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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)101 East State StreetKennett Square, Pennsylvania
    
    19348(Address of principal executive offices)
    
    (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
    
    
    25ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    40ITEM 4: Controls and Procedures
    
    
    40PART II: OTHER INFORMATION
    
    
    41ITEM 1: Legal Proceedings
    
    
    41ITEM 1A: Risk Factors
    
    
    41ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43ITEM 3: Defaults Upon Senior Securities
    
    
    43ITEM 4: Submission of Matters to a Vote of Security Holders
    
    
    43ITEM 5: Other Information
    
    
    44ITEM 6: Exhibits
    
    
    44SIGNATURES
    
    
    46Certification of George V. Hager, Jr., Chief Executive OfficerCertification of James V. McKeon, Chief Financial OfficerCertification of George V. Hager, Jr., Chief Executive Officer pursuant to 18 U.S.C Section 1350Certification of James V. McKeon, Chief Financial Officer pursuant to 18 U.S.C. Section 1350




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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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
    
    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 occurrence of any event, change or other circumstance that could give rise to the termination
of the Merger Agreement;
    
    the outcome of any legal proceedings that have been or may be instituted against us and
others relating to the Merger Agreement;
    
    the inability to complete the proposed merger due to the failure to obtain shareholder approval
or regulatory approvals or the failure to satisfy other conditions to consummate the proposed
merger;
    
    the failure to obtain the necessary debt or equity financing set forth in commitment letters
received by FC-GEN Acquisition, Inc. in connection with the Merger Agreement;
    
    the failure of the proposed merger to be completed for any other reason;
    
    the risk that the proposed merger disrupts current plans and operations and/or results in
difficulties in employee retention;
    
    the effect of the announcement of the proposed merger on our client and customer relationships,
operating results and business generally;
    
    the amount of the costs, fees, expenses and charges related to the proposed merger;
    
    the timing of the completion of the proposed merger or the impact of the proposed merger on our
capital resources, profitability, cash requirements, management resources and liquidity; 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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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 ITEM 1: Financial Statements
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 AND SEPTEMBER 30, 2006
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 March 31, 2007
    
    September 30, 2006Assets:Current assets:Cash and equivalents
    
    $
    33,092
    
    
    $
    74,819Current portion of restricted cash and investments in marketable securities
    
    
    31,044
    
    
    
    35,160Accounts
receivable, net of allowances for doubtful accounts of $29,683 and $25,685, at March 31, 2007 and September 30, 2006, respectively
    
    
    253,164
    
    
    
    226,689Prepaid expenses and other current assets
    
    
    47,618
    
    
    
    48,583Current portion of deferred income taxes
    
    
    39,704
    
    
    
    45,206Total current assets
    
    
    404,622
    
    
    
    430,457Property and
equipment, net of accumulated depreciation of $274,231 and $234,928, at March 31, 2007 and September 30, 2006, respectively
    
    
    997,365
    
    
    
    873,164Assets held for sale
    
    
    3,911
    
    
    
    3,911Restricted cash and investments in marketable securities
    
    
    62,293
    
    
    
    64,819Deferred income taxes
    
    
    8,105
    
    
    
    5,830Other long-term assets
    
    
    96,023
    
    
    
    94,349Total assets
    
    $
    1,572,319
    
    
    $
    1,472,530Liabilities and Shareholders Equity:Current liabilities:Current installments of long-term debt
    
    $
    15,009
    
    
    $
    4,829Accounts payable and other accrued expenses
    
    
    192,465
    
    
    
    162,978Current portion of self-insurance liability reserves
    
    
    36,554
    
    
    
    40,455Total current liabilities
    
    
    244,028
    
    
    
    208,262Long-term debt
    
    
    460,239
    
    
    
    440,005Self-insurance liability reserves
    
    
    77,946
    
    
    
    70,682Other long-term liabilities
    
    
    66,954
    
    
    
    53,107Commitments and contingenciesShareholders equity:Common stock  par $0.01, 45,000,000 shares authorized at March 31, 2007
and September 30, 2006, 20,888,250 and 20,736,223 shares issued
at March 31, 2007 and September 30, 2006, respectively
    
    
    209
    
    
    
    207Additional paid-in capital
    
    
    653,406
    
    
    
    645,278Retained earnings
    
    
    117,629
    
    
    
    101,546Accumulated other comprehensive income (loss)
    
    
    73
    
    
    
    (65
    )Treasury stock at cost, 1,075,745 shares at March 31, 2007 and
September 30, 2006
    
    
    (42,787
    )
    
    
    (42,787
    )Common stock held in deferred compensation plan at cost, 286,337 and
236,227 shares at March 31, 2007 and September 30, 2006, respectively
    
    
    (12,262
    )
    
    
    (9,714
    )Deferred compensation liability
    
    
    6,884
    
    
    
    6,009Total shareholders equity
    
    
    723,152
    
    
    
    700,474Total liabilities and shareholders equity
    
    $
    1,572,319
    
    
    $
    1,472,530
  3




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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 Three months endedMarch 31, 2007
    
    March 31, 2006Net revenues
    
    $
    496,070
    
    
    $
    436,265Salaries, wages and benefits
    
    
    302,998
    
    
    
    267,717Other operating expenses
    
    
    108,969
    
    
    
    95,799General and administrative costs
    
    
    33,955
    
    
    
    29,611Provision for losses on accounts receivable and notes receivable
    
    
    4,939
    
    
    
