES
  Genesis HealthCare CorporationDate: February 9, 2007
    
    /s/ James V. McKeonJames V. McKeon,Chief Financial OfficerDate: February 9, 2007
    
    /s/ George V. Hager, Jr.George V. Hager, Jr.,Chief Executive Officer and Chairman of the Board
 36