    3,928Loss on early extinguishment of debt
    
    
    
    
    
    
    188Transaction costs of proposed merger
    
    
    5,196
    
    
    
    Lease expense
    
    
    5,540
    
    
    
    5,620Depreciation and amortization expense
    
    
    18,508
    
    
    
    15,530Interest expense
    
    
    7,679
    
    
    
    6,357Investment income
    
    
    (2,834
    )
    
    
    (2,237
    )Income before income tax expense, equity in net income of
unconsolidated affiliates and minority interests
    
    
    11,120
    
    
    
    13,752Income tax expense
    
    
    4,933
    
    
    
    5,579Income before equity in net income of unconsolidated
affiliates and minority interests
    
    
    6,187
    
    
    
    8,173Equity in net income of unconsolidated affiliates
    
    
    179
    
    
    
    435Minority interests
    
    
    (552
    )
    
    
    (323
    )Income from continuing operations
    
    
    5,814
    
    
    
    8,285Loss from discontinued operations, net of taxes
    
    
    (453
    )
    
    
    (217
    )Net income
    
    $
    5,361
    
    
    $
    8,068Per common share data:Basic:Income from continuing operations
    
    $
    0.30
    
    
    $
    0.43Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.01
    )Net income
    
    $
    0.27
    
    
    $
    0.42Weighted average shares
    
    
    19,495,676
    
    
    
    19,234,656Diluted:Income from continuing operations
    
    $
    0.29
    
    
    $
    0.43Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.01
    )Net income
    
    $
    0.26
    
    
    $
    0.42Weighted average shares
    
    
    20,246,698
    
    
    
    19,434,096
  4




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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2007 AND 2006
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 Six months endedMarch 31, 2007
    
    March 31, 2006Net revenues
    
    $
    972,043
    
    
    $
    871,871Salaries, wages and benefits
    
    
    590,126
    
    
    
    535,727Other operating expenses
    
    
    212,959
    
    
    
    190,963General and administrative costs
    
    
    64,698
    
    
    
    55,276Provision for losses on accounts receivable and notes receivable
    
    
    10,020
    
    
    
    6,864Loss on early extinguishment of debt
    
    
    766
    
    
    
    188Transaction costs of proposed merger
    
    
    7,985
    
    
    
    Lease expense
    
    
    11,004
    
    
    
    11,086Depreciation and amortization expense
    
    
    36,128
    
    
    
    30,269Interest expense
    
    
    14,388
    
    
    
    12,855Investment income
    
    
    (5,398
    )
    
    
    (4,176
    )Income before income tax expense, equity in net income of
unconsolidated affiliates and minority interests
    
    
    29,367
    
    
    
    32,819Income tax expense
    
    
    12,275
    
    
    
    13,394Income before equity in net income of unconsolidated
affiliates and minority interests
    
    
    17,092
    
    
    
    19,425Equity in net income of unconsolidated affiliates
    
    
    415
    
    
    
    969Minority interests
    
    
    (1,041
    )
    
    
    (818
    )Income from continuing operations
    
    
    16,466
    
    
    
    19,576Loss from discontinued operations, net of taxes
    
    
    (383
    )
    
    
    (71
    )Net income
    
    $
    16,083
    
    
    $
    19,505Per common share data:Basic:Income from continuing operations
    
    $
    0.85
    
    
    $
    1.01Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.00
    )Net income
    
    $
    0.83
    
    
    $
    1.01Weighted average shares
    
    
    19,472,439
    
    
    
    19,349,678Diluted:Income from continuing operations
    
    $
    0.83
    
    
    $
    1.00Loss from discontinued operations
    
    
    (0.02
    )
    
    
    (0.00
    )Net income
    
    $
    0.81
    
    
    $
    1.00Weighted average shares
    
    
    19,836,027
    
    
    
    19,599,131
  5




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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2007 AND 2006
(IN THOUSANDS)
 Six months endedMarch 31, 2007
    
    March 31, 2006Cash flows from operating activities:Net income
    
    $
    16,083
    
    
    $
    19,505Net charges included in operations not requiring funds
    
    
    63,918
    
    
    
    52,363Changes in assets and liabilities:Accounts receivable
    
    
    (35,842
    )
    
    
    (29,739
    )Accounts payable and other accrued expenses
    
    
    38,917
    
    
    
    (20
    )Other, net
    
    
    1,261
    
    
    
    5,900Total adjustments
    
    
    68,254
    
    
    
    28,504Net cash provided by operating activities
    
    
    84,337
    
    
    
    48,009Cash flows from investing activities:Capital expenditures
    
    
    (53,157
    )
    
    
    (53,962
    )Net proceeds on maturity or sale of restricted marketable securities
    
    
    13,904
    
    
    
    475Net change in restricted cash and equivalents
    
    
    (7,088
    )
    
    
    (621
    )Purchase of eldercare centers
    
    
    (68,716
    )
    
    
    (4,823
    )Consolidation of partnerships
    
    
    2,324
    
    
    
    Other, net
    
    
    (164
    )
    
    
    6,828Net cash used in investing activities
    
    
    (112,897
    )
    
    
    (52,103
    )Cash flows from financing activities:Repayment of long-term debt
    
    
    (13,991
    )
    
    
    (5,212
    )Debt prepayment premium
    
    
    (383
    )
    
    
    (130
    )Purchase of common stock for treasury
    
    
    
    
    
    
    (10,691
    )Proceeds from exercise of stock options
    
    
    767
    
    
    
    1,108Other, net
    
    
    440
    
    
    
    312Net cash used in financing activities
    
    
    (13,167
    )
    
    
    (14,613
    )Net decrease in cash and equivalents
    
    $
    (41,727
    )
    
    $
    (18,707
    )Cash and equivalents:Beginning of period
    
    
    74,819
    
    
    
    107,350End of period
    
    $
    33,092
    
    
    $
    88,643Supplemental disclosure of cash flow information:Interest paid
    
    $
    14,374
    
    
    $
    12,607Taxes paid
    
    
    3,066
    
    
    
    4,491Non-cash financing activities:Capital leases
    
    $
    40,013
    
    
    $
    Assumption of debt
    
    
    4,375
    
    
    
    
  6




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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
    7




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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
  8




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(3) Significant Transactions and Events
 Proposed Merger
       Matters Related to the Proposed Merger
   9




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Lease and Purchase Option Agreements
  Acquisition of ElderCare Centers
    Debt Extinguishment
    Severance Obligations
  10




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(4) Long-Term Debt
  March 31, 2007
    
    September 30, 2006Senior credit facility  revolving credit
    
    $
    6,000
    
    
    $
    6,000Senior subordinated notes
    
    
    145,935
    
    
    
    145,935Convertible senior subordinated debentures
    
    
    180,000
    
    
    
    180,000Mortgages and other secured debt (recourse)
    
    
    26,998
    
    
    
    37,909Capital lease obligations
    
    
    72,590
    
    
    
    34,950Mortgages and other secured debt (non recourse)
    
    
    43,725
    
    
    
    40,040475,248
    
    
    
    444,834Less:Current installments of long-term debt
    
    
    (15,009
    )
    
    
    (4,829
    )Long-term debt
    
    $
    460,239
    
    
    $
    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).
 11




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(5) Investment Income
   Three months ended March 31,
    
    Six months ended March 31,2007
    
    2006
    
    2007
    
    2006Income on cash and short-term investments
    
    $
    640
    
    
    $
    940
    
    
    $
    1,604
    
    
    $
    2,032Income on restricted cash and investments
    
    
    1,035
    
    
    
    631
    
    
    
    2,117
    
    
    
    1,212Income on assets held in rabbi trust
    
    
    899
    
    
    
    576
    
    
    
    1,344
    
    
    
    782Interest income on notes receivable and lines of credit
    
    
    260
    
    
    
    90
    
    
    
    333
    
    
    
    150Total investment income
    
    $
    2,834
    
    
    $
    2,237
    
    
    $
    5,398
    
    
    $
    4,176
  (6) Earnings Per Share
  12




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(7) Comprehensive Income
  Three months ended March 31,
    
    Six months ended March 31,2007
    
    2006
    
    2007
    
    2006Net income
    
    $
    5,361
    
    
    $
    8,068
    
    
    $
    16,083
    
    
    $
    19,505Net unrealized gain (loss) on restricted investments
in marketable securities
    
    
    240
    
    
    
    (193
    )
    
    
    175
    
    
    
    (275
    )Unrealized (loss) gain on interest rate swap agreement
    
    
    (37
    )
    
    
    100
    
    
    
    (37
    )
    
    
    164Total comprehensive income
    
    $
    5,564
    
    
    $
    7,975
    
    
    $
    16,221
    
    
    $
    19,394
   (8) Assets Held for Sale and Discontinued Operations
    Three months ended March 31,
    
    Six months ended March 31,2007
    
    2006
    
    2007
    
    2006Net revenues
    
    $
    236
    
    
    $
    1,268
    
    
    $
    1,329
    
    
    $
    2,786Net operating loss of discontinued businesses
    
    $
    (763
    )
    
    $
    (366
    )
    
    $
    (644
    )
    
    $
    (119
    )Income tax benefit
    
    
    310
    
    
    
    149
    
    
    
    261
    
    
    
    48Loss from discontinued operations, net of taxes
    
    $
    (453
    )
    
    $
    (217
    )
    
    $
    (383
    )
    
    $
    (71
    )
 (9) Segment Information
  13




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Three months ended March 31,
    
    Six months ended March 31,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Revenues:Inpatient services  external
    
    $
    445,677
    
    
    $
    392,047
    
    
    $
    871,985
    
    
    $
    783,830Rehabilitation therapy services:External
    
    
    41,580
    
    
    
    35,459
    
    
    
    82,411
    
    
    
    71,147Intersegment
    
    
    29,463
    
    
    
    22,755
    
    
    
    56,407
    
    
    
    45,212All other services:External
    
    
    8,813
    
    
    
    8,759
    
    
    
    17,647
    
    
    
    16,894Intersegment
    
    
    8,750
    
    
    
    17,458
    
    
    
    17,476
    
    
    
    30,115Elimination of intersegment revenues
    
    
    (38,213
    )
    
    
    (40,213
    )
    
    
    (73,883
    )
    
    
    (75,327
    )Total net revenues
    
    
    496,070
    
    
    
    436,265
    
    
    
    972,043
    
    
    
    871,871EBITDA (1):Inpatient services
    
    
    62,150
    
    
    
    51,729
    
    
    
    123,610
    
    
    
    104,244Rehabilitation therapy services
    
    
    5,114
    
    
    
    3,375
    
    
    
    10,711
    
    
    
    8,061All other services and corporate costs
    
    
    (24,761
    )
    
    
    (19,277
    )
    
    
    (45,687
    )
    
    
    (36,174
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    (188
    )
    
    
    (766
    )
    
    
    (188
    )Transaction costs of proposed merger
    
    
    (5,196
    )
    
    
    
    
    
    
    (7,985
    )
    
    
    Total EBITDA
    
    
    37,307
    
    
    
    35,639
    
    
    
    79,883
    
    
    
    75,943Capital and other:Depreciation and amortization expense
    
    
    (18,508
    )
    
    
    (15,530
    )
    
    
    (36,128
    )
    
    
    (30,269
    )Interest expense
    
    
    (7,679
    )
    
    
    (6,357
    )
    
    
    (14,388
    )
    
    
    (12,855
    )Income tax expense
    
    
    (4,933
    )
    
    
    (5,579
    )
    
    
    (12,275
    )
    
    
    (13,394
    )Equity in net income of unconsolidated affiliates
    
    
    179
    
    
    
    435
    
    
    
    415
    
    
    
    969Minority interests
    
    
    (552
    )
    
    
    (323
    )
    
    
    (1,041
    )
    
    
    (818
    )Income from continuing operations
    
    
    5,814
    
    
    
    8,285
    
    
    
    16,466
    
    
    
    19,576Loss from discontinued operations, net of taxes
    
    
    (453
    )
    
    
    (217
    )
    
    
    (383
    )
    
    
    (71
    )Net income
    
    $
    5,361
    
    
    $
    8,068
    
    
    $
    16,083
    
    
    $
    19,505
 
 (1)
    
    GHC defines EBITDA as earnings from continuing operations before
equity in net income of unconsolidated 14




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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.  March 31, 2007
    
    September 30, 2006Inpatient services
    
    $
    1,218,251
    
    
    $
    1,071,635Rehabilitation therapy services
    
    
    47,167
    
    
    
    43,189All other
    
    
    306,901
    
    
    
    357,706Total assets
    
    $
    1,572,319
    
    
    $
    1,472,530
 (10) Stock-Based Benefit Plans
 Stock-Based Compensation Expenses
  Three months ended
    
    Six months endedMarch 31,
    
    March 31,
    
    March 31,
    
    March 31,2007
    
    2006
    
    2007
    
    2006Stock options
    
    $
    891
    
    
    $
    964
    
    
    $
    1,772
    
    
    $
    1,537Stock incentive plan
    
    
    1,844
    
    
    
    1,058
    
    
    
    3,853
    
    
    
    2,831Stock held in deferred compensation plan
    
    
    2,264
    
    
    
    1,475
    
    
    
    2,210
    
    
    
    788Total stock-based compensation before income taxes
    
    
    4,999
    
    
    
    3,497
    
    
    
    7,835
    
    
    
    5,156Income tax benefit
    
    
    (2,032
    )
    
    
    (1,420
    )
    
    
    (3,184
    )
    
    
    (2,093
    )Total stock-based compensation after income taxes
    
    $
    2,967
    
    
    $
    2,077
    
    
    $
    4,651
    
    
    $
    3,063
   15




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##### Table of Contents



Stock Option Plan
    WeightedWeighted
    
    
    
    
    
    AverageAverage
    
    Intrinsic
    
    RemainingExercise
    
    Value (in
    
    ContractualShares
    
    Price
    
    thousands)
    
    LifeOutstanding at October 1, 2006
    
    
    1,022,629
    
    
    $
    32.17Exercised
    
    
    (29,288
    )
    
    
    26.19
    
    
    $
    1,008Forfeited
    
    
    (15,000
    )
    
    
    47.57
    
    
    
    233Outstanding at March 31, 2007
    
    
    978,341
    
    
    $
    32.11
    
    
    $
    30,326
    
    
    
    7.91Exercisable at March 31, 2007
    
    
    650,502
    
    
    $
    29.13
    
    
    $
    22,104
    
    
    
    7.47Vested and expected to vest at March 31, 2007
    
    
    929,439
    
    
    $
    31.81
    
    
    $
    29,091
    
    
    
    7.87
  16




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##### Table of Contents



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
    
    
    400,925
    
    
    
    6.86
    
    
    $
    23.68
    
    
    
    400,925
    
    
    
    6.86
    
    
    $
    23.68$30.00 - $39.99
    
    
    469,916
    
    
    
    8.71
    
    
    
    36.40
    
    
    
    194,575
    
    
    
    8.71
    
    
    
    36.40$40.00 - $49.99
    
    
    107,500
    
    
    
    8.30
    
    
    $
    44.83
    
    
    
    55,002
    
    
    
    7.54
    
    
    $
    43.16
  WeightedNon-Vested
    
    AverageNumber of
    
    Grant-DateStock Options
    
    Fair ValueNon-vested at October 1, 2006
    
    
    559,629
    
    
    $
    17.20Vested
    
    
    (216,790
    )
    
    
    15.56Forfeited
    
    
    (15,000
    )
    
    
    22.58Non-vested at March 31, 2007
    
    
    327,839
    
    
    $
    18.05
   Stock Incentive Plan
  17




---



##### Table of Contents



Non-Vested
    
    WeightedNumber of
    
    AverageRestricted
    
    Grant-DateShares
    
    Fair ValueNon-vested at October 1, 2006
    
    
    532,699
    
    
    $
    25.72Granted
    
    
    20,709
    
    
    
    48.33Vested and Distributed
    
    
    (122,652
    )
    
    
    25.43Forfeited
    
    
    (15,155
    )
    
    
    36.19Non-vested at March 31, 2007
    
    
    415,601
    
    
    $
    27.42
  (11) New Accounting Pronouncements
 Income Tax Uncertainties
 Accounting for Uncertainty in Income Taxes, Accounting for
Income Taxes.
 Accounting for Misstatements
  18




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##### Table of Contents



Fair Value Measurements
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115
 (12) Commitments and Contingencies
   
    
    extended $3.9 million in working capital lines of credit to certain jointly owned and
managed entities, including certain consolidated VIEs, of which $2.1 million was unused;
and
    
    posted $10.3 million of outstanding letters of credit to guarantee the performance to
third parties of various trade activities.
 (13) Unaudited Condensed Consolidating Financial Statements of Genesis HealthCare Corporation and Subsidiaries
   19




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##### Table of Contents



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2007
(IN THOUSANDS)
 Parent
    
    Guarantors
    
    Non-guarantors
    
    Eliminations
    
    ConsolidatedAssets:Current assets
    
    $
    75,943
    
    
    $
    270,274
    
    
    $
    59,576
    
    
    $
    (1,171
    )
    
    $
    404,622Property and equipment, net
    
    
    33,592
    
    
    
    861,014
    
    
    
    102,759
    
    
    
    
    
    
    
    997,365Other long-term assets
    
    
    125,229
    
    
    
    24,428
    
    
    
    76,387
    
    
    
    (55,712
    )
    
    
    170,332Investments in subsidiaries
    
    
    472,414
    
    
    
    
    
    
    
    
    
    
    
    (472,414
    )
    
    
    Intercompany receivables
    
    
    522,014
    
    
    
    
    
    
    
    
    
    
    
    (522,014
    )
    
    
    Total assets
    
    $
    1,229,192
    
    
    $
    1,155,716
    
    
    $
    238,722
    
    
    $
    (1,051,311
    )
    
    $
    1,572,319Liabilities and shareholders equity:Current liabilities
    
    $
    98,860
    
    
    $
    116,033
    
    
    $
    33,963
    
    
    $
    (4,828
    )
    
    $
    244,028Intercompany payables
    
    
    
    
    
    
    486,166
    
    
    
    35,848
    
    
    
    (522,014
    )
    
    
    Long-term debt
    
    
    326,887
    
    
    
    51,898
    
    
    
    84,182
    
    
    
    (2,728
    )
    
    
    460,239Other long-term liabilities
    
    
    80,293
    
    
    
    3,298
    
    
    
    57,748
    
    
    
    3,561
    
    
    
    144,900Shareholders equity
    
    
    723,152
    
    
    
    498,321
    
    
    
    26,981
    
    
    
    (525,302
    )
    
    
    723,152Total liabilities and shareholders equity
    
    $
    1,229,192
    
    
    $
    1,155,716
    
    
    $
    238,722
    
    
    $
    (1,051,311
    )
    
    $
    1,572,319
 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
 20




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##### Table of Contents



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007
(IN THOUSANDS)
 Parent
    
    Guarantors
    
    Non-guarantors
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    53
    
    
    $
    502,049
    
    
    $
    31,815
    
    
    $
    (37,847
    )
    
    $
    496,070Equity in net income of subsidiaries
    
    
    34,402
    
    
    
    
    
    
    
    
    
    
    
    (34,402
    )
    
    
    Operating expenses
    
    
    46,798
    
    
    
    418,579
    
    
    
    29,152
    
    
    
    (38,472
    )
    
    
    456,057Lease expense
    
    
    459
    
    
    
    5,345
    
    
    
    (568
    )
    
    
    304
    
    
    
    5,540Depreciation and amortization expense
    
    
    3,512
    
    
    
    13,804
    
    
    
    1,192
    
    
    
    
    
    
    
    18,508Interest expense
    
    
    4,560
    
    
    
    1,217
    
    
    
    2,073
    
    
    
    (171
    )
    
    
    7,679Investment income
    
    
    (2,104
    )
    
    
    183
    
    
    
    (1,091
    )
    
    
    178
    
    
    
    (2,834
    )Income (loss) before income tax
    (benefit) expense, equity in net income of unconsolidated affiliates and
    minority interests
    
    
    (18,770
    )
    
    
    62,921
    
    
    
    1,057
    
    
    
    (34,088
    )
    
    
    11,120Income tax (benefit) expense
    
    
    (23,269
    )
    
    
    28,146
    
    
    
    475
    
    
    
    (419
    )
    
    
    4,933Income before equity in net income of
unconsolidated affiliates and
minority interests
    
    
    4,499
    
    
    
    34,775
    
    
    
    582
    
    
    
    (33,669
    )
    
    
    6,187Equity in net income of unconsolidated
affiliates
    
    
    863
    
    
    
    
    
    
    
    
    
    
    
    (684
    )
    
    
    179Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (552
    )
    
    
    (552
    )Income from continuing operations
    
    
    5,362
    
    
    
    34,775
    
    
    
    582
    
    
    
    (34,905
    )
    
    
    5,814Loss from discontinued
operations, net of taxes
    
    
    (1
    )
    
    
    (452
    )
    
    
    
    
    
    
    
    
    
    
    (453
    )Net income
    
    $
    5,361
    
    
    $
    34,323
    
    
    $
    582
    
    
    $
    (34,905
    )
    
    $
    5,361
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006
(IN THOUSANDS)
 Parent
    
    Guarantors
    
    Non-guarantors
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    659
    
    
    $
    450,797
    
    
    $
    25,273
    
    
    $
    (40,464
    )
    
    $
    436,265Equity in net income of subsidiaries
    
    
    30,884
    
    
    
    
    
    
    
    
    
    
    
    (30,884
    )
    
    
    Operating expenses
    
    
    33,319
    
    
    
    382,930
    
    
    
    21,057
    
    
    
    (40,063
    )
    
    
    397,243Lease expense
    
    
    479
    
    
    
    5,112
    
    
    
    29
    
    
    
    
    
    
    
    5,620Depreciation and amortization expense
    
    
    3,064
    
    
    
    11,887
    
    
    
    579
    
    
    
    
    
    
    
    15,530Interest expense
    
    
    4,405
    
    
    
    1,052
    
    
    
    1,152
    
    
    
    (252
    )
    
    
    6,357Investment income
    
    
    (991
    )
    
    
    (576
    )
    
    
    (670
    )
    
    
    
    
    
    
    (2,237
    )Income (loss) before income tax
(benefit) expense,
equity in net income of unconsolidated
affiliates and minority interests
    
    
    (8,733
    )
    
    
    50,392
    
    
    
    3,126
    
    
    
    (31,033
    )
    
    
    13,752Income tax (benefit) expense
    
    
    (16,055
    )
    
    
    20,674
    
    
    
    1,376
    
    
    
    (416
    )
    
    
    5,579Income before equity in net income of
unconsolidated affiliates and
minority interests
    
    
    7,322
    
    
    
    29,718
    
    
    
    1,750
    
    
    
    (30,617
    )
    
    
    8,173Equity in net income of unconsolidated
affiliates
    
    
    678
    
    
    
    
    
    
    
    
    
    
    
    (243
    )
    
    
    435Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (323
    )
    
    
    (323
    )Income from continuing operations
    
    
    8,000
    
    
    
    29,718
    
    
    
    1,750
    
    
    
    (31,183
    )
    
    
    8,285Income (loss) from discontinued
operations, net of taxes
    
    
    68
    
    
    
    (337
    )
    
    
    52
    
    
    
    
    
    
    
    (217
    )Net income
    
    $
    8,068
    
    
    $
    29,381
    
    
    $
    1,802
    
    
    $
    (31,183
    )
    
    $
    8,068
 21




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##### Table of Contents



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2007
(IN THOUSANDS)
 Parent
    
    Guarantors
    
    Non-guarantors
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    180
    
    
    $
    997,505
    
    
    $
    48,241
    
    
    $
    (73,883
    )
    
    $
    972,043Equity in net income of subsidiaries
    
    
    68,245
    
    
    
    
    
    
    
    
    
    
    
    (68,245
    )
    
    
    Operating expenses
    
    
    80,329
    
    
    
    836,085
    
    
    
    44,020
    
    
    
    (73,880
    )
    
    
    886,554Lease expense
    
    
    885
    
    
    
    10,659
    
    
    
    (540
    )
    
    
    
    
    
    
    11,004Depreciation and amortization expense
    
    
    6,719
    
    
    
    27,632
    
    
    
    1,777
    
    
    
    
    
    
    
    36,128Interest expense
    
    
    9,077
    
    
    
    2,574
    
    
    
    3,062
    
    
    
    (325
    )
    
    
    14,388Investment income
    
    
    (3,075
    )
    
    
    (263
    )
    
    
    (2,238
    )
    
    
    178
    
    
    
    (5,398
    )Income (loss) before income tax
(benefit) expense,
equity in net income of unconsolidated
affiliates and minority interests
    
    
    (25,510
    )
    
    
    120,818
    
    
    
    2,160
    
    
    
    (68,101
    )
    
    
    29,367Income tax (benefit) expense
    
    
    (39,873
    )
    
    
    52,168
    
    
    
    936
    
    
    
    (956
    )
    
    
    12,275Income before equity in net income of
unconsolidated affiliates and
minority interests
    
    
    14,363
    
    
    
    68,650
    
    
    
    1,224
    
    
    
    (67,145
    )
    
    
    17,092Equity in net income of unconsolidated
affiliates
    
    
    1,724
    
    
    
    
    
    
    
    
    
    
    
    (1,309
    )
    
    
    415Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,041
    )
    
    
    (1,041
    )Income from continuing operations
    
    
    16,087
    
    
    
    68,650
    
    
    
    1,224
    
    
    
    (69,495
    )
    
    
    16,466Loss from discontinued
operations, net of taxes
    
    
    (4
    )
    
    
    (379
    )
    
    
    
    
    
    
    
    
    
    
    (383
    )Net income
    
    $
    16,083
    
    
    $
    68,271
    
    
    $
    1,224
    
    
    $
    (69,495
    )
    
    $
    16,083
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2006
(IN THOUSANDS)
 Parent
    
    Guarantors
    
    Non-guarantors
    
    Eliminations
    
    ConsolidatedNet revenues
    
    $
    1,230
    
    
    $
    898,487
    
    
    $
    47,986
    
    
    $
    (75,832
    )
    
    $
    871,871Equity in net income of subsidiaries
    
    
    62,743
    
    
    
    
    
    
    
    
    
    
    
    (62,743
    )
    
    
    Operating expenses
    
    
    62,891
    
    
    
    757,664
    
    
    
    43,589
    
    
    
    (75,126
    )
    
    
    789,018Lease expense
    
    
    925
    
    
    
    10,104
    
    
    
    57
    
    
    
    
    
    
    
    11,086Depreciation and amortization expense
    
    
    5,853
    
    
    
    23,258
    
    
    
    1,158
    
    
    
    
    
    
    
    30,269Interest expense
    
    
    8,932
    
    
    
    2,115
    
    
    
    2,301
    
    
    
    (493
    )
    
    
    12,855Investment income
    
    
    (2,110
    )
    
    
    (782
    )
    
    
    (1,284
    )
    
    
    
    
    
    
    (4,176
    )Income (loss) before income tax
(benefit) expense,
equity in net income of unconsolidated
affiliates and minority interests
    
    
    (12,518
    )
    
    
    106,128
    
    
    
    2,165
    
    
    
    (62,956
    )
    
    
    32,819Income tax (benefit) expense
    
    
    (30,286
    )
    
    
    43,456
    
    
    
    892
    
    
    
    (668
    )
    
    
    13,394Income before equity in net income of
unconsolidated affiliates and
minority interests
    
    
    17,768
    
    
    
    62,672
    
    
    
    1,273
    
    
    
    (62,288
    )
    
    
    19,425Equity in net income of unconsolidated
affiliates
    
    
    1,583
    
    
    
    
    
    
    
    
    
    
    
    (614
    )
    
    
    969Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (818
    )
    
    
    (818
    )Income from continuing operations
    
    
    19,351
    
    
    
    62,672
    
    
    
    1,273
    
    
    
    (63,720
    )
    
    
    19,576Income (loss) from discontinued
operations, net of taxes
    
    
    154
    
    
    
    (334
    )
    
    
    109
    
    
    
    
    
    
    
    (71
    )Net income
    
    $
    19,505
    
    
    $
    62,338
    
    
    $
    1,382
    
    
    $
    (63,720
    )
    
    $
    19,505
 22




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##### Table of Contents



GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2007
(IN THOUSANDS)
 Parent
    
    Guarantors
    
    Non-guarantors
    
    ConsolidatedNet cash (used in) provided by operating activities
    
    $
    (50,974
    )
    
    $
    141,087
    
    
    $
    (5,776
    )
    
    $
    84,337Net cash used in investing activities
    
    
    (1,190
    )
    
    
    (95,331
    )
    
    
    (16,376
    )
    
    
    (112,897
    )Net cash (used in) provided by financing activities
    
    
    (137,785
    )
    
    
    98,776
    
    
    
    25,842
    
    
    
    (13,167
    )Net (decrease) increase in cash and equivalents
    
    $
    (189,949
    )
    
    $
    144,532
    
    
    $
    3,690
    
    
    $
    (41,727
    )
 GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2006
(IN THOUSANDS)
 Parent
    
    Guarantors
    
    Non-guarantors
    
    ConsolidatedNet cash (used in) provided by operating
activities
    
    $
    (71,918
    )
    
    $
    116,922
    
    
    $
    3,005
    
    
    $
    48,009Net cash used in investing activities
    
    
    (6,718
    )
    
    
    (44,710
    )
    
    
    (675
    )
    
    
    (52,103
    )Net cash (used in) provided by financing
activities
    
    
    (79,380
    )
    
    
    65,409
    
    
    
    (642
    )
    
    
    (14,613
    )Net (decrease) increase in cash and equivalents
    
    $
    (158,016
    )
    
    $
    137,621
    
    
    $
    1,688
    
    
    $
    (18,707
    )
 (14) Subsequent Events
 Proposed Merger Developments
    23




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Acquisition of ElderCare Center
  Debt Extinguishment
  24




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ITEM 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
  Revenue Sources
   Laws Affecting Medicare Revenues
     25




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Laws Affecting Medicaid Revenues
     26




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27




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Significant Transactions and Events
 Proposed Merger
        28




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Matters Related to the Proposed Merger
      Lease and Purchase Option Agreements
  29




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##### Table of Contents



Acquisition of ElderCare Centers
    Debt Extinguishment
     Severance Obligations
  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
 30




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##### Table of Contents



Results of Operations
 Reasons for Non-GAAP Financial Disclosure
   
    
    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 reflects the principal basis on
which management monitors financial performance; and
    
    facilitates comparisons with the performance of others in the long-term care
services industry.
    31




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##### Table of Contents



Reconciliation of Net Income to EBITDA
 Three months ended March 31,
    
    Six months ended March 31,(in thousands)
    
    2007
    
    2006
    
    2007
    
    2006Net income
    
    $
    5,361
    
    
    $
    8,068
    
    
    $
    16,083
    
    
    $
    19,505Add back:Income from discontinued operations, net of taxes
    
    
    453
    
    
    
    217
    
    
    
    383
    
    
    
    71Equity in net income of unconsolidated affiliates
    
    
    (179
    )
    
    
    (435
    )
    
    
    (415
    )
    
    
    (969
    )Minority interests
    
    
    552
    
    
    
    323
    
    
    
    1,041
    
    
    
    818Income tax expense
    
    
    4,933
    
    
    
    5,579
    
    
    
    12,275
    
    
    
    13,394Interest expense
    
    
    7,679
    
    
    
    6,357
    
    
    
    14,388
    
    
    
    12,855Depreciation and amortization expense
    
    
    18,508
    
    
    
    15,530
    
    
    
    36,128
    
    
    
    30,269EBITDA
    
    $
    37,307
    
    
    $
    35,639
    
    
    $
    79,883
    
    
    $
    75,943
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006
    32




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Capital Costs and Other
  33




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Six Months Ended March 31, 2007 Compared to Six Months Ended March 31, 2006
     34




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35




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Capital Costs and Other
      Liquidity and Capital Resources
 Working Capital and Cash Flows
    36




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
    
    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
amended 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 in excess of $20 million 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
   37




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##### Table of Contents



Income Taxes
  Contractual Obligations
  Critical Accounting Policies
  
    
    Allowance for Doubtful Accounts;
    
    Loss Reserves for Certain Self-Insured Programs;
    
    Revenue Recognition / Contractual Allowances; and
    
    Long-Lived Asset Impairments.
  38




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##### Table of Contents



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
 The Fair Value Option for Financial Assets
and Financial Liabilities, including an amendment of FASB Statement No. 115
 Seasonality
  Impact of Inflation
  39




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##### Table of Contents



ITEM 3: Quantitative and Qualitative Disclosures about Market Risk
      
 ITEM 4: Controls and Procedures
      40




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##### Table of Contents



PART II: OTHER INFORMATION
 
 ITEM 1: Legal Proceedings
 Haskell et al. v. Goldman Sachs & Co. et al.
   Drumm Investors, LLC. v. Genesis HealthCare Corp
   
 ITEM 1A: Risk Factors
  41




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##### Table of Contents



Risks Associated with the Proposed Merger
 Prior to completion of the proposed merger and if the proposed merger is not completed, there may
be a negative impact on our ongoing business.
   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.
  42




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##### Table of Contents



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.
  
 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
   43




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Votes For
    
    Votes Against
    
    Votes Withheld
    
    Broker Non-VoteElection of John F. DePodesta
    
    
    12,965,180
    
    
    
    
    
    
    
    4,617,182
    
    
    
    Election of J. Michael Gallagher
    
    
    12,570,623
    
    
    
    
    
    
    
    5,011,739
    
    
    
    Election of Terry Allison Rappuhn
    
    
    11,952,651
    
    
    
    
    
    
    
    5,629,711
    
    
    
    
  
 ITEM 5: Other Information
  
 ITEM 6:Exhibits
  ExhibitNumber
    
    Description2.1 (1)*
    
    Agreement and Plan of Merger, dated as of January 15,
2007, by and among FC-GEN Acquisition, Inc. and Genesis HealthCare Corporation.2.2 (2)*
    
    Amendment No. 1 to the Agreement and Plan of Merger, dated
January 25, 2007, by and among FC-GEN Acquisition, Inc., GEN Acquisition Corp.
and Genesis HealthCare Corporation.2.3 (3)*
    
    Amendment No. 2 to the Agreement and Plan of Merger, dated
April 19, 2007 by and among FC-GEN Acquisition, Inc., GEN Acquisition Corp. and
Genesis HealthCare Corporation.2.4 (4)*
    
    Amendment No. 3 to the Agreement and Plan of Merger, dated
May 1, 2007 by and among FC-GEN Acquisition, Inc., GEN Acquisition Corp. and
Genesis HealthCare Corporation.4.1 (5)
    
    Amendment No. 1 to Rights Agreement, dated as of January
15, 2007, by and between Genesis HealthCare Corporation and StockTrans, Inc.,
as Rights Agent.10.1(6)+
    
    Form of Employment Agreement entered into between Genesis HealthCare
Corporation, on the one hand, and each of David C. Almquist (as EVP  Southern
Area), Richard P. Blinn (as President  Northeast Area), James V. McKeon (as
EVP and CFO), Robert A. Reitz (as EVP and COO), Barbara J. Hauswald (as SVP 
Planning and Development), Paul Bach (as EVP  Central Area), James W. Tabak
(as SVP  Human Resources), Eileen M. Coggins (as SVP and General Counsel),
Irene Fleshner (as SVP  Clinical Practice), Richard Castor (as SVP 
Information Systems) and Richard Pell (as SVP  Administration).
 44




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ExhibitNumber
    
    Description31.1
    
    Certification of George V. Hager, Jr., Chief Executive Officer,
of the Company dated May 10, 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 May 10, 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 May 10, 2007 pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of James V. McKeon, Chief Financial Officer, of
the Company dated May 10, 2007 pursuant to 18 U.S.C. Section 1350.
 
 +
    
    Management contract or compensatory plan.*
    
    Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company
agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Securities
and Exchange Commission upon request.(1)
    
    Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K filed on
January 18, 2007.(2)
    
    Incorporated by reference to Exhibit 2.2 of the Companys Current Report on Form 8-K filed on
January 29, 2007.(3)
    
    Incorporated by reference to Exhibit 2.3 of the Companys Current Report on Form 8-K filed on
April 20, 2007.(4)
    
    Incorporated by reference to Exhibit 2.4 of the Companys Current Report on Form 8-K filed on
May 2, 2007.(5)
    
    Incorporated by reference to Exhibit 4.2 of the Companys Registration Statement on Form
8-A12G/A filed on January 18, 2007.(6)
    
    Incorporated by reference to Exhibit 99.1 of the Companys Current Report on Form 8-K filed
on February 5, 2007. 45




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##### Table of Contents



SIGNATURES
  Genesis HealthCare CorporationDate:
May 10, 2007
    
    /s/ James V. McKeonJames V. McKeon,Chief Financial OfficerDate:
May 10, 2007
    
    /s/ George V. Hager, Jr.George V. Hager, Jr.,Chief Executive Officer and Chairman of the Board
 46